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Home Loan Basics: A Beginner’s Guide


Getting the best home loan means doing your homework. Know what you can afford using a mortgage calculator and compare offers from multiple lenders. Pay attention to interest rates, comparison rates, fees, and features to find the right fit for you.

What is a Home Loan and How Do They Work?

Definition: A home loan is money you borrow from a lender (such as a bank or building society) to buy a property. You agree to pay back the loan, plus interest, over an agreed-upon period, usually 25-30 years.

Who are home loans for? Home loans are designed for people wanting to purchase a property. This includes:

Owner-Occupiers: Those who plan to live in the property.

First-Time Buyers: Many lenders offer features and programs specifically geared towards first-time buyers.

The Mortgage: This is the legal document that gives the lender the right to repossess your property if you fail to make your loan repayments.

Key Components of a Home Loan

  • Loan Amount: The sum you borrow to purchase the property.
  • Interest Rate: The percentage charged by the lender on the outstanding balance of the loan.
  • Repayment Period: The length of time you have to repay the loan (e.g., 25 years).
  • Fees & Charges: Additional costs associated with setting up and maintaining the loan.

Understanding Home Loan Repayments

How Principal & Interest Repayments Work: Most home loans in Australia are structured as “principal and interest” loans. This means your regular repayments are made up of:

  • Principal: A portion that reduces the original loan amount.
  • Interest: The amount charged on the remaining loan balance.

Example: How Home Loan Repayments Work

Let’s assume you have a $500,000 home loan with a 5% interest rate and a 30-year loan term. Your monthly repayment is approximately $2,685. Here’s how those payments break down in the early years of your loan:

Year Monthly Payment Interest Paid Principal Paid Remaining Balance
Year 1 $2,685 $2,083 $602 $499,398
Year 2 $2,685 $2,079 $606 $498,792
Year 3 $2,685 $2,075 $610 $498,182


  • Notice how in the first year, most of your payment goes towards interest. As you pay down the loan, the outstanding balance decreases, so the interest charged lowers each month. This means more of your payment goes towards reducing the principal.
  • Important: This is a simplified example. Your exact figures will depend on your specific interest rate, fees, and repayment frequency.

Use a Mortgage Calculator

To get personalised numbers for your situation, use a mortgage calculator!

Key Takeaways

  • Understanding how repayments work is crucial for budgeting and long-term financial planning.
  • Making additional repayments, even small amounts, can help you pay off your home loan faster and save significantly on interest over time.

Understanding Types of Home Loans

Choosing the Right Fit: The right type of home loan can impact your repayment strategy and overall costs. Here’s a breakdown of the most common options:

Repayment Types

Principal & Interest (P&I): Each payment chips away at both the loan balance and the interest charged. This is the standard option for most owner-occupiers.

Interest-Only: Payments cover only the interest for a set period. Suitable for investors in specific circumstances. It’s important to understand the total cost over the loan term.

Interest Rate Types: Learn more about interest rates

Owner-Occupier vs. Investor Loans:

One important factor when choosing a home loan is whether you plan to live in the property or rent it out as an investment. Lenders often have specific loan products tailored to each scenario.

Owner-Occupier Loans

  • Designed for: People buying a home to live in.
  • Potential Advantages:
    • May have slightly lower interest rates compared to investor loans.
    • Might have access to first-home buyer grants or schemes (if eligible)
  • Considerations:
    • You’re responsible for all mortgage payments, regardless of whether the property is tenanted.

Investor Loans

  • Designed for: People buying property to generate rental income.
  • Potential Advantages:
    • Interest may be tax-deductible (consult a tax advisor).
    • Can offer features like interest-only periods for short-term cash flow management.
  • Considerations:
    • Might have slightly higher interest rates than owner-occupier loans.
    • Lenders may assess your application based on rental income projections.

Which Type is Right for Me?

Ask yourself these questions:

  • Primary Goal: Is this property my home or an investment to build wealth?
  • Tax Implications: How will my tax situation be impacted by each loan type? (Speak to an accountant)
  • Cashflow Needs: Do I need the flexibility of interest-only payments initially?

Important Note:

  • Some lenders offer flexibility to switch between owner-occupier and investor rates if your circumstances change.

Interest Rates

What is an Interest Rate?
The interest rate is the percentage a lender charges you for borrowing money. Even small differences can add up over 25+ years.

Fixed vs. Variable: Which is Right for Me?
Fixed rates stay the same for a set period (e.g., 2 years), offering stability. Variable rates can change with market conditions, offering potential savings but more risk.

Where to Find Current Interest Rates:
Websites like RBA and Moneysmart provides average interest rates for different loan types, giving you a benchmark.

Fees & Charges

Common Fees: Application, establishment, ongoing monthly/annual fees, break fees (if paying off early)… these all add up.

The Importance of the Comparison Rate: This rate factors in the interest rate AND most fees, giving you a truer picture of the loan’s cost.

Loan Features

Offset Accounts: Linked savings account where your balance reduces the amount interest is calculated on.

Redraw Facilities: Lets you withdraw extra payments you’ve made, but there might be restrictions or fees.

Extra Repayments: Paying more than the minimum can save you a lot in interest over time.

How to Compare Home Loans

  1. Know What You Can Afford: Use a mortgage calculator and be realistic about your budget.
  2. Compare, Compare, Compare: Get offers from multiple lenders. Here’s how to compare those offers:
    • Interest Rate: The advertised annual rate.
    • Comparison Rate: A truer cost figure, including interest and most fees.
    • Monthly Repayment: How much you pay each month.
    • Application/Establishment Fees: One-off costs at loan setup.
    • Ongoing Fees: Monthly or annual service charges.
    • Loan Term: The loan’s length (affects payment size and total interest).
    • Loan Features: Offset accounts, redraw, etc. Factor in their fees as well.
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FAQ: Home Loans in Australia

1. How much can I borrow for a home loan?

  • Answer: This depends on several factors, including your income, expenses, deposit amount, and the lender’s criteria. Use a borrowing power calculator for a rough estimate, then speak to a lender for personalized figures.

2. What is a good interest rate for a home loan?

  • Answer: Interest rates fluctuate constantly. The ‘best’ rate depends on the loan type, your financial profile, and current market conditions. Comparison websites [link to relevant resources] provide up-to-date averages to give you a benchmark.

3. Do I need a deposit to get a home loan?

  • Answer: Yes, most lenders require a deposit, typically at least 5% of the purchase price. The larger your deposit, the better your chances of approval and a potentially lower interest rate. Some lenders may offer options if you have a guarantor.

4. What is LMI and when do I need to pay it?

  • Answer: Lenders Mortgage Insurance (LMI) protects the lender if you default on your loan. You usually pay it if your deposit is less than 20% of the property value. The cost varies based on deposit size and loan amount.

5. How long does it take to get a home loan approved?

  • Answer: The timeline varies between lenders and the complexity of your application. Pre-approval can happen relatively quickly, while final approval after you’ve found a property can take several weeks.

6. What’s the difference between a mortgage broker and going directly to a bank?

  • Answer:
    • Mortgage Broker: Acts as an intermediary, comparing loans from multiple lenders on your behalf.
    • Going Direct: You interact with a single lender and their available products.

7. Can I get a home loan if I’m self-employed?

  • Answer: Yes, but it might be slightly more challenging. You’ll likely need to provide more income documentation than someone with a standard payslip. Some lenders specialize in loans for self-employed borrowers.

8. What is a pre-approval and why is it important?

  • Answer: A pre-approval is a lender’s conditional indication of how much they might lend you. This gives you confidence when house hunting and demonstrates to sellers that you’re a serious buyer.

9. Are there any government schemes to help first-time buyers?

  • Answer: Yes, there may be state or federal schemes to assist with deposits, stamp duty concessions, or guarantee schemes. Eligibility criteria vary, so research what’s available in your area.

10. Can I make extra repayments on my home loan?

  • Answer: Most lenders allow extra repayments. This can save you significantly on interest over the life of your loan. Check if your loan type has any restrictions or fees for extra repayments.