Why Is My Home Loan Interest Rate Higher Than Someone Else’s?
Have you ever compared home loan rates with a friend, family member or colleague and wondered:
“Why is their interest rate lower than mine?”
Perhaps your friend tells you they're paying 5.99%, while you're paying 6.29%. You might even be with the same bank.
So, are you getting a bad deal?
Not necessarily.
Home loan interest rates aren't always one-size-fits-all. The rate available to one borrower can be different from the rate available to another, even when they use the same lender.
Your deposit or equity, whether you're an owner-occupier or investor, your repayment type, loan product and even the lender you choose can all influence the interest rate available to you.
Let's look at some examples.
The interest rates used in the scenarios below are illustrative only and are not current home loan offers.
Scenario 1: Sarah Has Plenty of Equity
Sarah lives in a home worth approximately $900,000 and has a $450,000 home loan.
Her Loan-to-Value Ratio (LVR) is therefore 50%.
She is an owner-occupier and makes principal and interest repayments.
Example rate: 5.99% p.a.
Sarah may have access to relatively competitive pricing because:
she's an owner-occupier;
her LVR is low; and
she's making principal and interest repayments.
LVR can be particularly important when it comes to home loan pricing.
Generally speaking, a borrower with a lower LVR represents less lending risk than someone borrowing close to the full value of their property.
This is why some lenders offer their sharpest rates to borrowers below particular LVR levels.
Scenario 2: James Has a Much Smaller Deposit
James is purchasing a home for $700,000.
He has a $70,000 deposit and needs to borrow approximately $630,000, giving him an LVR of around 90%.
He's also an owner-occupier making principal and interest repayments.
Example rate: 6.39% p.a.
James could have an excellent income, stable employment and a perfect repayment history.
But his interest rate may still be higher than Sarah's.
Why?
His LVR is considerably higher.
The important point is that this doesn't necessarily mean the bank considers James a “bad borrower”.
It simply means the characteristics of his loan are different.
Some lenders have specific pricing tiers — for example, rates for borrowers below 60%, 70% or 80% LVR may differ from rates available at 80%, 90% or 95% LVR.
So when someone tells you their home loan rate, one of the first questions should be:
What's their LVR?
Without knowing that, you're not necessarily comparing like with like.
Scenario 3: Michael Is an Investor
Michael has a $500,000 loan against an investment property worth $750,000.
His LVR is approximately 67%, which is relatively low.
He's making principal and interest repayments.
Example rate: 6.19% p.a.
Sarah, from our first example, had a similar low LVR but an illustrative rate of 5.99%.
Why might Michael pay more?
Because Michael's property is an investment property, while Sarah lives in hers.
Lenders commonly price owner-occupied and investment loans differently.
This means two borrowers could have:
the same lender;
the same loan balance;
the same property value; and
the same repayment type;
but still potentially receive different interest rates because one loan is owner-occupied and the other is for investment purposes.
Scenario 4: Lisa Is an Investor Paying Interest Only
Lisa also owns an investment property.
However, instead of making principal and interest repayments, she has chosen interest-only repayments.
Example rate: 6.49% p.a.
Her rate could be different again.
With an interest-only loan, your regular repayments during the interest-only period don't reduce the principal balance unless you make additional repayments.
Lenders commonly have different pricing for interest-only loans compared with principal and interest loans.
This is why saying:
“I have an investment loan — what rate should I be paying?”
isn't enough information by itself.
We would also want to know the LVR, repayment type, loan amount, product and other relevant circumstances.
Scenario 5: David Has Been With the Same Bank for Eight Years
David has had his home loan with the same bank for eight years.
He has never missed a repayment and has built substantial equity in his home.
His rate is:
6.34% p.a.
Then he discovers that the same bank is advertising rates to new borrowers around:
6.04% p.a.
Understandably, David isn't particularly impressed.
Unfortunately, being a loyal customer doesn't automatically mean you're receiving your lender's most competitive rate.
Banks may have different offers, discounts or pricing available for new lending, and existing borrowers can sometimes remain on older pricing arrangements.
This doesn't necessarily mean David needs to refinance.
His first step could simply be asking his existing lender to review his interest rate.
If they won't offer something competitive, he can then compare the cost and potential benefit of refinancing elsewhere.
This is also why reviewing your mortgage periodically can be worthwhile, even if you're otherwise happy with your bank.
Scenario 6: Two Borrowers With Similar Loans Choose Different Banks
Now consider Emma and Daniel.
Both are owner-occupiers.
Both are borrowing approximately $600,000.
Both have an LVR below 80%.
Both are making principal and interest repayments.
Their circumstances look remarkably similar.
Emma's lender offers:
Example rate: 5.94% p.a.
Daniel's lender offers:
Example rate: 6.14% p.a.
How can that happen?
Because lenders don't all price their home loans identically.
One lender might be particularly competitive for lower-LVR owner-occupiers at a particular point in time.
Another might be targeting investors.
Another lender may have a competitive basic loan but charge more for a product containing additional features.
Banks also change their pricing and promotions over time.
That's why asking:
“Which bank has the lowest home loan rate?”
doesn't always have a simple answer.
The better question is:
“Which lenders have competitive options for my particular circumstances?”
Scenario 7: The Cheapest Rate Doesn't Necessarily Mean the Cheapest Loan
Let's say two lenders are offering you a home loan.
Lender A:
5.99% interest rate
$395 annual package fee
Offset account included
Lender B:
6.04% interest rate
No annual fee
No offset account
At first glance, Lender A appears cheaper because its interest rate is lower.
But is it?
That depends on the size of your loan, how long you expect to keep it and whether you'll actually benefit from the offset account.
For someone who regularly keeps substantial savings in an offset account, paying for that feature could potentially make sense.
For someone who keeps very little money in their account, the no-fee option may potentially work out cheaper despite having a slightly higher interest rate.
This is why comparing home loans based solely on the advertised interest rate can sometimes be misleading.
What Actually Determines Your Home Loan Interest Rate?
While every lender has its own pricing policies, some of the factors that can influence the rate available to you include:
Your Loan-to-Value Ratio (LVR)
The amount you're borrowing compared with the property's value can make a significant difference.
Some lenders have different pricing tiers depending on Loan-To-Value (LVR).
Owner-Occupied or Investment
Investment loans can be priced differently from loans for homes that borrowers live in themselves.
Principal & Interest or Interest Only
Lenders may apply different rates depending on the repayment type.
Loan Product
A basic variable home loan may have different pricing and features from a packaged loan containing an offset account and other features.
Fixed or Variable
Fixed and variable home loans are priced differently, and fixed rates can also vary depending on the length of the fixed-rate period.
Loan Amount
Some lenders have minimum loan amounts for particular products, offers or discounts.
Loan size can also sometimes influence the pricing available, although a larger loan certainly doesn't guarantee a lower interest rate.
New Lending or Existing Customer
The pricing available for new lending isn't necessarily identical to the rate an existing customer is currently paying.
The Lender
Perhaps most importantly, different lenders simply have different pricing strategies.
A lender that is highly competitive for one type of borrower may be less competitive for another.
So What Is a “Good” Home Loan Interest Rate?
This is why we need to be careful when someone asks:
“What's a good home loan rate at the moment?”
There isn't necessarily one rate that applies to everyone.
A competitive rate for an investor borrowing at 85% LVR may look quite different from a competitive rate for an owner-occupier borrowing at 60% LVR.
Likewise, someone requiring an offset account may appropriately choose a different product from someone whose priority is simply keeping ongoing fees as low as possible.
The real comparison should be between home loans available to borrowers in circumstances similar to yours.
Don't Judge Your Home Loan by Your Friend's Interest Rate
It's completely understandable to compare rates.
In fact, knowing what other borrowers are paying can sometimes prompt you to review a loan you've had for years.
But your friend's rate alone doesn't tell you whether your own home loan is competitive.
Before comparing the two, you'd need to consider things such as:
their LVR;
whether they're an owner-occupier or investor;
principal and interest versus interest only;
their loan product;
fees and features;
when the loan was established; and
which lender they're with.
Only then are you starting to compare apples with apples.
How Often Should You Review Your Home Loan Interest Rate?
There isn't a set rule for how often you should review your home loan, but it's worth checking periodically — particularly if you've had the same loan for several years, your property has increased in value, you've built up more equity or your financial circumstances have changed.
A lower LVR or a change in the home loan market may mean there are now options available that weren't available when you originally took out your loan.
Reviewing your home loan doesn't necessarily mean refinancing. Sometimes your existing lender may still offer a competitive option, or may be willing to review your current interest rate.
At Mortgage Compare Plus, we review our customers' home loans annually to check whether their existing interest rate remains competitive. Where appropriate, we can approach the existing lender for a better rate and compare the loan against other options available in the market.
The aim isn't to refinance a customer every year — it's to make sure their home loan continues to be competitive and suitable for their circumstances.
Is Your Home Loan Interest Rate Still Competitive?
If you've had your mortgage for a while, it may be worth checking how your current interest rate compares with options available for someone in your circumstances.
That doesn't automatically mean refinancing.
Sometimes your existing lender may already be competitive. Sometimes a simple rate review with your current lender can produce a better result. And sometimes another lender may offer a more suitable overall option.
At Mortgage Compare Plus, we can review your existing home loan and compare it against options from a range of lenders, taking into account your LVR, loan purpose, repayment type, features and overall circumstances.
Contact Steve at Mortgage Compare Plus if you'd like us to review your current home loan and see whether your interest rate is still competitive.
Disclaimer: This article provides general information only and may not reflect the publisher’s opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher’s prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication. The interest rates and scenarios in this article are examples for illustrative purposes only and do not represent current offers or recommendations. General information only. Interest rates, fees, lending criteria, discounts and eligibility requirements vary between lenders and can change.
