Is there such thing as a ‘best’ home loan? 

William Jolly By on November 1, 2019
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How does one define “the best home loan”? Does such a product even exist? 

While we can’t outright say what the best home loan is, we can use data from responses provided by real home loan customers to determine what the majority of Australians want from a home loan, thus narrowing our scope of what the average home buyer considers “the best” in a home loan. 

Is there such thing as the best home loan?

Technically, no, there is no such thing as the best home loan, because “best” is a subjective term, and finance doesn’t deal in the “one-size-fits-all” trade.

What’s the best product for one person might be the worst for someone else, since everyone has different wants and needs. So it’s almost impossible to define one single home loan as the best on the market since there are thousands of them and millions of people who want one. 

But there is some research done by ASIC that sheds a light on what the typical home loan customer wants from a home loan, and what they think the best home loan is. 

As things stand, these are some of the sharpest variable home loan rates Savings.com.au has found on offer which may represent the ‘best of’ the big four banks, the ‘best of’ the top 10 customer-owned institutions and the ‘best of’ the larger non-banks:

Provider Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
Purchase or Refi, P&I 80% Smart Home Loan 2.88% 2.90% $1,660 More details
Low Rate Home Loan w/Offset 2.90% 2.92% $1,665 More details
Base Variable Rate Special P&I 3.20% 3.20% $1,730 More details
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
Purchase or Refi, P&I 80% Smart Home Loan
2.88% 2.90% $1,660
More details
Low Rate Home Loan w/Offset
2.90% 2.92% $1,665
More details
Base Variable Rate Special P&I
3.20% 3.20% $1,730
More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 18 November 2019. View disclaimer.

What defines the best home loans?

According to an August 2019 report from ASIC titled Looking for a mortgage: Consumer experiences and expectations in getting a home loan, finding the ‘best’ loan was a key focus for prospective home buyers at the start of their journey. When asked what the ‘best loan’ meant for them, respondents gave the following responses in their own words:

  • ‘Is the cheapest’
  • ‘The loan with the lowest interest rates’
  • ‘The best interest rate’
  • ‘Flexible with a low interest rate’
  • ‘Low fees and low interest with no strings attached’
  • ‘I can pay off quickly with low rates’
  • ‘Offers flexibility of redraw and extra repayments’
  • ‘Suits my particular needs’.

Roughly two-thirds of respondents said the best home loan had low interest rates or similar variations. After taking on board all of the responses, ASIC referred to the best home loan as:

A home loan that offers the consumer the best value taking into consideration what a consumer desires in a home loan.

Another highly-desired home loan trait – flexibility – is also referenced in the report. Flexibility in a home loan, in this case, was mainly referred to by respondents as features like an offset account or a redraw facility:

I really like offset accounts, we use it all the time—the way we
structure—the way we spend—all through our finances is based on
keeping as much as our monthly wage in the offset account to
offset our mortgage—so I’ve found that a really useful tool.

So, going forward, I’d like to have an offset account—I need to make sure the package price isn’t going to cost more in offsetting my interest.

(Refinancer, unfinished journey)

The only real main requirement is an offset account—we currently
have this.

(Non-first home buyer, unfinished journey)

First home buyers though are less likely to care too much about these additional features, or even know what they are: 

I got confused with offset accounts in general—didn’t even know
that was a thing, not something they tell me—they tell you, you can
put money into an offset account which offsets your loan—I wasn’t
even aware that was something you can do.

(First home buyer, direct)

So first home buyers don’t really seem to care as much for handy home loan features – some are just after a good rate and an easy application. According to ABS Household Lending statistics for April 2019, lending to first home buyers rose to a six and a half year high, occupying a market share of 28.2%. 

This means first home buyers represent about one-third of it. Therefore we can assume, based on ASIC’s report, that the standard ‘best’ home loan is one that offers a low interest rate, low fees and flexible features such as an offset account. 

Low-rate flexible home loans

The table below shows a collection of some of the lowest variable interest rates on the market for owner-occupiers seeking home loans with offset features. 

Provider Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
Low Rate Home Loan w/Offset 2.90% 2.92% $1,665 More details
Achieve Vairable OO P&I Special 3.05% 3.10% $1,697 More details
Real Deal P&I Special Offer 3.19% 3.05% $1,727 More details
Essentials OO P&I 90% 3.28% 3.42% $1,747 More details
Tailored Variable P&I 4.77% 4.90% $2,091 More details
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
Low Rate Home Loan w/Offset
2.90% 2.92% $1,665
More details
Achieve Vairable OO P&I Special
3.05% 3.10% $1,697
More details
Real Deal P&I Special Offer
3.19% 3.05% $1,727
More details
Essentials OO P&I 90%
3.28% 3.42% $1,747
More details
Tailored Variable P&I
4.77% 4.90% $2,091
More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 18 November 2019. View disclaimer.

How to find the best home loan

There are a few things you can look for when looking for a potential best home loan. 

For variable rate home loans: 

  • Look at the comparison rate: some lenders will hide high fees behind an ultra-low advertised rate 
  • Is it a packaged loan? Packaged loans can have low interest rates but can have high comparison rates, since there are often package fees associated with the other linked products 
  • Are there any discounts available? 
  • Can you get a better rate through a mortgage broker?

For fixed-rate home loans:

  • Look out for restrictions on the fixed rate: many fixed loans don’t offer those extra features like offset accounts and may also not allow extra repayments 
  • What’s the revert rate? At the end of the fixed-rate period, your fixed-rate may revert to a much higher variable rate
  • What are the break fees? Breaking a fixed loan contract before it ends can carry a hefty break fee, sometimes in the thousands of dollars 

Many customers who do get a home loan are left unsure as to whether they actually have a good rate. ASIC’s research found one in five (21%) consumers settled for higher rate home loans, or were uncertain they got a good deal, because of “confusion, indifference or exhaustion”.

Source: ASIC

“Based on the findings of this research, we believe that some consumers are likely taking out loans when cheaper alternatives exist, suggesting there is a need for greater price transparency in relation to home loans to help consumers make informed decisions,” the ASIC report said.

A big reason why so many people don’t get the best home loan for them is because they aren’t comparing them properly. Most consumers (60%) took out a home loan with a lender they had an existing relationship with, with 19% of them doing so without obtaining an alternative quote for a home loan from another lender.

“Where consumers had home loan options to compare, we found that they rarely compared options in any formal, methodical way,” ASIC said.

“While consumers appeared to consider aspects of the loan (e.g. interest rates, fees, features), they were less likely to compare potential savings between options.”

Source: ASIC

To avoid the pains of shopping around, you could always consider consulting a mortgage broker. Mortgage brokers settle around 60% of all home loans in Australia, while in the last 12 months, 56% of consumers who had taken out a loan in the previous 12 months went direct with a lender and 44% of consumers went through a mortgage broker.

ASIC’s research found more home loan customers were happy with their home loan when they went through a broker compared to going direct to a lender. Consumers going through a mortgage broker were more than twice as likely to believe that the broker got them the best interest rate available (42%) compared to consumers who took their loan out direct with a lender (17%).

Source: ASIC

However, those broker-utilising consumers that believed they got the best interest rate available may have simply been unaware of the potentially lower-rate home loans available to them. ASIC research found 58% of consumers received only one or two loan options from brokers. 

So if you are going to use a mortgage broker, don’t rely on them to do all the work for you. Make sure you do your own research by doing a thorough comparison of the various home loans on the market based on their interest rates, fees and features. Compare your findings with what your broker suggests – you may be surprised to find that the loans you’ve found through your own research offer better value than the ones suggested by your broker. 

Ways to boost your chances of getting a good loan 

The interest rate you’ll be offered on a home loan (or whether you get approved for one or not) will depend on how the lender perceives you as a risk. It isn’t as easy as just walking into a bank and being given the stamp of approval on the spot – banks now want to know you’re a trustworthy borrower. How can you prove this to them? 

In our article ‘How to improve your chances of getting a home loan’ we cover nine things you can do to boost your chances of getting approved for your dream loan. These nine things are: 

Savings.com.au’s two cents 

We do wish we could just point to one single home loan and say “Yes this one here is by far the best home loan for you specifically, get it and we guarantee you’ll save loads of money”. Aside from the fact that we legally can’t do that, it also just wouldn’t work. There are thousands of home loan products on the market, each of which could be the best choice for a different person. It all depends on your circumstances. 

A crucial point to remember is that a home loan can only be ‘perfect’ for the person who pays for it. That’s you. And if you can’t afford to meet the repayments, then that home loan is not the right one for you. 

More than 30% of homeowners in this country are currently in mortgage stress because 30% or more of their pre-tax income is being spent solely on repaying their mortgage. Many of these people are in severe stress and are in danger of completely defaulting on their loan. 

So even if a particular loan checks all the boxes of ‘the best loan’, it might not be perfect for you. Plug its details into a home loan repayment calculator to see if you can afford the loan, and use other tools like offset account calculators to see if those are worth getting as well. Remember, loans with extra features can sometimes have higher fees or interest rates. 


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in 2018. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers’ products may not be available in all states.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure. The interest rate per annum is based on a loan credit of $150,000 and a loan term of 25 years.

William Jolly
William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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