There are a lot of aspects to choosing and getting a great value home loan – here’s links to some of our in-depth guides and tools we’ve developed to help you.
A home loan is an amount of money that you borrow to finance the purchase of a property.
A home loan works in a similar way to any other loan. You borrow an amount of money to fund the purchase of a property or land and you pay that money back (known as the principal), plus interest, over a period of time.
There are a range of different factors that determine the repayment amount.
There are two types of home loans: owner-occupied and investment home loans.
There are two main types of home loan interest rates you can choose: fixed rate and variable rate.
A comparison rate represents the ‘true’ cost of a home loan by wrapping the interest rate, fees and charges of a particular loan into a simplified percentage figure. This makes it easier to compare home loan costs from different lenders.
Learn more about how comparison rates are calculated.
The standard deposit for a home loan in Australia is 20% of the property’s value. It is possible to buy a home with a deposit of less than 20% by using government schemes, such as the First Home Guarantee scheme, and by opting for a low deposit home loan and paying lender’s mortgage insurance.
The interest on your home loan is calculated daily, based on your outstanding balance. Read our guide on how mortgage repayments are calculated for more information.
Your loan-to-value ratio (LVR) is the amount you borrow, expressed as a percentage of the value of the property you buy. For example, if you want to buy a property worth $1 million and you have a deposit of $200,000, you’ll need to borrow $800,000. This gives you an LVR of 80%.
When you first apply for a loan, your LVR is determined by your deposit size. The higher your deposit is, the lower your LVR will be. But your LVR can also change over time, as you pay off more of your home loan, or as your property value goes up and down.
Some lenders offer low deposit home loans, and lenders mortgage insurance (LMI) is an insurance product that allows you to get a home loan without a full 20% deposit. The cost of this insurance is usually added to your home loan amount and it is designed to protect your lender financially in the case of a default – it does not protect you.
See our guide on the difference between LMI and mortgage protection insurance.
Home loan interest is not tax-deductible for owner-occupiers. However, property investors can claim interest as a tax deduction if they have an investment home loan.
Once your fixed rate term expires, your home loan will revert to a variable rate set by your lender. This new rate may be higher or lower than your fixed rate, depending on market conditions. You may have the option to:
Some fixed rate home loans allow extra repayments, but there are often limits on how much you can repay each year. If you exceed the limit, you may incur fees or break costs. Always check with your lender before making extra payments.
Break costs are fees charged by lenders when you exit a fixed rate home loan before the fixed term ends. These costs can be high and are calculated based on:
Advantages of a having a variable rate include:
Disadvantages of a variable rate include:
Leading smaller lenders and customer-owned banks typically offer lower variable rates compared to the ANZ, Commonwealth Bank, NAB and Westpac, so consider lenders outside the Big Four when you’re ready to apply.
Your loan-to-value ratio (LVR) also has an impact on what interest rate your lender can offer you, because LVR refers to how much you need to borrow in comparison to the value of the property. Generally speaking, the less you need to borrow, the lower your interest rate could be.
You can also search all lenders in the Mozo database using our filters, or look at the winners list of the Mozo Experts Choice Awards for Low Cost Home Loan.
An offset account is a transaction account that allows you to reduce how much interest you’re charged. You won’t pay interest on your loan balance equal to the amount of money you hold in your offset account.
For example, if you have a $500,000 home loan debt and $50,000 in your offset account, your home loan interest will be calculated on just $450,000.
Read our guide on how offset accounts work for more information.
A home loan redraw is when you withdraw extra repayments you’ve already made on your home loan to use the money for another purpose. Depending on the lender, sometimes there is a redraw fee or minimum redraw amount required. Learn more about home loan redraws.
Home loan pre-approval is when a lender approves you as a suitable candidate for a home loan and indicates how much it’s willing to let you borrow – subject to conditions.
The purpose of getting pre-approval is to understand how much you can feasibly borrow to buy a property, and by setting a budget, it helps you go house hunting with some confidence.
The key information lenders will need for a home loan application is:
The great news about digital home loans is that applying online reduces the time it takes to get approval. Depending on the lender it can take as little as a few hours to a few days to get pre-approval (assuming you have all the information required to process the application). Full loan approval through to property settlement can take approx 4 -6 weeks.
The standard loan term for a home loan is 25 years, though many lenders offer home loans for terms up to 40 years.
It is important to get the shortest loan term you can afford. The longer the loan term the more interest you’ll pay, but the lower your regular loan repayment will be. The shorter the loan term, the higher your regular repayment but you’ll pay less in interest. Use our mortgage repayment calculator to see what the difference in repayments will be between different loan terms.
A mortgage broker is a go-between who can help borrowers arrange home loans through banks and lending institutions.
A mortgage broker can help:
Mortgage brokers tend to receive commission payments from lending institutions, so you usually won’t have to worry about paying them (though some mortgage brokers may charge service fees). See information about the role of mortgage brokers.
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