Why the lowest interest rate isn’t always the best

It is no surprise that when many people look to choose a home loan, they look for one with the lowest interest rate possible.

With interest rates at record lows, there is no shortage of low rate loans available. Low rates mean lower repayments and less interest over the life of your loan.

For instance, InfoChoice compares a range of variable and fixed low interest rates starting at 2.17 per cent (comparison rate 2.17 per cent) for a variable loan with Freedom Home Loans. On a $300,000 loan, that’s just $1297 a month in repayments.

As for fixed rates, Bank Australia’s Clean Energy Home Loan LVR<70% starts at just 1.79 per cent (comparison rate 3.10 per cent) for a $1241 monthly repayment on a $300,000, three year loan.  

That’s a pretty good deal and affordable if you are looking to break into the home market.

However, interest rates aren’t the be all and end all of mortgage decisions. There are several other things you need to take into consideration when comparing home loans.

Look for suitable features

A low-interest home loan may not come with the features you need, even though a lower interest rate makes it appear that  your mortgage would be more affordable.

You may have a  low interest rate but if your fees are high, this can increase your monthly repayments and the total cost of the loan. You also need to be aware that some home loans come with a low introductory interest rate that reverts to a standard, higher interest rate after a set period.

You also need to take into consideration that not all home loans are available to all borrowers.

Certain loans and benefits might only be approved for people who meet the lender’s borrowing criteria. Some lenders will only approve you for low interest loans if you put down a 20% deposit or are buying to occupy rather than renting. 

Fundamentally, a home loan is right for you will suit your financial circumstances and your needs. If you find a home loan that looks attractive, but doesn’t fit your needs it’s obviously not the right one for you.

So, when considering a home loan, consider some of the following factors:

Affordability

Knowing what you can and can’t afford is the first step and most important thing to take into account when searching for a home loan. Have a precise outline of your budget, all your income and expenses. List all your essentials such as mortgage, bills and food. Then list the non-essentials such as entertainment and wardrobe. These might be areas where you could cut back if you need a few extra bucks for your new loan. InfoChoice offer a range of calculators to help you determine affordability, including the Borrowing Power Calculator and the Budget Planner Calculator.  

Borrowing criteria

Lenders have a comprehensive list of things that they take into consideration and you need to remember that you might not qualify for certain home loans. Lenders look at things such as your age, residency, employment, financial situation, income, credit score, expenses, assets and liabilities just to name a few. 

Product features

Choosing  a home loan with features is imperative as this will enable you to manage and repay your loan. Some features might be:

  • An offset account where the balance of your account is ‘offset’ against your loan balance. In the long run, this means you pay less in interest each month and over the life of your contract.
  • A redraw facility, which allows you to access money you’ve already repaid into your home loan.
  • Repayment holiday, which is a pause in repayments or temporarily reduce your repayment amount.
  • Extra repayments, which are beneficial if you want to pay off your loan faster.

Your goals

Achieving your short-term and long-term goals should be made easier if you select  the right home loan for your circumstances. For example you may want to pay off your mortgage faster. If this is the case you might choose a home loan that allows extra repayments.

There are plenty of home loans to choose from, so don’t just decide by interest rate alone. Take into account every factor that affects length and payback. Once you have properly compared, you will be well armed to take the next step to buying a home.


This update is not financial advice. This article is general news and information.

Home Loans: The comparison rates are based on a secured loan amount of $150,000 and a term of 25 years.

Personal Loans: The comparison rates in this table are based on a loan of $30,000 and a term of 5 years unless otherwise indicated in the product name with^, in which case, the comparison rate is based on a loan of $10,000 and a term of 3 years. The comparison rates are for unsecured personal loans only for the relevant amounts and terms. The comparison rates for car loans and secured personal loans are for secured loans unless indicated otherwise.

WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.

The products compared in this article are chosen from a range of offers available to us and are not representative of all the products available in the market and influenced by a range of factors including interest rates, product costs and commercial and sponsorship arrangements

InfoChoice compares financial products from 145 banks, credit unions and other financial institutions in Australia. InfoChoice does not compare every product in the market. Some institutions may have a commercial partnership with InfoChoice. Rates are provided by partners and taken from financial institutions websites. We believe all information to be accurate on the date published. InfoChoice strives to update and keep information as accurate as possible.

The information contained on this web site is general in nature and does not take into account your personal situation. Do not interpret the listing order as an endorsement or recommendation from us. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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