Do your homework
You wouldn't think a small difference in interest rates could make that much difference on how much is repaid, but it adds up.
The reason is the power of compounding. Just as an investment grows if the interest it pays is added to the capital, the same thing happens with the mortgage, but in reverse.
To show the difference a small gap in interest rates can make I used the MoneySmart mortgage calculator provided by the Australian Securities and Investments Commission at moneysmart.gov.au.
I assumed a mortgage of $350,000 that is paid back over 25 years with monthly repayments.
If the interest rate is 6 per cent the amount repaid in interest is $326,516. If the interest rate is 5.5 per cent, the amount repaid in interest falls to $294,792, or a difference of $31,724 between the two interest rates.
However, the mortgage with the lowest interest rate may not necessarily be the best loan. Fees and charges can add thousands to the cost of a loan. All lenders are required to provide the "comparison rate" alongside their advertised rates.
The comparison rate is based on a loan of $150,000 and a term of 25 years. It is a good attempt to capture the fees and charges of the loan and express those costs through the interest rate.
It captures most of the costs, but not all. For those who prefer to have help, mortgage brokers can be good. While they can help take the legwork out of finding the best mortgage, it does not remove all responsibility from the borrower. A good broker will have a spread of loans from various lenders and will recommend more than one mortgage. Brokers are paid a commission by the lenders at a time when commissions for financial planners, for example, are on their way out.
There is usually an upfront payment for signing a client and an ongoing trial commission, which is a percentage of the loan size. The larger the mortgage the larger the commission, so be wary of being advised by a mortgage broker to borrow more than is needed.
Some lenders pay higher commissions on their mortgages than other lenders. Brokers have to be licensed and with that comes better disclosure of commissions and "volume" payments, if any, where the broker is paid more by the lender for selling more of its mortgages. Brokers also have to conduct an assessment as to whether the mortgage is "not unsuitable" for the borrower.
That is much better than the bad old days but borrowers should also check directly with lenders to see what is on offer or with comparison websites such as canstar.com.au or ratecity.com.au.
Frequently Asked Questions about this Article…
Even a half‑percent difference can cost thousands. Using the MoneySmart mortgage calculator example in the article for a $350,000 mortgage over 25 years with monthly repayments: at 6.0% total interest repaid is $326,516, while at 5.5% total interest repaid is $294,792 — a difference of $31,724. The gap grows because of the compounding effect on mortgage interest.
The comparison rate is a required figure lenders must show alongside advertised rates. It's calculated on a $150,000 loan over 25 years and attempts to express fees and charges as an interest‑rate equivalent. It captures most loan costs, making it easier to compare offers, though it doesn’t include every possible fee or situation.
Advertised interest rates don't always reflect fees and other charges that can add thousands to a loan’s cost. Because of these extra costs, the lowest advertised rate can be misleading — the comparison rate and a careful look at fees are needed to judge the true cost of a loan.
You can use tools such as the MoneySmart mortgage calculator on moneysmart.gov.au (run by ASIC) to model different loan amounts, terms and interest rates. The article used that calculator to show how rates, loan size and term affect total interest repaid.
Mortgage brokers can save you legwork and typically offer a spread of loans from various lenders and multiple recommendations. However, they don’t remove your responsibility to check offers. Be aware brokers are paid by lenders, so check disclosures and compare broker recommendations with direct lender offers and comparison websites.
Brokers usually receive an upfront payment when you sign and an ongoing trail commission (a percentage of the loan size). Because larger loans generate larger commissions, there is potential for conflicted advice — for example, being encouraged to borrow more than you need.
Yes. Brokers must be licensed and, with licensing, come stricter disclosure rules. Licensed brokers must disclose commissions and any 'volume' payments from lenders and must assess whether a loan is 'not unsuitable' for the borrower.
Besides checking directly with lenders, the article recommends comparison websites such as canstar.com.au and ratecity.com.au to see a range of home loan offers and compare features, interest rates and fees.
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