We’ve all been at a BBQ when someone starts bragging about their “unbelievably low” home loan rate. While some stories stretch the truth, it’s helpful to understand what really drives home loan interest rates – and why some people genuinely do have better deals than others.
Some of the factors are outside your control and come down to how banks price risk or respond to regulatory settings. But there are areas where you can take action to improve your rate – either with your current bank or by switching.
1. Loan Purpose: Owner-Occupier vs Investor
Why it matters:
Banks price investment loans higher because they carry more risk and are subject to tighter regulations. The Australian Prudential Regulation Authority (APRA) requires banks to hold more capital for investment loans and caps how quickly their investor loan books can grow. These costs are passed on to borrowers.
What you can do:
With the right loan structure and bank strategy (often involving different lenders), you may be able to classify more of your lending under owner-occupied purposes – but timing is key, and it needs to be done properly.
2. Repayment Type: Principal & Interest vs Interest-Only
Why it matters:
Interest-only loans are riskier for banks — you’re not paying off the principal during the interest-only period. Regulators impose limits on how much interest-only lending banks can offer. This results in higher rates.
What you can do:
While you can’t avoid the rate difference, interest-only loans may still make sense in some cases for tax planning or cash flow purposes. The rate isn’t always the main consideration – strategy matters.
3. Loan-to-Value Ratio (LVR)
Why it matters:
The higher your LVR (i.e., the higher your loan to thew value of the property), the greater the risk to the bank. This is why you’ll often see rate differences at LVR breakpoints like 70%, 80%, and 90%.
What you can do:
Valuations vary between lenders. We often order 4–5 valuations across different banks to try and qualify a loan for lower pricing by bringing the LVR below a key threshold. This strategy only on properties that weren’t recently purchased, as banks will use the lower of the purchase price or valuation within the first 12 months generally.
4. Your Lender
Why it matters:
Each bank has different risk appetites, pricing models, and business goals. Some banks offer highly competitive introductory rates but may not reprice existing loans competitively over time. Others have better long-term pricing strategies.
What you can do:
Regularly review your rate and lender.
5. Your Total Borrowing
Why it matters:
Larger loans mean more profit for banks, and the cost to service a customer doesn’t increase much with loan size. So, banks sometimes offer better pricing to larger borrowers.
What you can do:
There’s not much you can do here – you’re better to be paying off the debt!
6. Loan Age (How Long You’ve Been with the Bank)
Why it matters:
Older loans are often left on outdated pricing. Lenders rely on inertia — unless you ask, they likely won’t reduce your rate.
What you can do:
Review your loan regularly. A quick rate review every 12–18 months can save you thousands.
Final Tip:
Don’t rely on BBQ chat for your financial strategy. Know what affects your rate and take control where you can. If you would like us to review your borrowing, please reach out to Jason at Hamilton Morello Finance – 0432 359 972 – jasono@hmadvisors.com
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