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How to find the cheapest mortgage rate

By looking carefully at interest rates, fees and features you can find the cheapest mortgage that works for you and saves you thousands.

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Cheap home loans

Getting a lower interest rate is one of the best ways to save on your loan. Even a difference of a few basis points saves you thousands over a 30-year mortgage. Take a look at our tips for saving on your mortgage, as there’s more to it than just a low-interest rate.

Find the lowest interest rate

Here are some ideas to help you compare rates among different lenders:

  • Floating versus fixed rates. Variable or floating mortgages usually have lower rates and offer more flexibility than a fixed-rate mortgage. However, you can find very competitive fixed-rate loans too. If rates rise while you’re still on a fixed loan, you may end up with a more competitive rate.
  • Introductory rate discounts. Look out for loans with discounted introductory interest rates. These might be some of the lowest loans on the market. However, you need to pay attention to the interest rate once the discount period ends and refinance to a better loan if your new rate jumps up. Also, look at discharge or exit fees. You don’t want to get hit with a big fee when trying to exit the loan later (although a small fee isn’t so bad if the rate is very competitive).
  • The comparison rate. A mortgage’s comparison rate takes the cost of loan fees into account. It does this using a hypothetical mortgage and combining the fee cost with the interest rate. It can be helpful, but you’re better off looking at the actual fees of a loan and working out what they’ll cost you.
  • Negotiating. Once you’ve chosen a mortgage you can ask for a discount. It never hurts to ask.

Your interest rate determines the cost of your monthly repayments. The cheapest home loan is usually the one with the lowest interest rate. It’s the first thing you should look for.

Let’s compare three loans that are otherwise identical and see how the interest rates affect the repayments.

Interest rate2.50%3.00%3.50%
Loan amount$600,000$600,000$600,000
Loan term30 years30 years30 years
Monthly repayment$2,370$2,529$2,694

You can see from these examples how the lowest interest rate makes your repayments cheaper each month. Over the life of a mortgage, this really adds up.

Over 30 years, with a 3.50% interest rate on a $600,000 loan, you end up paying $116,475 more in interest than with a 2.50% interest rate.

Can I get a lower rate from a smaller lender?

Many Kiwi borrowers may go with one of the Big Four banks (Westpac, ASB, BNZ and ANZ). However, you may find a cheaper mortgage interest by looking at a smaller lender. Examples of smaller lenders include:

  • Online lenders. Some lenders save on the cost of physical branch locations by going entirely online. They pass the savings onto borrowers in the form of lower rates.
  • Small lenders and credit unions. Local credit unions and other customer-owned banks may be an alternative for a mortgage, as they can offer competitive deals. There are also smaller banks that operate nationwide which also offer very good deals.

However, don’t count the Big Four out completely. It’s a crowded market and everyone wants your business. While everyone cares about getting a cheap mortgage, the big banks do offer apps, strong customer service, more branch locations and the biggest selection of other financial products, like transaction and savings accounts. Those are important considerations too.

Get a loan with low fees

Most mortgages come with fees. These are separate from the interest rate and your repayments, but they are calculated into a loan’s comparison rate.

Upfront, one-off fees (like application fees) can be expensive. You should also watch out for smaller, ongoing fees that some lenders charge monthly or annually.

So should I avoid fees at all costs?

Not always. You need to crunch the numbers and work it out for yourself. If a loan has a low rate and features you need (like an offset account), then it might be worth paying the fee.

Some fees only come at the end of the loan or when switching lenders. Keep this in mind if you’re planning to refinance (which you probably should).

Choose features that save you time (and money)

Calculating your mortgage expenses.Mortgages with the lowest interest rates often have fewer features. However, the right features can help you get more out of your mortgage and save you money. It depends on your strategy.

  • Offset accounts. An offset account is a transaction account linked to your home loan. It reduces the amount of interest you’re repaying. For example, if you borrow $200,000 and save $10,000 in a 100% offset account, you only pay interest on $190,000. You can use the offset account funds if you need to spend them, but then you have to pay interest on the full amount.
  • Loan portability. This feature lets you move your loan to a new property without the high costs of exiting a loan and taking out a new one.
  • Unlimited extra repayments. Some lenders charge penalty fees when you make extra repayments. The most affordable mortgage could be the one that lets you pay it off in your own way, so watch out for repayment fees. Note that while most lenders allow you to pay variable-rate mortgages off early with no problem, fixed loans charge a penalty fee known as break costs.

It is possible to get a cheap home loan that also has the features you need. You just need to do your homework.

Save a bigger deposit

The bigger your deposit, the less you have to borrow, which makes for cheaper repayments. In some cases, a bigger deposit unlocks lower rates. Most mortgages require a deposit between 5% and 20% of your property’s value. If you borrow with a deposit that is less than 20% of your property’s value, you may need to pay lenders mortgage insurance (LMI) on top of your loan.

A 20% deposit means avoiding LMI, which makes the loan cheaper. If you can’t save 20% but your parents own a home and are willing to help you, they could guarantee your deposit and help you avoid the LMI.

Take a closer look at your repayments

Your repayment structure has a big effect on the cost of your mortgage and it’s important to understand how interest is charged. Most borrowers choose principal-and-interest repayments but you have the option to make interest-only repayments instead. Both are “cheaper” in different ways:

  • Principal-and-interest repayments. You borrow money (the loan principal) and repay it together with interest, which means you’re paying off your debt immediately. Principal-and-interest loans tend to have the lowest interest rates and work out cheaper in the long run for most borrowers.
  • Interest-only repayments. With an interest-only loan, you get an initial period where you only repay the interest charged on the loan and don’t pay off any of the principal. This option makes your repayments much cheaper early on but by the end of the loan, it costs you more. Because the loan principal needs to be paid off and the longer you take the more interest you pay. Also, rates on interest-only loans tend to be higher than on principal-and-interest rates.

So which is the cheaper mortgage?

A cheap mortgage means different things to different borrowers. Some property investors favour interest-only loans because they are so cheap at the start, which makes sense if you’re hoping to turn a profit in a few years in a booming market by selling quickly (also known as “flipping” a property).

If you’re struggling to make repayments because you’ve lost your job or your income has fallen, then the cheapest mortgage is the one with low repayments right now. In that case, you might need to go interest-only for a while (lenders usually let you switch repayment types).

However, for most borrowers the cheapest home loan has a lower interest rate and lets you pay down debt from day one, costing you less interest over the life of the loan. That’s a principal-and-interest loan.

Choose the length of your mortgage carefully

The faster you pay off a mortgage, the less interest you pay over time. So even though the repayments for a 25-year mortgage might look high compared to those of an identical 30-year mortgage, the savings would be higher.

That’s great, but a shorter loan term means your repayments each month are a lot bigger. There’s cheap right now and then there’s cheaper over the life of the mortgage.

Here’s a simple breakdown. Let’s take three mortgages, all with 3.00% variable interest rates and loan amounts of $600,000. Now let’s look at both the monthly repayments and overall loan cost (the cost of all the repayments you make until the loan is paid off with the interest) if each loan has a different length.

Loan term30 years25 years20 years
Interest rate3.00%3.00%3.00%
Loan amount$600,000$600,000$600,000
Monthly repayment$2,529$2,845$3,327
Total cost$910,664$853,580$798,620

The differences here are enormous. The 30-year loan’s monthly repayments are $316 cheaper than the 25-year loan’s. However, over the life of the loan, you end up paying $57,084 more.

The 30-year loan’s repayments each month are $798 cheaper than the 20-year loan’s, but if you pay that loan off in 20 years you save $112,044 in interest.

This is why the notion of the cheapest home loan really does differ depending on what you need. If you’re borrowing a lot of money, then a 20- or even 25-year loan term might make your monthly repayments too expensive. Even if it saves you in the long run, it’s not affordable in reality.

Similarly, the lower repayments of a 30-year mortgage cost you more over time. However, for most borrowers, that’s a sensible trade-off.

I have a few more questions about getting the cheapest home loan

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