Why is my interest rate higher than my mates?

You know the scene: you're at the pub, halfway through a schnitty, and your mate starts banging on about their home loan being "in the fours."

"Pffft... 5.60%!? Mate, they're having you on."

Egg on your face. It's been a hot minute since you've even thought about your interest rate - and that's despite hearing the RBA rumblings of future cuts.

After slumping your way to your morning local, you grab yourself a brew and rage dial your mortgage broker.

"Why the hell is my rate so much higher?! My mate's with Big Bank and they're on 4.99%!"

"We're getting a lot of, 'but my mate got X%, why can't you get me that rate?', says Chris Foster-Ramsay, finance and money expert and founder of Foster Ramsay Finance.

"It's become a national pastime."

5 factors that shape your mortgage rate

The truth is, no two borrowers are the same. Lenders weigh up a bunch of things when deciding your rate - and that's why your mate's deal might look sharper than yours. Here are the big ones:

1. How much equity you've got

"The more equity you've built up, the sharper the rate," says Foster-Ramsay.

Equity is the portion of your property that you truly own. It's the difference between your property's value and the amount you still owe on your mortgage.

Lenders assess interest rates based on Loan-to-Value Ratio (LVR) bands.

For example, someone with a 50% LVR (meaning they've paid off half of their loan) is considered more financially stable than someone with an 80% LVR.

"It's a retention tool as much as it is a risk thing. If you've been paying your loan for years and the bank sees you as solid, they'll want to keep you," Foster-Ramsay says.

On the flip side, if you're new to the market with a small deposit, your loan-to-value ratio is higher - and so is your rate.

"It's not that the bank doesn't like you," he adds, "it's just that you're higher risk until you've built up that buffer."

2. The property itself

Two mates can borrow the same amount but get different rates if one's buying a house and the other's buying a tiny apartment.

"Lenders see density risk," says Foster-Ramsay. "A freestanding house on a block in suburbia is very different to a two-bedder in a 200-unit tower. That's concentration risk."

"Add flood zones or bushfire ratings on top, and you can see why one property gets a loading while the other doesn't."

3. Owner occupier vs Investor

Live in the place, and you'll usually pay less. Rent it out, and your rate climbs.

"Around a decade ago, there wasn't really a difference between owner-occupied and investment rates, or between interest-only and principal-and-interest loans," Foster-Ramsay says.

"But times have changed. Lenders are directed by regulators to assess these loans differently."

Across lenders, owner-occupier loans are generally cheaper. Foster-Ramsay says even with the same lender, it can be a 0.2-0.3% swing.

4. How you prove your income

Documentation also makes a difference.

"If you're salaried, with PAYG slips and ATO statements, it's easy for the bank to assess," Foster-Ramsay says.

"If you're self-employed and relying on an accountant's letter, that's riskier for the lender. The rate reflects that."

5. Fixed vs variable

Here's where pub bragging rights get tricky.

The banks generally have a good idea of whether interest rates are going to go up or down.

Variable interest rates are directly linked to the official cash rate set by the Reserve Bank. When the cash rate drops, lenders usually pass on those cuts to borrowers with variable-rate loans.

If financial markets expect rates to fall (like they are now), banks may offer lower fixed rates now to lock in customers before rates drop further.

"If your mate's locked into a fixed rate, sure, it might sound sharp now," Foster-Ramsay says. "But if rates fall, he's stuck. And breaking out of a fixed loan can be brutally expensive."

"But fixing isn't about trying to beat the bank," he stresses. "It's about buying repayment certainty. If you're chasing a quick win, you're in the wrong product."

Why your mate's in the fours (and you're not)

Before you start getting as bitter as your VB, remember there are a few reasons your mate might be bragging about his killer rate.

1. Different circumstances

Your financial position isn't theirs.

They might have more equity, a safer property type, or simply ticked more boxes for the lender.

Or they could've locked themselves into a fixed rate. Be sure to remind them of that when your rate's in the threes.

2. They've actually done the work

Your mate might have picked up the phone and told their broker to sharpen the pencil.

In fact, nearly 100,000 borrowers switched lenders in the past three months alone, according to Canstar.

That's more than a thousand Aussies a day deciding loyalty to their bank isn't worth the tax.

According to Canstar's Sally Tindall, "The RBA might have served up rate cuts on a platter, but that hasn't stopped borrowers chasing even sharper deals."

If your mate's one of them, fair play - they've earned the right to bang on about it at the pub.

3. They're full of it

And then there's the simplest explanation: they're just putting it on. We all have "that mate".

Bottom line

Don't assume your mate's deal is better until you've looked at your own. Maybe they've fixed, maybe they've refinanced, maybe they've just having a lend.

Either way, loyalty is rarely rewarded in banking and if you haven't checked your rate lately, odds are you're the one buying the next round.

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