Although lenders’ rates are often publicly advertised, when it comes time to select a home loan rate, you won’t necessarily get to choose the one you’ve just seen on the back of a taxi or side of a bus shelter. The rate you are eligible for will vary greatly depending on your circumstances. Different rates are made available to buyers and investors, for example. The size of your deposit and where the property is located, may also play a role.
uno’s technology scans thousands of different rates from our pool of 29 lenders to show you deals you may not be seeing elsewhere. Our home loan advisers can then tailor the right solution for you, ensuring you’re getting the best deal for your situation. It’s our tech + people model that ensures you have access to the best home loan products for your situation.
What is a good interest rate on a mortgage?
A rate is a percentage charged as interest against the principal (the amount borrowed) to the borrower as a portion of their loan repayments. Home loan rates are influenced by a number of factors which we’ll look at in a minute, but are usually dictated by the current cash rate set by the Reserve Bank of Australia (RBA).
The cash rate acts like a threshold within the economy. It’s a reference point that moves up and down with the government’s monetary policy. In determining monetary policy, the RBA has a duty to maintain price stability, full employment and the economic prosperity and welfare of the Australian people.
To achieve this, the RBA sets an ‘inflation target’ of around 2-3% to encourage strong and sustainable growth in the economy.
To arrive at a standard variable rate (SVR), a lender will add an extra percentage points to the official cash rate. This is to cover the cost of funding the loan, and includes a margin so they can make a profit.
If the cash rate was to move by 25 basis points, for example from 1.00% to 1.25%, then you can expect home loan rates to also move by 25 basis points. So a “good” interest rate at the moment is one that sits around 2.5-3%. But before you jump in, there is a great deal more you should know about rates.
What is better: variable or fixed interest rate?
A variable interest rate loan is one in which the interest rate charged on your loan varies as market rates change. This means your payments on the outstanding balance of your loan may vary month by month, and year by year.
Choosing a fixed interest rate means you are locking into the same rate for a period of time, e.g. one year, three years, five years. This means your repayments will always be the same during that time frame – even if the RBA moves the official cash rate up or down.
If rates are low, many people will opt to lock into a fixed rate, in order to keep their repayments low in case the interest rate rises. Alternatively, if rates are high and look like they will go down at some point, many people will choose a variable rate so that their repayments drop when the interest rate falls.
What is the best type of loan for a first time home buyer?
Just because your friend chose one type of rate, it doesn’t mean that it’s right for you. A uno adviser can chat to you about your income, the type of property you are purchasing, your lifestyle, expenses, etcetera., and help you decide the best rate for your circumstances.
When looking at rates, some customers have been conditioned to look at the rate, while others go straight to the comparison rate.
What is a comparison rate?
As you may have noticed above, a comparison rate is displayed next to a lender’s interest rate. As of 1 July 2003, all lenders by law are required to display a comparison rate next to the advertised interest rate. The comparison rate takes all of the fees – upfront fees, ongoing fees, exit fees, etcetera – and adds them to the interest rate.
The comparison rate is worked out on a standard $150,000 principal and interest loan on a 25-year loan term. If you are borrowing more than $150,000, be aware that the interest rate will have a greater impact on your situation. A uno adviser can help by working out the total cost comparison for your specific circumstances. If you’re borrowing a million dollars, for example, the interest charged is going to be eight times what it would be in the comparison rate scenario.
Can I get a home loan with bad credit?
When someone has “bad credit”, it means they haven’t kept up with their credit obligations. They may have missed payments, failed to pay off credit cards, not paid their rent on time (if at all), or had a vehicle repossessed, for example. A bad credit rating, based on your credit history, may therefore prevent you from securing a home loan. Each black mark on your credit report increases the chances that a lender will say “no”.
There are several types of bad credit, including:
- Poor credit history: Defaults and bankruptcies leave big black marks on your report. Making too many unsuccessful loan applications can also damage the report.
- Mortgage arrears: Every missed home loan payment counts against you. If you have missed several in six months, most lenders won’t offer you a loan. Even one missed payment can lead to refusal for refinancing.
- Unpaid bills: Overdue bills will show up in the documents you give to lenders. They are another indicator that you may not pay back a loan.
- Your history with a lender: A poor history with the lender you apply to is a major black mark. Most don’t forget previous issues easily.
- Too much debt: Having too much debt for your current income to sustain could stop a home loan in its tracks, particularly if a lender views you as insolvent.
Does uno offer special rates not found elsewhere?
uno negotiates discounts with certain lenders, so there are some opportunities on the market that you won’t find elsewhere. Chat to one of our advisers to learn more.
How often should people be checking their rates?
Back in the day, people took out a loan and stuck to it. They tended not to switch rates (known as refinancing) and paid off their loan on the same rate for 30 years. uno commissioned some research that found 40% of Aussie home owners don’t know their rate and almost a quarter have a mortgage with the same bank they signed up to as a kid. Interesting, huh?
If you’d like to find out if you could switch to a better rate, speak to a uno adviser about your refinancing options and have a play with our refinancing calculator to see how much you could save. There is plenty of information about refinancing on that page too.
uno’s Household Financial Waste Report shows Australians are wasting an estimated $4.2 billion annually on non competitive interest rates and ineffective savings tactics. The report also looks at what savings Australian households could make if they made some changes. Per household, consumers in New South Wales stand to gain $1,300 back in lower interest payments in the first year should they switch to a better home loan, while Victorians could gain back $1,200, the report says.
Is it up to me to shop around or will my lender say, ‘We can offer you a better rate’?
You’d like to think so, but, this doesn’t tend to happen very often. If a customer says they are switching lenders to get a better deal elsewhere, their existing lender may offer them a better deal to stay – kind of like when you tell your employer you’re leaving and they miraculously find that extra $10k they’ve been keeping from you for the past two years.
Is the lender with the best rate the best one to choose?
Not necessarily. Again, it depends on your individual circumstances and the best rate for your current situation. But lenders will often advertise competitive rates if they’re trying to attract new business – and it could be a good time to nab a deal. The rates advertised on uno’s site include all of the discounts available through the various lenders, to save you all that running around.
It’s important to look into the features that are available with each rate as well, and pick one that contains the features that will benefit you the most.
What additional features should I be looking out for with my rate?
It’s worth asking your lender about extra features that come with your home loan. These could include the option to make extra repayments, the use of a redraw facility and/or an offset account. An offset and a redraw mathematically produce the same outcome, but they provide a different set of banking services. An offset is a fully transactional bank account that’s linked to your home loan, whereas a redraw facility enables you to pay down the balance,get ahead of your normal repayments schedule and redraw the extra repayments if and when you need the extra cash.
A redraw facility enables you to put any money you have saved towards making extra repayments. If you happen to need this money at any time, you can simply withdraw it. There may be fees involved, so it’s worth checking the details with your lender. It’s like a savings account for big ticket items. You may like to pay an extra $10,000 into your redraw facility and reduce the interest on your loan. But then redraw that $10,000 a year down the track to pay for a holiday. Or let’s say you choose to make 10 extra repayments of $200. The 10 months where you have made an extra payment has reduced the interest you are being charged during that 10 months. So even when you take it out at the end of the 10 months, the benefit of it having been there stays in the loan, because you have been charged less interest during that time. So every repayment that you make from that point onwards and into the future is paying off more of the principal and less of the interest.
An offset account is more like a transaction account. You set it up to receive all your income and the bank then offsets the balance in your account against your loan balance. As a result, interest is only calculated on the remaining loan balance, which can save you a lot of money in the long term. It’s a good idea to set up your offset account to receive your salary payments and any other income you receive. You can access the money on a day-to-day basis, but the money that is in there will be offset against your mortgage so the more money you have, the better off you’ll be. An offset account usually has fees, but some lenders do offer no fee offset home loans.
An offset account and a redraw account can effectively give you the same result, but they are practically and conceptually different: Money you’ve put in a redraw account is technically a home loan repayment, and money in an offset account is technically savings that “offsets” the debt of your home loan to reduce the interest payable.
Talk to our team of home loan advisers about the options available and decide which option best suits you and your situation.
Do foreign buyers have access to the same rates?
There’s been a tightening in terms of credit policy around buyers that earn their income overseas, and foreign residents living here in Australia. Typically, the rate for foreign buyers will be somewhat higher, but different lenders take different approaches. There’s more risk involved in verifying someone’s income if they work overseas.
How do I get the best possible rate?
The interest rate you will be offered is based on the lender’s perceived credit risk. You’ll pay a higher interest rate (and fees) if you are a foreign buyer, have bad credit or have not saved up enough of a deposit and want to borrow more than 80% of the property’s value.
The best interest rates are offered to borrowers with a stable income and employment history, clean credit history and a substantial deposit saved in the bank – or those who have more than 20% equity in their existing property.
Of course, the lender’s perceived credit risk is based on decades of experience and terabytes of statistics. When it comes to your situation, you’ll need someone on your side selling your situation to the lender, and that’s where uno helps most.
Your situation will have to be verified with documents – the lender isn’t going to just take your word for it – so it’s advisable to keep accurate records and documentation, which is invaluable when it comes to securing the best possible rate.
What to do next:
- Speak to an expert about your options
- Find your best deal now
This information is general in nature and you should always seek professional advice when making financial decisions.