How they work
Types of home loan
Where to apply
How to make an application
How to compare home loans and features
Do you dream of owning your own home? Purchasing property is a major financial decision and, if you are like many Australians, you may require a home loan to finance the purchase.
Home loans can be a great tool to get on the property ladder - but there are risks. The more you know about the process, the better you’ll be able to avoid those pitfalls and enjoy your new home after purchasing.
What is a home loan?
A home loan is a finance product offered by a lender, which is used to buy or build a residential property. Home loans are usually ‘secured’ - they use the property purchased as collateral - and may be offered by a variety of lenders with terms up to 40 years.
How do home loans work?
Lenders charge interest to lend you money with a home loan. The interest rate is expressed as a percentage of the total home loan amount (the principal).
In most cases, you’ll make fortnightly or monthly repayments that will cover interest charges and principal repayments. Over the loan period, which is usually 25 to 30 years, your repayments will reduce the principal amount until you pay off the loan.
There are several types of home loans, fees, interest rates and loan features that you should be aware of before applying.
Types of home loan
There are many types of home loan available in Australia and which is right for you will depend on your circumstances and goals.
- Low Deposit Home Loans
Low deposit home loans help borrowers with small deposits buy property. Home loans are generally considered low deposit if the borrower has a deposit equal to less than 20% of the property’s purchase price - or a loan to value ratio over 80%. They may come with extra fees such as lenders mortgage insurance and higher interest rates.
Find out more about low deposit home loans.
- Bad Credit Home Loans
Bad credit home loans enable those who’ve declared bankruptcy or have a bad credit score/credit history to secure a home loan and purchase property. They often come with higher interest rates and fees and may be more difficult to secure than normal home loans.
Find out more about bad credit home loans.
It may be easier to secure a bad credit home loan with non-bank lenders as they often have less strict credit policies.
- Low Doc Home Loans
Low doc or low documentation home loans don’t require as much evidence of income and/or employment as regular home loans do. They’re for borrowers that may not be able to present the documents usually required for a home loan like:
- Business owners
- Seasonal workers
While low doc loans may make it easier to secure a loan to buy property, they also come with a few drawbacks like higher interest rates and lower maximum LVR (usually 60%).
Find out more about low doc home loans.
- Investment Home Loans
Investment home loans are for borrowers who want to purchase an investment property. They usually function the same as owner-occupier home loans, although they may include interest-only options and higher interest rates.
Find out more about investment home loans.
- Construction Home Loans
Construction home loans are designed for borrowers who want to build a home or investment property. They function a little differently than regular home loans, allowing you to withdraw funds in stages as you need them to complete construction.
During the building phase construction home loans are usually interest only, and will revert to principal and interest when the build is complete.
Find out more about construction home loans.
- Interest-only home loans
The vast majority of home loans include both interest payments and principal repayments. However, in some cases borrowers may be able to make interest-only payments for a set period of time - usually one to five years. This may have tax benefits for investors, or it may free up cash flow when it’s needed for other costs or lifestyle changes.
Find out more about interest-only home loans.
- First-Home Buyers Home Loans
Buying your first home can be a big step toward financial security and a better lifestyle, but it can also be a huge financial challenge. Because of the high price of property in Australia, federal and state governments have created a number of grants, schemes and discounts to make it easier for first home buyers to purchase their first property.
Learn more about first-home buyer home loans.
Who offers home loans?
Home loans are offered by four types of lenders, retail banks, credit unions, non-bank lenders and mortgage brokers. Each type of lender has pros and cons and which is better for you will depend on your unique goals and circumstances.
- Retail banks - Includes Commbank, Westpac, ASB and ANZ.
Banks are financial establishments that are licensed as authorised deposit-taking institutions (ADIs). With a bank, you can open transaction and savings accounts, deposit and access your money and secure a number of financial products - including home loans.
Banks are for-profit institutions owned by their shareholders. Many borrowers choose banks because they already have accounts with them and are familiar with their brand and the vast majority of home loans are through retail banks.
- Customer-owned banks or credit unions - Includes CUA, Heritage Bank, Newcastle Permanent and IMB Bank & more.
Customer-owned banks are sometimes called credit unions or mutual banks. They are ADIs just like banks, but the difference is they’re owned by their customers and are not-for-profit. They exist to provide services for their members.
- Non-bank lenders - Includes Pepper Money, La Trobe Financial, Liberty & more.
Non-bank lenders are not registered ADIs. That means they can’t offer transaction accounts, term deposits, savings accounts like banks can. They can, however, offer home loans and often cater to specialist borrowers like those with bad credit or low deposits.
- Mortgage brokers - Includes Aussie Home loans, Mortgage Choice and Shore Financial & more.
A mortgage broker is an intermediary between you and other lenders, including banks, non-banks and credit unions. They will act on your behalf, helping you to secure a mortgage, liaising with lenders and providing advice. Mortgage brokers are usually paid via commission by the lenders whose products they sell.
Non-bank lenders and customer-owned banks are less popular than retail banks. Despite that, they often offer competitive home loan deals and should be considered as an option.
How to apply
To apply for a home loan, and have your application approved, you’ll need to understand the process. Here’s the process in 8 simple steps:
- Prepare your finances
- Gather supporting documents
- Compare lenders and loan products
- Complete a home loan application
- Receive home loan pre-approval
- Select a property & make an offer
- Complete offer conditions
- Gain unconditional home loan approval and complete settlement
If your home loan application is denied it’s not the end of the world. Speak to your lender to find out why your application was unsuccessful and spend time remedying those problems.
Find out more about applying for a home loan.
Compare home loans
The type of loan that is suited to you will depend on your circumstances. Before you start looking for a home loan take time to learn about loan features and interest rate types or get someone to help you figure out what you need - like a mortgage broker or financial advisor.
Interest is the biggest cost of any home loan by far. That’s why it’s so important to understand how to find low interest rates, how interest works and what type of interest is best suited to your situation.
Learn more about home loan interest rates.
When comparing home loans always use the comparison rate, not the interest rate or advertised rate. The comparison rate describes the true cost of the home loan including both interest and fees.
Home loan features
When securing a home loan you should always consider which home loan features might help make the loan cheaper, more flexible or easier to manage. These might include:
- Offset account - A savings account linked to your main home loan account that reduces interest payable
- Redraw facility - Allows you to withdraw any additional payments that exceed the minimum repayment amount as needed
- Interest-only - Switching to interest-only payments reduces your repayment amount for a set period of time
- Portability - The ability to transfer your home loan to another property with no fees
Keep in mind when considering home loan features that they often come with extra fees. Make sure you’re aware of the fees and weigh them against the benefits that the feature provides.
Fees and repayment options
Once you secure a home loan and buy a property you’ll make regular repayments every month or fortnight until the loan is paid off. These repayments will generally include:
- Contributions toward the principal of your loan
- Interest charges
- Home loan fees
Use our home loan calculator to estimate home loan repayments.
The higher your loan principal, interest rate and loan fees are the higher your repayment amounts will be. The length of your loan term will also determine the size of your repayments.
Interest and principal repayments make up most of the expense involved with a home loan, but fees charged by your lender can add up as well.
Lenders may charge fees for:
- Processing your application
- Organising your loan each month
- Changing your loan to another property
- Early exit from fixed-rate home loans
- Paying off your loan
- Late payment
- Using a redraw facility
To make sure you’re not paying an arm and a leg in fees, always check the comparison rate of a loan - as well as the interest rate. The comparison rate includes both the interest rate and fees and expresses the true cost of the loan.
Find out more about home loan fees and repayment options.
Refinancing is the process of changing to another home loan. To do this you’ll secure a new mortgage to pay off your existing one.
There are many reasons to refinance, including:
- Lower interest rates
- Lower fees
- Better loan features
- More suitable loan structure
- To release equity from a property to buy more property or investments
- Financial difficulty or debt consolidation
Refinancing may cost you money, so make sure you know the cost and can weigh it against the benefits before making a decision. If you’re unsure, it’s always best to get advice from a financial advisor or mortgage broker.
Find out more about refinancing your home loan.
Home loans are an essential tool for the vast majority of people who want to buy property in Australia. The more you know about your loan, the more equipped you’ll be to get a great deal, pay your loan off faster and save money.
Choosing the right home loan is nearly as important as choosing the right home. Take time to understand how home loans work and what type of home loan is suited to you, or seek expert advice before applying.
Do it right and a few good decisions now could save you hundreds of thousands of dollars and make your life easier.
Home Loans FAQ
What’s the best way to compare home loans?
You can compare home loans by using a mortgage broker, doing your own research or visiting a home loan comparison site. Consider home loan fees, features and lender customer service while researching rates. A comparison rate expresses the true cost of the loan, including both fees and interest.
What home loan can I afford?
As a general rule, home loan repayments should ideally be less than 30% of your household’s take-home income. Paying more than this amount can potentially lead to financial stress - always speak to a financial advisor to assess your capacity to meet repayments.
What home loan is best for me?
The home loan that is best for you will depend entirely on your goals and circumstances. Take the time to learn about what you need in a home loan to achieve those goals, and talk to an expert for advice like a mortgage broker or a financial advisor.
Where can I get a home loan?
There are many lenders offering home loans in Australia, and a wide variety of home-loan types to suit individual borrowers. Banks are often the primary lender for home loans in Australia, however they are also available from credit unions, non-bank lenders, and through mortgage brokers.