Why the Lowest Home Loan Interest Rate Isn’t Always the Best Option

It’s completely understandable to start your home loan search by looking for the lowest advertised interest rate.

A lower rate can reduce your repayments and the total interest paid over the life of the loan. However, the lender advertising the lowest rate may not necessarily be the lender that will approve the amount you need, or provide the most suitable loan for your circumstances.

Why the lowest home loan interest rate doesn’t guarantee approval

Home loan rates are often advertised for a particular type of borrower or property.

Eligibility may depend on factors such as:

• The size of your deposit

• Your loan-to-value ratio

• Whether you’re buying a home or an investment property

• Whether you’ll make principal and interest or interest-only repayments

• The loan amount

• Your credit history

• The type and consistency of your income

You may meet the lender’s general eligibility requirements but still not qualify for the advertised rate or the amount you want to borrow.

Lenders don’t all assess income the same way

This is particularly important for people whose income includes more than a standard base salary.

Overtime, allowances, bonuses, commissions and casual income can be treated differently by each lender. One lender may accept most of that income, while another may use a reduced percentage, require a longer history or exclude some components altogether.

The lender with the lowest advertised rate could therefore calculate a much lower borrowing capacity than another lender with a slightly higher rate.

This doesn’t mean the lower-rate lender is doing anything wrong. It simply means its lending policy may not be the best fit for that particular applicant.

Borrowing capacity matters

Before comparing interest rates, it’s important to establish which lenders are likely to:

• Accept your income

• Provide the amount you need

• Be comfortable with your credit history and existing commitments

• Consider the type and location of the property

• Offer a loan structure that suits your plans

There’s little benefit in choosing a rate that looks excellent online if the lender won’t approve the loan you need.

Look beyond the headline rate

The interest rate is important, but it isn’t the full cost or structure of a home loan.

Other things to consider include:

• The comparison rate

• Application and ongoing fees

• Offset or redraw facilities

• The ability to make additional repayments

• Cashback offers and their conditions

• The lender’s credit policy

• How the lender will assess your income

• The expected approval and settlement process

Moneysmart also recommends comparing interest rates, comparison rates, fees, repayments, loan terms and features when choosing a home loan.

The best lender depends on the borrower

There isn’t one lender that is best for everyone.

A PAYG employee earning a fixed salary may have very different options from a shift worker receiving regular overtime and allowances. The same applies to self-employed applicants, investors, first home buyers and borrowers with previous credit issues.

The goal is to find a competitive loan from a lender whose policy suits your actual circumstances.

Sometimes that will be the lender advertising the lowest rate. Sometimes another lender will provide a stronger and more practical overall option.

If you’re buying or refinancing and want to understand which lenders may suit your income and circumstances, I can compare the options and explain the differences before you apply.