Understanding home loan interest rates
Learn how home loan interest rates work, how interest is calculated, and the difference between fixed, variable and comparison rates.
A home loan interest rate is the annual percentage a lender charges you to borrow money for a property. It directly determines how much you repay each month and over the life of your loan.
Understanding how interest rates work helps you compare home loans, estimate your repayments, and spot opportunities to save.
What is a home loan interest rate?
A home loan interest rate is the annual cost a lender charges you to borrow money. It’s expressed as a percentage of your outstanding loan balance.
Interest is calculated daily on the amount you still owe. As you make repayments and reduce your balance, the amount of interest charged each day decreases.
How is daily interest calculated?
Lenders calculate interest daily using this formula:
Daily interest = Loan balance × Annual interest rate ÷ 365
For example, on a $500,000 loan at 6% p.a.
$500,000 × 0.06 ÷ 365 = $82.19 per day
Over a 30-day month, that’s approximately $2,466 in interest, assuming the loan balance remains unchanged.
This is a simplified example only. Actual interest calculations may vary depending on your lender, loan structure and repayment type.
What is the difference between an interest rate and a comparison rate?
The interest rate is the annual percentage charged on your loan balance.
A comparison rate includes the interest rate as well as certain fees and charges relating to a loan and therefore is usually higher than the interest rate. The aim of the comparison rate is to help you identify the true cost of a loan and compare loans and services offered by financial institutions and mortgage providers.
The formula for calculating a comparison rate is regulated by the Consumer Credit Code, and all Australian financial institutions and mortgage providers use this same formula.
Comparison rates are based on a standard example and may not include all costs and features, so they should be used as a guide only.
What does the term principal mean?
The principal is the total amount you borrow from a lender to buy a property.
If you are making principal and interest repayments, each repayment reduces your principal balance. As your balance falls, the daily interest charged on your loan also decreases, meaning a larger portion of each repayment goes toward the principal over time.
What is a principal and interest home loan?
A principal and interest (P&I) home loan means each repayment covers a portion of your loan balance plus the interest charged. This is the most common repayment type for owner-occupied home loans in Australia.
This structure gradually reduces your loan to zero by the end of your loan term. Because you’re paying down the principal from day one, you pay less total interest than an interest-only loan.
What is an interest-only home loan?
An interest-only home loan means you pay only the interest charges for a set period, usually 1–5 years. During this time, your loan balance stays the same because no repayments go toward the principal.
When the interest-only period ends, your repayments switch to principal and interest. Repayments increase because you now need to repay the full loan balance in the remaining term.
Example: Interest-only vs principal and interest
On a $500,000 loan at 6% p.a. over 30 years:
A loan that has a period of interest-only payments can result in higher total interest over the life of the loan, as the principal is not reduced during the interest-only period.
This is a simplified example only. Actual interest calculations may vary depending on your lender, loan structure and repayment type.
Unloan does not currently offer interest-only repayments. All Unloan home loans are principal and interest.
What is a variable rate home loan?
A variable rate home loan has an interest rate that can move up or down at any time. Most variable rate changes follow the RBA’s cash rate decisions, though lenders can adjust rates independently.
When the RBA raises or lowers the cash rate, most lenders pass the change on to variable rate borrowers. Your repayments adjust accordingly.
Variable rate loans usually offer more features than fixed rate loans, including unlimited extra repayments and redraw facilities. Unloan offers variable rate home loans with no application fees, no ongoing fees, and a fee-free redraw facility.
What is a fixed rate home loan?
A fixed rate home loan locks in your interest rate for a set period, usually 1–5 years. Your interest rate and repayments stay the same during this time.
At the end of the fixed period, your loan converts to the lender’s standard variable rate unless you choose to re-fix. Breaking a fixed rate loan early can trigger break costs.
Fixed rate loans typically have fewer features. Most don’t allow unlimited extra repayments or access to offset accounts during the fixed term.
What is the difference between fixed and variable interest rates?
Rate changes and features can vary by lender and loan type. This is general information only.
What is a split home loan?
A split home loan divides your loan into two parts: one with a fixed rate and one with a variable rate. This gives you a mix of repayment certainty and flexibility.
Split loans may suit borrowers who want budget certainty on part of their loan but don’t want to lose flexibility entirely.
Please note that Unloan does not offer split loans.
What role does the RBA cash rate play?
The Reserve Bank of Australia (RBA) sets the cash rate, which is the interest rate banks charge each other for overnight loans. The cash rate influences the interest rates lenders offer on home loans.
When the RBA changes the cash rate, lenders may adjust their variable home loan rates. This can affect how much you repay over time.
Fixed rates are generally influenced by wholesale funding costs and market conditions, so they may not move in line with changes to the RBA cash rate.
What factors affect your home loan interest rate?
Several factors determine the interest rate a lender offers you:
- Loan-to-value ratio (LVR) - A lower LVR may result in a lower interest rate and may reduce the likelihood of paying Lenders Mortgage Insurance (LMI).
- Loan purpose - Owner-occupier loans may have different interest rates compared to investment loans.
- Repayment type - Principal and interest repayments may have different interest rates compared to interest-only payments.
- Loan size - Some lenders may offer tiered discounts for larger loan amounts.
- Fixed or variable - Fixed and variable rates are priced independently and can differ at any given time.
How do interest rates affect home loan repayments?
Interest rates can affect your repayment amount, particularly for variable rate loans. Even small rate changes can affect the total amount paid over the life of a loan.
If variable rates increase, your repayments may increase. If rates decrease, your repayments may decrease.
For example, on a $500,000 loan over 30 years, a 0.25% p.a. rate increase may increase monthly repayments by around $70–$80, depending on the loan structure.
Lenders may apply a serviceability buffer when assessing how much you can borrow. This means your ability to repay the loan is assessed at a higher interest rate than the actual rate, to account for potential rate increases.
Example: How interest rates affect repayments
Loan amount: $500,000
Interest rate: 6% p.a.
Loan term: 30 years
Your monthly repayment is about $2,998.
If the interest rate rises to 7% p.a., your monthly repayment increases to about $3,327.
That is roughly $329 more per month.
Repayment impact at different interest rates
On a $500,000 loan over 30 years:
This example is for illustrative purposes only and assumes a $500,000 loan over 30 years with principal and interest repayments. Actual repayments may vary depending on your loan terms, interest rate, and lender.
What happens when a fixed rate home loan ends?
When your fixed rate period ends, your loan automatically converts to the lender’s standard variable rate.
At this point, some common options include: you can stay on the variable rate, negotiate a new fixed rate with your lender, or refinance to a different lender.
How can you reduce the interest you pay?
There are some common ways to reduce the total interest you pay on your home loan:
Choose a shorter loan term
A shorter loan term means interest is charged over a shorter period, which may reduce the total interest paid.
Switch to fortnightly repayments
Paying fortnightly instead of monthly means you make more frequent repayments, which may help reduce the total interest paid over time.
Use a redraw facility (if available)
Some home loans allow you to make extra repayments and access those funds later through a redraw facility.
Making extra repayments may reduce the interest you pay over time. Access to redraw and how it works will depend on your lender and loan terms.
Consider refinancing your home loan
Refinancing involves switching your existing home loan to a new loan, which may have a different interest rate or features.
If a lower interest rate is available, refinancing may reduce your repayments or the total interest paid over time.
Costs, fees, and eligibility criteria may apply, and the impact will depend on your individual circumstances.
Unloan is a division of Commonwealth Bank of Australia.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Unloan is a division of Commonwealth Bank of Australia, and Commonwealth Bank does not provide tax (financial) advice under the Tax Agent Services Act 2009 (Cth). You should consider seeking independent tax advice from a registered tax agent, accountant or adviser before you make any decisions based on this information.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions are found on our Unloan Terms and Conditions. Modified Terms and Conditions will be set out in our Notice of Variation Agreement, if you are approved. This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.
