Deceptive decimal points in your home loan: How much extra they're costing you

It’s so small you might not even notice it, but when it comes to interest repayments, that tiny decimal point in the interest rate you’re paying can cost you thousands more in repayments.

So would you raise an eyebrow at a difference of 50 basis points when comparing home loans? What about 25?

Strap in, because the big four banks aren’t expecting a rate cut until at least next year.

The Reserve Bank of Australia (RBA) has kept the national cash rate on hold at 4.10 per cent for the third meeting in a row, but home buyers still need to shop wisely when looking for the best deal in the market.

If you look closely, banks are raising and cutting rates outside of the RBA hiking cycle, and these incremental changes in interest rates translate into real dollar values that have never been more critical, given our cost-of-living crisis.

The big four’s average headline rate is 7.21 per cent. 

Financial comparison firm Mozo points out that, based on the average variable rate of 6.60 per cent, a mere 0.5 per cent difference in the rate on a $600,000 home loan can add up to $57,064 more in interest over a 25-year loan term.

On the same loan, a shift of just 10 basis points, to 6.70 per cent, is still $11,319 extra interest you’re paying over the course of the loan. Every basis point counts, so shop wisely.

A 0.5 per cent difference in home loans could cost you $57,064 more in interest over the life of the loan.

A 0.1 per cent difference doesn’t sound like much either, but it still equates to a considerable $11,319 in interest payments.

A 0.05 per cent difference is still in the thousands, at $5378 in extra interest you will have to fork out on the home loan.

Calculating your repayments

Interest on your home loan is calculated daily and charged at the end of the month. Your lender deducts the outstanding loan amount daily. 

So, if you have an outstanding loan amount of $600,000 and an interest rate of 6.0 per cent, your interest repayment for one day would be calculated this way:

$600,000 x 0.06 ÷ 365 (days in the year) = $98.63

The next step is to multiply the daily interest charge by the number of days in the month.

$98.63 x 30 = $2958.90

Every point counts

While there’s an obvious lure to low interest rates, especially after 400 basis points of cash rate hikes since last year, the truth is, when it comes to the real cost of a home loan, every basis point counts.

“A seemingly tiny difference in interest rates can end up costing you tens of thousands of dollars in the long run,” says Mozo banking and rates expert Peter Marshall.

“If you’re considering switching lenders, thinking about investing in property or looking to buy your first home, it pays to do the maths.”

According to Mozo’s database, comparing the two lowest home loan rates on offer shows a measly 5 basis-point difference. 

However, in dollar terms, using the same loan as above, that’s actually a difference of $5378 in interest paid over the loan term.

“Home owners need to fully comprehend the long-term implications of the interest rates they choose,” Marshall says.

“Don’t just look at the difference between the lowest and the highest rates – analyse the dollar difference as well between similar looking rates.”

As house prices continue to rise, mortgage holders need to be careful to ensure they read the fine print, including these seemingly small rate differences. 

It’s also crucial to check the comparison rate to understand the trust cost of the loan, including any fees and charges.

“Understanding the long-term implications of opting for home loans with slightly higher rates can help home owners avoid falling victim to deceptive decimal differences,” Marshall says.

Also, look at the other fees, product features and any extra benefits the lender may be offering that could help you save.