How do interest rates affect my home loan?


When you take out a home loan, you’ll typically pay back more than what you initially borrowed as you’ll need to repay the loan in full, with interest on top.

For that reason, it’s a good idea to compare what interest rates different lenders are willing to offer you, as even the slightest difference could have a big impact on what you pay over the long term.

To get up to speed with what you should know and look out for, here are some general pointers.

A low rate can make a big difference

Many people know that the lower the interest rate, the less interest they’ll pay over the life of their loan, but what people don’t always realise is how important even the tiniest increment can be.

For example, say one lender was offering you an interest rate of 5.2%, and another 5.45% on a $300,000 loan over a 30-year period. Opting for the lower interest rate, assuming fees and charges are the same, could save you $16,789.

It’s for the same reason that factoring in a rate rise when drawing up your budget is important. If your lender increases its rates, you may need to fork out more than what you were paying initially.

The comparison rate could raise a red flag

Some home loans, offering lower rates, can appear cheap but be laden with fees, which makes them not so cheap at all.

To help you in the decision-making process, it’s worth checking out the comparison rate, which is different to the headline rate that a lender may be advertising.

A comparison rate can help you make a better choice because it incorporates the annual interest rate, as well as the cost of most upfront and ongoing fees—giving you a reasonable guide of the true cost of the loan and making it easier to compare different offers.

Your rate options will play a big part

You can generally choose a home loan with a fixed rate, variable rate, or combination of the two.

Fixed rate

Fixing your interest rate for a set period of time, means you’ll know exactly what your repayments are and won’t be affected by interest rate rises during the fixed period.

At the same time, you won’t have the ability to benefit from a rate drop, and there are often restrictions around additional repayments and redraw facilities, and break fees usually apply.

Variable rate

A variable rate loan differs in that you have the ability to make extra repayments and can access additional features, while changing loans (should you find a better deal) is easier and cheaper.

On the downside, a variable rate can make budgeting more difficult as your repayments are vulnerable to changes in interest rates.

Split rate

A split rate could give you the best of both worlds as you can opt to have part of your loan fixed and part variable, allowing you to manage some of the risks while still making extra repayments.

Other things to look into

Credit rating

If you’ve got a credit card, personal loan, mobile phone plan or utility account, there’s probably a credit reporting agency out there that has a file with your name on it.

This is important to note as a tarnished credit report could affect your ability to get instant approval on a loan—not to mention, you could be charged a higher interest rate or knocked back completely.

With that in mind, it’s worth looking into your credit report to ensure there are no surprises.

Consider additional features

While it always makes financial sense to save with a lower rate home loan, keep in mind that getting value on your home loan isn’t just restricted to the rate you pay.

Features such as the ability to make extra repayments, redraw funds and access an offset account may be important to you, and still be effective in cutting years off the cost of your home loan.

Support and tools available

For more information check out our 9 tips for first home buyers. And, if you’d like to speak to an AMP Bank relationship manager about the range of AMP Bank home loans that are on offer, you can request a call back via our online form.

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Important information

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It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.

This information is provided by AMP Life Limited. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.

Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

The credit provider and product issuer is AMP Bank Limited, AFSL 234517 and Australian Credit Licence 234517.