What is a Home Loan?
A home loan (or mortgage) is money borrowed from a lender to purchase property. You repay the loan over a set period, typically 25 to 30 years, through regular repayments that cover both the amount borrowed and interest charged by the lender.
Key Concepts
- Principal — the amount you borrow from the lender. If you buy a $700,000 property with a $140,000 deposit, your principal is $560,000.
- Interest — the cost of borrowing money, expressed as a percentage rate per year. This is how lenders earn revenue on the loan.
- Loan Term — the length of time you have to repay the loan. Most Australian home loans have a 25 or 30 year term, though you can pay it off sooner.
- Repayments — regular payments (usually monthly) that go toward reducing the principal and covering interest.
The earlier you make extra repayments, the more interest you save over the life of the loan, because interest is calculated on the remaining balance.
Types of Home Loans
Australian lenders offer several loan structures. The right choice depends on your financial situation, risk tolerance, and goals.
Variable Rate
Your interest rate moves up or down with the market. Offers flexibility with features like extra repayments and redraw. Most popular loan type in Australia.
Fixed Rate
Your rate is locked in for a set period (1 to 5 years). Gives certainty on repayments but may have limited features and break costs if you exit early.
Split Loan
Part of your loan is fixed and part is variable. Gives you a balance of rate certainty and flexibility. You choose the split ratio.
Interest-Only
You only pay interest for a set period (usually 1 to 5 years), then switch to principal and interest. Common for investors but means higher total interest paid.
Offset Account
A transaction account linked to your loan. The balance offsets your loan principal, reducing the interest charged. A $50,000 offset on a $500,000 loan means you only pay interest on $450,000.
How Much Can You Borrow?
Your borrowing capacity depends on several factors that lenders assess to determine how much they are comfortable lending you.
Income
Lenders look at your gross income from all sources: salary, rental income, bonuses, and government payments. Higher income means higher borrowing power. Most lenders require at least two recent payslips and your latest tax return.
Expenses & Existing Debts
All your living expenses, credit card limits (even if unused), personal loans, HECS/HELP debt, and car loans reduce what you can borrow. Lenders use the Household Expenditure Measure (HEM) or your actual expenses, whichever is higher.
Deposit & LVR
Your deposit size determines your Loan-to-Value Ratio (LVR). An LVR of 80% or below (meaning a 20% deposit) is ideal because it avoids Lenders Mortgage Insurance. Most lenders accept deposits as low as 5%, but you will pay LMI on top.
A general rule of thumb is that you can borrow roughly 6 times your annual household income, but this varies significantly between lenders. A mortgage broker can help you find the lender that offers the best borrowing power for your situation.
The Home Loan Process
From first enquiry to getting the keys, here is what the home loan journey looks like.
- Pre-Approval — you apply to a lender (or through a broker) to find out how much you can borrow. Pre-approval typically lasts 3 to 6 months and gives you confidence when house hunting. It is not a guarantee of final approval.
- Property Search — with your budget confirmed, you search for a property. Attend inspections, research the area, and get building and pest inspections before committing.
- Make an Offer — once you find the right property, make an offer or bid at auction. If accepted, you sign a contract of sale and pay a deposit (usually 10% of the purchase price).
- Formal Approval — your lender conducts a full assessment including a property valuation. They verify your financial details and confirm the loan. This typically takes 1 to 2 weeks.
- Settlement — the legal process where ownership transfers to you. Your solicitor or conveyancer handles the paperwork. Settlement usually occurs 30 to 90 days after the contract is signed. You get the keys on settlement day.
Understanding Interest Rates
Interest rates are the single biggest factor in determining the cost of your home loan over time.
The RBA Cash Rate
The Reserve Bank of Australia sets the cash rate, which influences the interest rates banks charge. When the cash rate goes up, variable loan rates typically follow. The RBA meets monthly (except January) to review the rate.
Advertised Rate vs Comparison Rate
The advertised rate is the headline interest rate. The comparison rate includes most fees and charges, giving you a more accurate picture of the true cost. Always compare loans using the comparison rate.
Fixed vs Variable: Which is Better?
Neither is universally better. Fixed rates suit borrowers who want certainty and budget stability. Variable rates suit borrowers who want flexibility and the potential to benefit from rate cuts. Many borrowers opt for a split loan to get some of both.
Even a 0.25% difference in interest rate on a $500,000 loan can cost or save you over $25,000 across the life of a 30-year loan. Comparing rates matters.
Costs & Fees
Beyond the purchase price, there are several costs to factor into your budget when buying property.
- Stamp Duty — a state government tax based on the property value. In Victoria, stamp duty on a $700,000 property is approximately $37,000. First home buyers may be eligible for concessions or exemptions.
- Lenders Mortgage Insurance (LMI) — required if your deposit is less than 20% of the property value. LMI protects the lender (not you) and can cost anywhere from $5,000 to $30,000+ depending on your loan size and LVR.
- Application & Establishment Fees — some lenders charge upfront fees to process your loan, typically $200 to $600.
- Valuation Fee — the lender arranges a valuation of the property to confirm its worth. Some lenders cover this cost, others charge $200 to $500.
- Conveyancing / Legal Fees — a solicitor or conveyancer handles the legal transfer of property. Expect to pay $1,000 to $2,500.
- Building & Pest Inspection — highly recommended before purchase. Costs around $400 to $800 combined.
- Ongoing Fees — some loans have annual fees, monthly service fees, or package fees. Check the product disclosure statement carefully.
Tips for Getting Approved
Lenders assess risk when deciding whether to approve your loan. Here is how to put your best foot forward.
- Check your credit score — request a free copy of your credit report from Equifax or Illion. Correct any errors and avoid applying for multiple credit products before your home loan application.
- Save a genuine deposit — lenders want to see consistent savings over 3 to 6 months. Money from gifts or windfalls may need additional documentation.
- Reduce existing debts — pay down credit cards, personal loans, and buy-now-pay-later accounts. Close any credit cards you do not use, as lenders count the limit, not the balance.
- Stable employment — lenders prefer at least 6 months in your current role. If you are self-employed, you will typically need 2 years of tax returns and business financials.
- Minimise spending — in the 3 months before applying, cut discretionary spending. Lenders review your bank statements and will question excessive spending on dining, gambling, or subscriptions.
- Get pre-approved first — pre-approval identifies any issues early, before you find a property and are under time pressure.
If you have been knocked back by one lender, a mortgage broker can often find an alternative. Different lenders have different credit policies, and a rejection from one does not mean a rejection from all.
Why Use a Mortgage Broker?
A mortgage broker acts as an intermediary between you and lenders. They compare home loan options from multiple banks and lenders to find the right fit for your situation.
- Free service — mortgage brokers are paid a commission by the lender, not by you. Their service costs you nothing.
- Access to dozens of lenders — instead of approaching banks one by one, a broker compares products from 20 to 40+ lenders on your behalf.
- Expert guidance — brokers understand lender credit policies, so they know which lender is most likely to approve your application based on your circumstances.
- Save time and stress — they handle the paperwork, follow up with the lender, and keep you informed throughout the process.
- Ongoing support — a good broker will review your loan regularly and let you know when a better deal is available.
In Australia, over 70% of all home loans are now arranged through mortgage brokers. It is the most popular way to get a home loan for good reason.