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A mortgage is a type of loan that allows a person to buy a house or any other real estate property, designed for people who cannot purchase real estate with cash. The time it takes to fully pay a mortgage depends on the agreement between the lender and borrower, making it a flexible enough choice for to-be homeowners across the country. 

Chances are, you may have seen mortgage interest rates advertised somewhere. Lenders usually set a benchmark rate, which is also known as the standard variable rate. As the name implies, it’s the standard rate that’s offered to prospective buyers of mortgages. However, some factors can affect how mortgage rates are set.

What exactly are the factors that can affect a mortgage rate? We’ve created this quick guide for you.

What Determines a Mortgage Interest Rate?

The main factor that determines a mortgage interest rate is risk. Let’s say you applied for a mortgage with a lender that follows risk-based pricing. Credit score plays an essential role in this because it measures how trustworthy you are when it comes to finances. 

A borrower with a low-risk profile can get a larger discount, which essentially means that a high credit score allows you to enjoy lower interest rates. However, there are other factors that lenders might look into when evaluating your profile. These include your loan-to-value ratio, the location of your property, other assets you own, and how much income you earn.

If you have a low credit score, chances are you might not get that loan, but you can increase your credit score by managing your finances well, such as not accumulating vast amounts of credit card debt and making payments on time.

Factors That Affect Mortgage Rates

The primary factor that affects the mortgage rate is the official cash rate that has been set by the Reserve Bank of Australia (RBA). It’s the market rate on overnight loans across different financial institutions. This helps manage the economy, especially inflation.

Lenders follow suit depending on the changes, and mortgage interest rates can increase or decrease depending on the official cash rate. Some bank lenders, however, don’t always follow through with the changes. 

Aside from the RBA’s cash rate, below are other factors that can affect mortgage rates:

#1: Loan to Value Ratio 

The loan to value ratio (LVR) refers to the percentage of a residential property’s value that a financial institution will let you borrow for a loan. An example of this would be if a lender requires an LVR of 80 per cent, you will need to come up with the remaining 20 per cent of the property’s total value for it to be approved.

If your LVR is over 80 per cent, you’re typically required to pay lenders’ mortgage insurance (LMI) to reduce the risk on the part of the lender. Be careful, though, because an LMI might cause you to pay for a slightly higher interest rate.

#2: Mortgage Size

According to an RBA publication, borrowers applying for larger loans tend to have sizable discounts from lenders. It’s highly suggested that borrowers looking for larger loans have the higher bargaining power to get larger discounts. 

With this in mind, lenders are also willing to offer greater discounts, provided that the borrower has a low-risk profile.

#3: Credit Score

As stated earlier, credit score is a measure of how a lender can trust you with money.  Your credit score also reflects your credit report, which is essentially a record of your financial history. If you manage your finances well, you can get that loan faster

Your credit score can become a problem if you don’t manage your finances properly. Most lenders outright refuse to lend money to borrowers because of low credit scores. If your finances are currently well taken care of after being financially unwise, you can speak with a broker to make things easier


A mortgage is a necessity if you don’t have enough money but wish to own a home. Mortgage rates differ among lenders, so the factors above should be taken into account. If you’re knowledgeable about these factors and manage your finances well, you’ll get that mortgage faster—and ensure you get the right one for your needs

Investing in the first time home buyer mortgage is the first step towards your dream home, a standard mortgage that anyone can get. If you need help, Wealthy You is a mortgage company guaranteed to help you realise homeownership. Contact us today to learn more!