Home Loan Interest Rates in Australia for January (2024)

What is a home loan interest rate?

When you take out a home loan, your lender typically gives you what is known as the principal loan amount and your home loan interest rate is the annual cost for borrowing this principal.This is expressed as a percentage, known as the Annualised Percentage Rate (APR), which represents the annual cost to borrow a sum of money.

Of course, your interest rate can vary because it’s set by your specific lender and the type of home loan you choose.

Home loan interest example

To illustrate how home loan interest is calculated, say you want to borrow $600,000 to purchase a home. Your lender agrees to lend you the money and charges an interest rate of 5% p.a. The amount of interest paid in this scenario is determined using the following formula:

(principal x interest rate) ÷ time = interest

So if we multiply $600,000 by 0.05, then divide it by 365 (the number of days in a year), we would get $82.19. This is the amount of interest you would be charged in a day.

However the amount of interest you will be charged changes as you chip away at your principal amount over the course of your loan. You can work out how much you would pay over the life of a loan with our home loan repayments calculator.

How are home loan rates determined?

The Reserve Bank of Australia (RBA) is our central bank, setting monetary policy and importantly, for mortgagees, the nation’s official interest rate. This figure is based on things like inflation, employment, and levels of spending and investment. So it is subject to change on an ongoing basis and as we have seen over the course of 2022 and ‘23, the official rate can change quite a bit!

Banks and lenders then set their own home loan interest rates based on the RBA’s decision each month, while also taking into account their business costs. So no two banks set their home loan rates the same way, which is why it’s a good idea to shop around and compare home loans.

Types of home loan interest rates

The type of interest rate you pay on your home loan can affect how much you pay overall and each month. There are pros and cons to each type, so it’s important to take the time to find out which will suit you best. Your options include:

• Fixed rate

A fixed home loan interest rate locks in your repayment amount at a certain value and will remain the same for a set time, usually up to 5 years. This makes budgeting easier, as you’ll have a set amount that you need to pay each month that won’t be affected by rate increases.

The downside, however, is that if rates decrease while you’re on fixed term interest, you won’t reap any of the benefits. When your fixed term ends, you have the option to either enter into a new fixed rate or switch to variable rates.
In general, fixed interest rate loans are less flexible than other types of mortgage rates, and you could end up paying penalties if you repay the loan early.

• Variable rate

A variable home loan interest rate means that your repayments might change at any time, based on changes to the cash rate or the whims of your bank. There’s less security in this type of interest rate - your repayments are subject to rises and falls in the market.

However, it’s a popular type of home loan in Australia, as variable rates often sit lower than fixed rates. A variable interest rate might suit you if you're looking for flexibility, as you’ll have the option to make extra repayments and pay off your loan quicker.

• Comparison rate

It can be hard to compare home loan rates sometimes. Aside from the interest rate, there might be extra fees and charges built into your home loan, which means the lowest headline interest rate might not always the best option. That’s where the comparison rate comes in.

The National Credit Code requires that lenders show comparison rates - which factor in interest, fees and charges - to give you a clearer idea of the true cost of a loan. So when you compare home loan interest rates on Mozo, you’ll see an interest rate plus a comparison rate for each product.

Keep in mind that comparison rates are a guide based on a secured loan of $150,000 over 25 years, with monthly principal and interest repayments. Different values or time frames on loans will mean different comparison rates. So while the comparison rates on our site are useful for choosing the best value home loan, to find out exactly how much interest you’ll be paying you'll need to check with your lender.

How are my home loan interest repayments calculated?

How much you pay each month will depend on numerous factors, including what type of rate you’re paying, how often your interest is calculated and how long your home loan term is for. One of the important factors in determining how your interest rates are calculated is whether your home loan is an interest only or principal and interest loan. Here’s the difference:

• Interest only loans

With an interest only loan your monthly repayment consists of only the interest for the loan, and not the loan amount itself. The monthly savings can be significant if you’re not paying any of the principal loan amount, which might be a great short term solution if you’re running on a tight budget. The downside is that you won’t be making any progress toward actually owning your home.

Interest only loans are popular for investors, because they’re often counting on the value of the home increasing enough to sell the property, pay off the loan and make a profit.

Remember that you will eventually have to pay off the total loan amount, so while an interest only loan might be affordable in the short term, you should have a long term repayment plan in place.

• Principal and interest loans

With a principal and interest loan, you’re paying interest, plus a part of the total loan amount each month. At the beginning of the loan, most of your repayment will go toward paying interest and a little will go toward the loan amount. As the principal amount gets lower, so does the interest you need to pay on it, so eventually, most of your monthly repayment will be going towards the principal, while a little goes to interest.

While you’ll be paying more each month than you would with an interest only loan, the good news is that by the end of your loan term, you’ll own your home entirely.
You can use Mozo’s home loan repayments calculator to see not only how much your monthly repayments would be with either an interest only or principal and interest home loan, but also how much total interest you would pay with each one.

How does the home loan interest rate affect my current home loan?

The interest rate charged on your home loan impacts the amount you’ll repay over the term of your mortgage. So while you might take on a home loan at one rate and be comfortable with your repayments, a fluctuation in the interest rate could see you paying more or less. This is why those with a variable rate home loan need to monitor the official rate set by the Reserve Bank, which influences how lenders set their home loan rates.

What is causing the home loan interest rates to increase?

Home loan interest rates are currently increasing due to the “cost of living” crisis that is playing out in the global economy. The RBA has been raising the official cash rate in a move to get inflation down. When the RBA raises the cash rate rate, bank’s funding costs are higher and they generally then pass some of these costs onto their customers.

It’s worth noting that lenders aren’t obligated to change the interest rate on products when the cash rate moves.

What should I do if interest rates get too high and I can’t make my repayments?

With mortgage interest rates jumping significantly in recent times, repaying a home loan has become more challenging. So if you're struggling with your home loan repayments, it’s important to know that all is not lost and that there is help available. It’s a good idea to address the issue early so that you have more options. Track your money, understand where you stand and don’t ignore default notices. Start by talking to your lender about your options and if you feel you need extra advice, a financial or legal advisor can also help.