What Affects Your Home Loan Interest Rate? (2026)

Understanding what influences your home loan interest rate can save you thousands of dollars over the life of your mortgage. Whether you're a first-home buyer or refinancing your existing loan, knowing these key factors puts you in control when negotiating with lenders. This guide breaks down exactly what affects your rate—and what you can do about it.

Why Your Interest Rate Matters More Than You Think

A difference of just 0.25% on your interest rate might not sound like much, but over a 30-year mortgage, it adds up fast. On a $500,000 loan, that small difference means roughly $26,000 in extra interest payments. Over the life of your loan, seemingly minor rate differences compound into tens of thousands of dollars.

Real Example: The Cost of 0.5% Over 30 Years

Two borrowers each take out a $500,000 loan over 30 years:

Borrower A at 6.0%: Monthly repayments of $2,997, total interest paid $579,190
Borrower B at 6.5%: Monthly repayments of $3,160, total interest paid $637,485

Borrower B pays an extra $58,295 over the loan term— all because of a 0.5% higher rate. That's money that could go toward renovations, investment, or paying off your loan faster.

The good news? You have more control over your interest rate than you might think. Let's break down the factors that determine what rate you'll pay.

What Influences Your Home Loan Interest Rate

1The Reserve Bank of Australia's Cash Rate

The RBA's cash rate is the foundation of all home loan interest rates in Australia. When the RBA changes this rate, lenders typically follow suit within days or weeks. The cash rate influences how much it costs banks to borrow money, and they pass these costs (plus their margin) onto you.

How It Works

Currently, the RBA adjusts rates based on inflation targets, employment figures, and economic growth. The cash rate is reviewed on the first Tuesday of each month (except January), and any changes typically flow through to home loan rates within 1-2 weeks.

What you can do: While you can't control the cash rate, understanding its movements helps you time your loan applications and refinancing decisions strategically. When the RBA cuts rates, it's often a good time to refinance. When rates are rising, locking in a fixed rate might make sense.

2Your Credit Score and Credit History

Your credit score is one of the most significant factors you can actually control. Lenders use it to assess risk—a higher score means you're seen as less risky, which often translates to better interest rates.

What Impacts Your Credit Score

Payment history: Late payments on credit cards, personal loans, or other debts hurt your score
Credit utilisation: Using close to your credit limit signals financial stress
Credit enquiries: Multiple loan applications in a short period can lower your score
Defaults and judgments: Serious black marks that stay on your file for years
Credit history length: Longer, consistent history generally helps

The Impact on Your Rate

What you can do: Check your credit score before applying (free via services like Equifax, Experian, or illion). Pay all bills on time, reduce credit card balances, close unused cards, and avoid multiple credit applications. Give yourself 3-6 months to improve your score before applying for a home loan.

3Loan-to-Value Ratio (LVR)

Your LVR is the amount you're borrowing compared to the property's value, expressed as a percentage. For example, if you're buying a $600,000 property with a $480,000 loan, your LVR is 80%.

How LVR Affects Your Rate

LVR below 80%: Best interest rates, no Lenders Mortgage Insurance (LMI) required
LVR 80-90%: Slightly higher rates, LMI payable (typically $10,000-$20,000+)
LVR above 90%: Higher rates, substantial LMI, stricter lending criteria

Real Example

Sarah is buying a $600,000 home. With a $120,000 deposit (80% LVR), she gets a rate of 6.19%. With only a $60,000 deposit (90% LVR), she's offered 6.49% plus $15,000 in LMI. Over 30 years, the higher LVR costs her an extra $43,000 in interest payments, plus the upfront LMI fee.

What you can do: Save a larger deposit to get below 80% LVR. If you can't reach 20%, the Australian Government's 5% Deposit Scheme (from October 2025) allows eligible first home buyers to purchase with just 5% down without paying LMI—potentially saving tens of thousands.

4Employment Status and Income Stability

Lenders assess your employment type and income stability carefully. Full-time permanent employees with consistent income typically receive the most competitive rates.

How Different Employment Types Affect Rates

Permanent full-time employees: Best rates, straightforward approval process
Casual and part-time workers: May need to show 6-12 months of consistent employment, potentially higher rates
Self-employed borrowers: Typically need 2 years of tax returns, may face slightly higher rates due to income variability
Contract workers: Assessment depends on industry and contract length, documentation requirements vary

Your income level matters too. Higher incomes relative to the loan amount (lower debt-to-income ratio) signal lower risk and can help you secure better terms.

What you can do: If you're casual or self-employed, wait until you have at least 12-24 months of consistent income documented before applying. Consider using a mortgage broker who knows which lenders are more flexible with non-traditional employment.

5Fixed vs Variable Interest Rates

The type of interest rate you choose affects both the rate you'll pay and the flexibility of your loan.

Variable Rate Characteristics

Rates move up or down with market conditions
More flexible features (offset accounts, redraw, unlimited extra repayments)
Usually no break fees for refinancing or paying off early
Can take advantage of rate cuts immediately

Fixed Rate Characteristics

Rate locked for 1-5 years (commonly 2-3 years)
Certainty in repayments, easier budgeting
Limited extra repayments (typically $10,000-$30,000 per year max)
Break fees apply if you refinance or pay off the loan early
Won't benefit if variable rates drop during fixed period

Split Loans: Best of Both Worlds?

Many borrowers choose a split loan—fixing 50-70% of their loan for certainty while keeping the rest variable for flexibility. This gives you protection against rate rises while still allowing extra repayments and access to features like offset accounts on the variable portion.

What you can do: Consider your risk tolerance and financial situation. If you need budget certainty and rates are expected to rise, fixing makes sense. If rates are falling or you want flexibility to make extra repayments, variable is better. A split loan offers a middle ground.

6The Property Type and Location

What you're buying and where it's located can influence your interest rate. Lenders categorise properties by risk, and this affects pricing.

Properties That Typically Get Better Rates

Established houses in major cities and well-serviced suburbs
Properties in areas with strong demand and price stability
Standard residential homes under $2 million
Owner-occupied properties (vs investment)

Properties That May Attract Higher Rates

Properties in regional or remote locations
Apartments in buildings with high investor concentrations or defects
Properties on hobby farms or with unique features
Company title or properties with land size/zoning issues
Investment properties (typically 0.20-0.50% higher than owner-occupied)

What you can do: If you're flexible on location, choosing a property in a well-serviced suburb can help you secure a better rate. Before committing, ask your lender or broker whether the property type or location will affect your rate or serviceability.

7Your Existing Debts and Financial Commitments

Lenders don't just look at your income—they assess all your financial commitments to determine how much you can genuinely afford to repay.

What Lenders Consider

Credit card limits (not just balances—the full limit)
Personal loans, car loans, and buy-now-pay-later services
HECS-HELP debt (calculated as percentage of income)
Child support and maintenance payments
Other mortgages or investment property commitments

Your debt-to-income (DTI) ratio has become increasingly important since APRA guidelines tightened. Lenders are more cautious about high DTI ratios, which can result in either a declined application or a higher interest rate to compensate for perceived risk.

Real Example: Credit Card Impact

Tom has a $10,000 credit card limit he rarely uses. When applying for a home loan, lenders assume he could max it out at any time, reducing his borrowing capacity by approximately $50,000-$64,000. By closing this card before applying, Tom could borrow more at a better rate.

What you can do: Before applying, pay off or consolidate high-interest debts. Close unused credit cards and reduce limits on cards you keep. Use our Borrowing Power Calculator to see how reducing debts improves your borrowing capacity and rate eligibility.

8Loan Features and Package Deals

The features you want can impact your interest rate. Basic loans with fewer features often have lower headline rates, while loans with offset accounts, redraw facilities, and other features may cost more.

Common Features and Their Impact

Offset account: May add 0.05-0.20% to your rate, but can save more in interest than it costs if used properly
Redraw facility: Usually minimal or no rate impact
Interest-only repayments: Typically 0.20-0.40% higher than principal and interest
Portability: Usually included with no rate impact
Package deals: Bundling with credit cards and transaction accounts sometimes offers better overall value

What you can do: Calculate whether features genuinely add value. An offset account that saves you thousands in interest is worth a small rate increase, but paying extra for features you'll never use makes no financial sense. Focus on features that align with your repayment strategy.

Competition Between Lenders and Your Negotiation Power

The competitive landscape affects rates significantly. Major banks, regional banks, credit unions, and online lenders all compete for customers—and this competition works in your favour.

Different Lenders, Different Approaches

Not all lenders target the same customers. Some offer sharp rates for borrowers with large deposits, others specialise in self-employed borrowers or first-home buyers. Shopping around and comparing at least 3-5 lenders is essential.

Online lenders and smaller institutions often offer lower rates because they have lower overheads (no branch networks). However, consider the trade-off between rate and service, especially if you need hands-on support or have complex circumstances.

Your Negotiation Skills Matter

Here's something many borrowers don't realise: home loan interest rates are negotiable. The rate advertised isn't necessarily the rate you'll pay. Lenders have discretion to offer better rates to attract or retain customers.

Strategies to Negotiate Better Rates

Get quotes from multiple lenders and use them as leverage with your preferred lender
Highlight your strong financial position (good credit score, stable job, low LVR)
Consider using a mortgage broker who has relationships with multiple lenders and volume-based pricing power
Time your application when lenders are pushing for growth (often end of financial quarter)
Bundle other banking products to increase your value as a customer
For existing customers: regularly review and renegotiate your rate (at least annually)

Important: Loyalty doesn't always pay in banking. New customers often get better deals than existing customers. If your current lender won't match competitive rates after negotiation, refinancing might be your best option—it could save you thousands per year.

Understanding the Real Cost: See It In Action

Small percentage differences might not seem significant on paper, but they add up dramatically over the life of a home loan. To truly understand the impact of different interest rates on your repayments, it's worth running the numbers yourself.

Try Our Mortgage Calculator

Want to see exactly how different interest rates affect your repayments? Use our free mortgage calculator to:

Calculate your monthly, fortnightly, or weekly repayments at different rates
See the total interest you'll pay over the life of your loan
Compare the cost difference between a 6.0% rate vs 6.5% vs 7.0%
Understand how changing your loan term affects your repayments
View a detailed amortization schedule showing principal vs interest breakdown

Example: Compare These Scenarios

Enter these details into our calculator to see the difference:

Scenario 1: Standard Rate

Loan: $500,000 | Rate: 6.5% | Term: 30 years

Scenario 2: Negotiated Rate

Loan: $500,000 | Rate: 6.0% | Term: 30 years

Scenario 3: Higher Rate (Poor Credit)

Loan: $500,000 | Rate: 7.0% | Term: 30 years

Play around with different percentages to find out exactly what your monthly, fortnightly, or weekly repayments would be at different interest rates. The results might surprise you—and motivate you to negotiate harder for a better rate.

Calculate Your Mortgage Repayments →

Taking Control of Your Interest Rate

While you can't control the Reserve Bank or broader economic conditions, you have significant influence over many factors that affect your home loan interest rate.

What You Can Control

Your credit score: Improve it by paying bills on time, reducing debts, and avoiding unnecessary credit applications
Your deposit size: Save a larger deposit to get below 80% LVR for better rates
Your existing debts: Pay off high-interest debts and close unused credit cards before applying
Your employment stability: Wait for consistent employment history if you're casual or self-employed
Which lender you choose: Shop around and compare rates from at least 3-5 lenders
Your negotiation approach: Don't accept the first rate offered—negotiate using competing quotes

The Long-Term Impact

The difference between a good rate and a great rate might seem small—just a fraction of a percent—but over the life of a 30-year mortgage, that small difference translates to thousands or even tens of thousands of dollars.

Loan Amount	Rate Difference	Savings Over 30 Years
$400,000	0.25% reduction	~$20,800
$500,000	0.25% reduction	~$26,000
$500,000	0.50% reduction	~$52,000
$700,000	0.25% reduction	~$36,400
$700,000	0.50% reduction	~$72,800

These savings are significant. That's money you could use to pay off your mortgage faster, invest, renovate, or build your financial security.

Don't Set and Forget

Most importantly, review your home loan regularly. What was a competitive rate two years ago might be well above market today. An annual health check of your mortgage can reveal opportunities to refinance, renegotiate, or restructure for better outcomes.

Annual Mortgage Health Check

Set a reminder each year to:

Check current market rates and compare to your rate
Call your lender and request a rate review
Get quotes from 2-3 other lenders as negotiation leverage
Consider whether refinancing makes sense
Review your loan features and whether they still suit your needs

Frequently Asked Questions

How often do home loan interest rates change?

Variable rates can change at any time, though they typically move in response to RBA cash rate decisions (announced on the first Tuesday of each month, except January) or competitive pressures. Lenders usually announce changes within days or weeks of an RBA decision. Fixed rates can change daily based on bond markets and lender funding costs, so if you're considering fixing, lock in quickly once you find a good rate.

What's the difference between the comparison rate and the interest rate?

The interest rate is what you pay on the amount borrowed. The comparison rate includes the interest rate plus most fees and charges (like application fees, monthly fees, and annual fees) rolled into a single percentage. It helps you compare the true cost of different loans, though it's based on a standard $150,000 loan over 25 years, so may not reflect your exact situation. Always look at both rates when comparing loans.

Can I negotiate my home loan interest rate?

Absolutely. Home loan rates are negotiable, especially if you have a strong financial profile, large deposit, or competing offers from other lenders. Both new borrowers and existing customers can negotiate. If you're an existing customer, call your lender annually to request a rate review—many lenders will reduce rates for valued customers rather than lose them to competitors. Come prepared with competitor rates and be willing to switch if they won't budge.

Is a fixed or variable rate better in 2025?

This depends on your circumstances and risk tolerance. Variable rates offer flexibility and potentially lower rates if the RBA cuts the cash rate. Fixed rates provide certainty and protection against rate rises. Consider your budget stability, how long you plan to keep the loan, and your ability to handle potential rate increases. Many borrowers choose a split loan to get benefits of both. Consider consulting with a mortgage broker or financial advisor for personalised advice based on current market conditions.

How much can my credit score affect my interest rate?

A strong credit score (700+) can help you secure rates 0.25% to 0.50% lower than borrowers with poor credit. On a $500,000 loan, that's $25,000 to $50,000 saved over 30 years. Some lenders offer their best rates only to borrowers with excellent credit (750+). Improving your credit score before applying can make a substantial financial difference—it's one of the most impactful things you can control.

Should I use a mortgage broker or go directly to lenders?

Both approaches have merits. Mortgage brokers can access multiple lenders (including some not available directly to consumers), save you time shopping around, and often negotiate better rates due to their relationships and volume of business. They're typically paid by lenders, so their service is usually free to you. Going direct gives you full control and allows you to build a relationship with your lender. Many borrowers use both approaches—getting broker quotes to compare with direct offers gives you maximum leverage.

When should I refinance my home loan?

Consider refinancing if your current rate is more than 0.50% above market rates, if your circumstances have improved (better credit score, higher income, more equity), or if you want to access better features. Factor in refinancing costs (typically $500-$1,500) and any break fees if you're on a fixed rate. Use our mortgage calculator to compare your current loan costs with potential new rates—if you'll save more than the refinancing costs within 1-2 years, it's worth considering.

What's the fastest way to reduce how much interest I pay?

Making extra repayments is the most effective strategy. Even an additional $100-$200 per month can shave years off your loan and save tens of thousands in interest. Other strategies: use an offset account to reduce the principal your interest is calculated on, switch to fortnightly or weekly repayments (you'll make an extra month's payment each year), and refinance to a lower rate. Run different scenarios through our mortgage calculator to see the impact of extra repayments on your specific loan.

Calculate Your Borrowing Power

Before you start negotiating rates, understand how much you can borrow. Our free calculator shows your borrowing capacity based on your income, expenses, and existing debts—helping you approach lenders with realistic expectations.

Check Your Borrowing Power →

The Bottom Line

Your home loan interest rate isn't set in stone—it's influenced by factors both within and outside your control. While you can't change the RBA's cash rate or broader economic conditions, you can significantly influence your rate by:

Improving your credit score before applying
Saving a larger deposit to reduce your LVR below 80%
Reducing existing debts and closing unused credit cards
Shopping around and comparing at least 3-5 lenders
Negotiating confidently with competing quotes as leverage
Reviewing your loan annually and refinancing when it makes sense

Even small improvements to your interest rate compound into massive savings over time. A 0.25% reduction might save you $26,000 over 30 years on a $500,000 loan. That's not money to leave on the table.

Don't accept the first rate you're offered. Question it, negotiate it, and compare it. Use mortgage calculators to understand the long-term impact of different rates. Get professional advice from a mortgage broker who can access multiple lenders and negotiate on your behalf.

Your mortgage will likely be your biggest financial commitment—taking time to secure the best possible rate is one of the smartest financial decisions you can make.

Important Disclaimer: The information provided in this article is general in nature and does not constitute financial, legal, or professional advice. It is not tailored to your personal circumstances, financial situation, or objectives. Interest rates, lending criteria, government schemes, and economic conditions change frequently and vary between lenders and borrowers.

The calculations, examples, and savings figures shown are estimates based on standard loan terms and assumptions. Your actual repayments, interest costs, and savings will vary based on your individual circumstances, the lender you choose, the specific loan product, and market conditions at the time of your application.

Before making any financial decisions, you should verify all current rates, fees, and requirements directly with lenders, and consider seeking advice from a qualified and licensed mortgage broker or financial advisor who can assess your specific situation and provide personalised recommendations. moneytools.com.au does not hold an Australian Financial Services Licence and does not provide personal financial advice.