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You'd think it was as simple as looking at the lowest number in the table, right? Well, it can be. But there are some things to watch out for that could make your cheap home loan…not so cheap.
The starting point is to always look at the rate. The lower rate, the lower your repayments.
Some loans lure you in with a cheap attractive rate, but then you find it piles on a huge fee to apply and another fee to pay each month as well. Your cheap rate now costs you more per month than the slightly higher interest rate with no fees.
Comparison rates are normally based on loans of $150,000 so they're not always helpful. But if the comparison rate is much higher than the actual interest rate, you can bet there are other costs driving your repayments up.
It's all well and good getting a low interest rate but if you're sacrificing access to features that could save you money in the long run, it's not worth it. Take an offset account, for example. Using an offset account will mean you pay down the loan faster because it reduces the amount of interest you need to pay.
The number one factor in determining a cheaper home loan is a low interest rate.
Let's compare 2 otherwise identical home loans with slightly different interest rates.*
| Interest rate | 7.48% | 5.69% |
|---|---|---|
| Loan amount | $625,050 | $625,050 |
| Loan term | 30 years | 30 years |
| Monthly repayment | $4,362 | $3,624 |
| Monthly saving | N/A | $738 |
| Annual saving | N/A | $8,856 |
As you can see, with the lower interest rate, you save $738 a month – or $8,856 a year.
*We're using the average owner-occupier home loan size from the ABS, the average variable rate loan in Finder's database of the full market and the lowest variable rate.
Every month, we analyse the rates in our database to create a list of the market's cheapest loans.
The lowest variable interest rate in Finder's database is 5.69%
The lowest fixed interest rate in Finder's database is 4.99%
Interest rates can change depending on your circumstances, but as a guide, here are the cheapest home loans from the big 4.
| Bank | Cheapest Fixed Rate | Cheapest Variable Rate |
|---|---|---|
| ANZ | 5.74% | 6.54% |
| CBA | 6.04% | 6.15% |
| NAB | 5.89% | 6.44% |
| Westpac | 5.89% | 6.74% |
The cheapest rate from the big 4 (by far!) is from CBA's new digital home loan which launched in May 2024. Even so, it's still a fairly considerable difference from the lowest rate across the market.
Let's do what we do best: compare.
Say you take out a $500,000 loan over 30 years with that 6.15% rate. You'd be paying $3,047 a month in repayments.
But with May's lowest variable rate across the market of 5.69%, you'd only (ha) be paying $2,899. That's a difference of $148 a month, or $1,776 a year.
In case you're interested, your repayments would be $3,190 with NAB's lowest variable rate. That's $291 more a month than the lowest market rate and $3,492 a year!
On 5 November the official cash rate was held at:
4.35%
The lowest variable owner-occupier rate on the market is:
5.69%
Assuming the average owner occupier home loan size of $641,143 you would be making monthly repayments of:
$3,718
"I wanted to make sure I have one of the cheapest home loans on the market. So I found an online lender with a consistently low interest rate (I should know, I check rates every month). But I also made the sure the loan had an offset account. For me, being able to build up savings in the offset account speeds up my loan and cuts down my overall interest charges dramatically. This makes the loan much cheaper in the long run."
At a very basic level, the cheapest home loan is the one with the lowest rate. But every borrower has different needs. So beyond a low rate, you need to get a loan that actually helps you achieve your property goals and financial needs.
Home loans are normally taken out for 30 years. But no one wants to spend the next 30 years making those repayments, right? With most variable rate home loans you can actually make extra repayments. By paying more off your loan than the required monthly repayments, you pay off the loan early and pay less in interest.
Fixed rate loans are less likely to allow extra repayments and will probably charge a break fee if you do repay early.
Owner-occupier home loans have the cheapest rates. But they're no good if you're a property investor because you'll need an investment loan.
Most borrowers want a principal and interest loan, but for investors, an interest-only loan offers tax benefits. It's important to understand your strategy early on. You may be someone that will start off as an owner occupier but then move out and use it for investment (if you have taken advantage of first home owner concessions, for example).
Is it worth going for the cheapest home loan if it doesn't have an offset account?! Well, that's up to you. But considering an offset account could see you paying your loan off early and therefore less in interest, it's a pretty key thing to want to include as part of your loan. An offset account is essentially a bank account attached to your mortgage. Instead of earning interest, it reduces the interest you'll pay.
Let's say you have $100,000 in your offset account and you have a $500,000 loan. You'll only pay interest on $400,000.
You still repay the same amount every month, but this just means more of your repayment goes towards the remaining loan value and not on interest. So you end up finishing the loan faster.
"If I had to credit just one thing with helping me repay my home loan in just 7 years, I'd say it was an offset account. This is a debt-busting secret weapon. You should keep every cent to your name in one of these – we're talking your savings for everything, your emergency cash stash and even your salary. You'll likely save tens of thousands of dollars and shave years off your time in debt."
Most borrowers choose 30-year loan terms. And spread out over that time, your monthly repayments are as low as possible.
If you picked a shorter loan term your monthly repayments would be higher, but you'd pay off your loan 5 years earlier, saving thousands in interest.
Let's look at 3 examples. These loans are all for the same amount borrowed, but the loan term changes:
| Loan term | 30 years | 25 years | 20 years |
|---|---|---|---|
| Interest rate | 6.00% | 6.00% | 6.00% |
| Loan amount | $600,000 | $600,000 | $600,000 |
| Monthly repayment | $3,598 | $3,866 | $4,299 |
| Total cost* | $1,295,030 | $1,159,743 | $1,031,611 |
*Total cost here refers to the amount of interest you pay over the life of the loan, plus the principal.
As you can see, a longer loan term means cheaper monthly repayments. But a shorter loan means you pay less interest in the long run, making the whole loan cheaper.
Some lenders charge multiple loan fees that can add up to hundreds of dollars. But other lenders charge basically no fees at all (you still have to pay government fees like a mortgage registration fee).
If 2 loans have identical interest rates and features, the one with fewer fees will be the cheapest home loan.
Easier said than done, of course. But saving a bigger deposit means borrowing less money. And that instantly makes your home loan cheaper.
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