How do I get the best interest rate?

Interest rates get a lot of attention and for good reason, so how do you get the best interest rate? They determine the cost of your loan and what you pay back. Even a small difference in rates can make a big difference to repayments, particularly on larger loan sizes.

But sometimes what appears to be the “cheapest” rate isn’t always right for you.

Australian banks and mortgage insurers have specific criteria they use to assess loan applications. If your situation falls outside their guidelines it can be expensive getting your application approved – in some cases interest rates can become less important. For example, if you want to borrow 80 per cent or more of the purchase price or property value (whichever is the lesser), mortgage insurance is likely to apply. The cost can vary dramatically between lenders. By shopping around a borrower can save as much as $2,000 (or more) on a loan size of $600,000.

Next there’s many types of interest rates: variable, fixed, split, introductory, P&I or investment-only
— each with their own advantages and disadvantages.

So you can see it takes a lot of work to sift through different loans and lenders to secure the best deal.

The devil is always in the detail. You need to know what you’re looking for to avoid getting caught in ‘discounted’ loan traps.

Don’t be dazzled by honeymoon interest rates

As the name suggests, they run for 12 months to two years but the life of your loan can last up to 30. To put that in perspective, a lender is generally unlikely to give you a discount for nothing, they’ll always try to get something in return, and it’s usually written in the fine print. After all, once they get you in the door, they don’t want to let you go.

Introductory offers take one of two forms: ‘fixed discount’ and ‘discounted fixed’ interest rates. The fixed discount is a rate that is variable, but fixed at a certain level or margin below the standard variable rate. During the introductory period, this means the discounted rate will move with the market. The discounted fixed rate is a rate fixed for the introductory period of the loan, and won’t move with the market.

Some lenders may also ‘cap’ or limit the amount of extra money you can pay off the loan during the introductory period, which, in turn, may limit the benefit of having the introductory period.

So what should you do to get a clear picture of the best value loan? Compare interest rates, product features, and fees and charges because they can add up to thousands of dollars over the life of your home loan.

Comparison rates

Always compare interest rates, product features, and fees and charges.

 

Comparison Rates
Option	Interest Rate	Fees & Charges	Comparison Rate
Home Loan “A”	4.00%	1.00%	5.00%
Home Loan “B”	4.25%	0.25%	4.50%

 

In the example, home loan B will cost less than home loan A, even though home loan A has a lower interest rate. However, ensure the features being offered by each loan suit you.

If that sounds like too much of a hassle, a mortgage broker will help you navigate the home loan mine-field. They will help you to find the best home loan combination for you. Best of all they’ll start with policy and analyse which lenders might provide the amount you’re seeking to borrow and match the best interest rate, along with product features and other associated fees and charges. Above all they’ll create a tailored plan that best suits the life of your loan.

If you are interesting in looking at the history of Interest rates in Australia, the Reserve Bank of Australia publishes some useful data.

If you’d like to chat about finance, please contact us.

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