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Will home loan interest rates go down in 2024?
Some economists predict a possible rate rise in August, following an increase in Australia's annual inflation rate to 4% in May. This comes after Australia's big four banks initially forecasted potential rate cuts later in 2024 or 2025. New quarterly inflation data, set to be released later in July, is likely to influence the RBA's next cash rate decision.
Home loan interest rates: Fixed vs variable
The interest rate on a home loan is either fixed, variable or split (a hybrid of the two).
Variable rate home loan
The interest rate will fluctuate in line with the market throughout the life of the loan. This means you can have lower repayments when interest rates drop, but higher repayments if they go up. A variable home loan provides flexibility and extra features like making additional payments to pay off your loan faster, and offset and redraw facilities.
Fixed rate home loan
The interest rate on the loan is fixed for a period, ranging from one to five years. Your repayments will be fixed during the fixed rate period, protecting you from rate rises, although you won’t benefit from lower repayments when rates drop. A fixed rate home loan may not have additional features like redraw and you may not be able to make extra repayments without penalty.
Split home loan
This is when you split your home loan into two parts — one with a fixed rate and one with a variable rate. This option provides both the flexibility of a variable rate loan and the certainty of a fixed-rate loan. You can choose your split, whether it's 50/50, 60/40, or 70/30.
How is interest on a home loan calculated?
Interest on a home loan is calculated daily based on your outstanding loan balance, but charged monthly with your repayments.
Here’s what the calculation would look like if your loan balance was $600,000 with an interest rate of 6.00% p.a.
- 600,000 x 0.0600 ÷ 365 = $98.63 daily interest
- $98.63 x 30 days = $2,958 monthly interest
If you’re making weekly or fortnightly repayments, divide this amount accordingly.
- $98.63 x 14 days = $1,380 fortnightly interest
- $98.63 x 7 days = $680 weekly interest
Your mortgage repayments will include a principal (what you borrowed) and interest component. Initially, a larger portion of your repayments will go towards paying off the interest, and over time, more of your repayments will go towards reducing your principal.
That's because the interest is calculated based on the remaining balance of your mortgage, which decreases as you repay more principal over time.
Home loan interest rates example comparison
The higher your interest rate, the higher your mortgage repayments will be and vice versa. A slightly lower interest rate can result in significant savings throughout your mortgage.
Let's compare the difference in monthly repayments and total interest paid on a $600,000 home loan with an interest rate of 6.00% vs 6.25% over a 30-year term (with principal and interest repayments).
As shown, you could end up paying up to 50% or more of your total mortgage amount in interest over time, depending on your loan term.
| Interest rate - 6.00% p.a. | Interest rate - 6.25% p.a. | |
|---|---|---|
Home loan | $600,000 | $600,000 |
Loan term | 30 years | 30 years |
Monthly repayments | $3,597 (save $97 per month) | $3,694 |
Interest over the loan term | $695,029 | $729,949 |
Difference | Save $34,920 | Nil |
How your LVR impacts your home loan interest rate
One of the biggest factors that will impact your interest rate is your loan-to-value ratio (LVR) — this is your loan amount as a percentage of your property's value. LVR is calculated by dividing your loan amount by the property's value.
- Here’s an example calculation: If you have a 20% deposit of $120,000 to purchase a $600,000 property, your loan amount would be $480,000.
- ($480,000 loan ÷ $600,000 property value) x 100 = 80% LVR
- In other words, you’re borrowing 80% of the property’s value.
Lenders consider your LVR when assessing your risk as a borrower and, therefore, your interest rate. That's why when you see a lender's advertised rate, you'll often see 'based on an LVR of X' next to it. The lower your LVR, generally the lower your rate.
Lenders consider an LVR above 80% (when your deposit or equity is less than 20%) as riskier and usually charge lender's mortgage insurance (LMI) to offset that risk, along with a higher interest rate. Here's an example of how LVR impacts home loan interest rates.
Home loan repayments: Principal & interest vs interest-only
Your home loan repayments have a principal and interest component. Your principal is the loan amount you’ve borrowed from the bank and the interest is the cost of borrowing.
Here's how the two repayment options work:
Principal and interest (P&I) repayments
Your repayments include both your loan principal and interest. In this case, your regular payments are higher, but you'll pay less interest over the life of the loan. This is the most common type of loan repayment structure for owner-occupiers.
Interest-only repayments
You only pay the interest portion of your home loan for a set period (up to five years). This reduces your mortgage repayments during that period, but you'll pay more interest over the life of the loan. Interest-only loans are commonly used for investment properties to keep costs down. Investors don’t mind the extra costs as they can claim a tax deduction on the interest repayments.
Explained: Home loan features that could save you money
Here are the most common home loan features to ask your broker about.
Offset account
An offset account is a transaction account linked to your home loan. Every dollar in that account offsets the amount owing on your mortgage and your interest. This is arguably the best home loan feature to reduce your interest payable.
Extra repayments
Many home loans offer the option of making extra payments in addition to your regular minimum mortgage repayments. Making additional repayments helps you pay down your loan principal faster and lowers your interest charges.
Redraw facility
Allows you to redraw any extra repayments you've made on your home loan. You can withdraw additional repayments for any reason. A redraw facility isn’t an account but a feature attached to your mortgage.
Cashback offers
Cashback offers are incentives some lenders offer to attract new customers, typically refinancers (people looking to switch their home loan to a new lender).
Portability
Portability is a home loan feature that allows you to transfer your mortgage to another property without incurring fees. This is done by changing the property securing the mortgage from your current property to a new one. This means you can avoid refinancing (and its associated costs) or keep your fixed rate without break costs.
Repayment holiday
A repayment holiday allows you to temporarily pause or reduce your home loan repayments if your financial circumstances change (e.g. parental leave, if you’re moving from a double to a single-income household, etc). Some lenders only offer this option if you’ve made enough additional repayments before the repayment holiday period.
Common home loan fees and what they could cost you
- Establishment fee: $150-$750
- Document processing fee: $100-$600
- Valuation fee: $100-$500
- Settlement fee: $150-$300
- Security guarantee fee: $200-$300
- Monthly loan service fees: $8-$10
- Annual package fee: $300-$500
- Loan feature fees: $10-$50
- Construction loan progressive drawdown fee: $50-$100
- Exit or switching fee: $100-$300
- Mortgage discharge fee: $350-$500
The total of your home loan fees from 1-3% of your mortgage amount. Ask you broker about ways to reduce them
Types of home loans in Australia
Owner-occupier home loan
A home loan to buy a property you intend to live in. Owner-occupier home loans typically have lower interest rates than investor home loans.
Investment home loan
A home loan to buy a rental or investment property. In other words, a home you want to rent out to tenants to generate income. Generally, investment home loans have higher interest rates because investors are considered riskier borrowers compared to owner-occupiers.
Refinance home loan
This is a new mortgage you take out to pay out your current home loan. You can refinance by going to another lender or by switching to another loan product with your current bank. Refinancing has costs, including discharge costs from your current lender and application fees for your new home loan.
Home equity loan
A home loan that allows you to borrow against the equity in your property. Equity is the difference between your property’s current value and what you still owe on your mortgage. You can access your home equity as a line of credit or cash it to fund renovations, use it as a deposit for an investment property, or pay for other expenses.
Low deposit home loan
A low deposit home loan is a mortgage that requires only a 5-10% deposit instead of the standard 20% of the property's value most lenders require. It’s commonly used by first-home buyers looking to buy a home sooner with a minimum deposit. You may have to pay LMI, unless you apply with a guarantor or via the Home Guarantee Scheme (HGS).
Guarantor home loan
A guarantor home loan is a mortgage where a guarantor, often a parent or family member, uses their home equity to secure a portion of the loan.
Self-employed (low doc) home loan
A home loan for self-employed individuals and business owners is called a low documentation (low doc) home loan. This type of mortgage requires less income documentation (usually just bank statements and an accountant’s letter) than a traditional application. It’s a common option for business owners or self-employed individuals who may not have payslips or tax returns to provide.
Bad credit home loan
A bad credit home loan is designed for borrowers with poor credit or who may not qualify for a mortgage with a traditional lender due to credit defaults, or previous bankruptcies.
Construction home loan
A construction home loan is designed for borrowers building their home (or an investment property) rather than purchasing an existing one. It works similarly to a line of credit, allowing you to draw down your loan in instalments during construction.
Bridging loan
A bridging loan is a short-term loan that can help you finance the purchase of a new property while you sell your current one. It bridges the gap between receiving funds from selling your existing property and purchasing your new home.
SMSF loan
A home loan that allows eligible borrowers to purchase an investment property through their self-managed super fund (SMSF).
Reverse mortgage
A reverse mortgage is a type of home equity loan for seniors. It allows homeowners aged over 60 to borrow against the equity in their home and defer repayments until the property is sold or they pass away.
How to compare home loans (tips from a mortgage broker)
1
Choose the right mortgage broker
Work with a mortgage broker who understands your financial situation and property goals to compare and pre-select home loan options with your desired features. They should be able to offer you a good spread of different lenders to choose from and explain how each loan works and what it costs (including interest and fees). They should also help you structure your home loan to help to pay it off faster.
2
Look at both the interest rate and the comparison rate
While the interest rate shows the percentage of interest you'll pay on your home loan, the comparison rate reflects the total annual cost of a mortgage — including interest and fees.
3
Look for the lowest interest rate
A home loan is a long-term debt, so finding the lowest interest rate can save you thousands of dollars over time. Compare loan options from at least three lenders. Review rates, home loan features, and fees from at least three different lenders as a way to benchmark their home loan offerings in the marketplace. Does any lender stand out for having a particularly good deal?
4
Ask your lender for a Key Facts Sheet (KFS)
This document outlines important details about a home loan you're considering, such as the interest rate, fees and terms. It also includes a personalised comparison rate, an estimate of the loan’s total cost, and a breakdown of your monthly and yearly repayments.
How to reduce your interest & pay off your mortgage faster
Make weekly or fortnightly repayments
Switching your repayment frequency to fortnightly or weekly can shave years and tens of thousands of dollars in interest off your mortgage. For example, by making fortnightly repayments, you effectively make an additional month's repayment each year.
Use your offset account
Deposit your salary and savings in your offset account to reduce your interest payable. For example, if you have $30,000 in your linked offset account on a $600,000 mortgage with a rate of 6.00%, you could shave more than three years off the life of the loan and save $131,00 in interest.
Increase your repayments by 5%
For example, by increasing your weekly repayment on a $600,000 home loan with an interest rate of 6.00% over a 30-year term by just 5% ($41), you could save around $96,000 and shave three years off your home loan.
Refinance every 2-3 years
Keep up with the market and aim to refinance to a lower interest rate every 2-3 years, while also reducing your loan term by one year each time. This can save you tens of thousands of dollars throughout your mortgage. Keep in mind that you’ll need at least 20% equity in your home, or you’ll need to pay LMI on the refinance.