Buying a home is one of the biggest financial commitments you’ll make. With different lenders, interest rates and loan features available, choosing the right mortgage can make a significant difference to your finances.
“Which home loan is right for me?”
The answer depends on how much you can borrow, the deposit you have available and how you want to manage your repayments.
Comparing home loans can help you find a mortgage that suits your financial goals.
Whether you’re entering the property market, purchasing your next home or reviewing an existing mortgage, understanding your options can help you make a more informed decision.
How home loans work
A home loan allows you to borrow money from a lender to purchase a property, with the property generally used as security for the mortgage.
You repay the loan over an agreed period, usually through regular repayments that include principal and interest.
Depending on the lender, home loans can offer:
- Fixed or variable interest rates
- Principal-and-interest or interest-only repayments
- Offset accounts and redraw facilities
- Flexible repayment frequencies
- Options to make additional repayments
Loan terms commonly extend up to 30 years, although shorter periods may be available. The length of your loan affects both your regular repayments and the total interest you pay.
How much deposit do you need for a home loan?
Many home buyers aim to save a deposit of 20% of the property’s value to avoid Lenders Mortgage Insurance (LMI). However, some lenders allow eligible borrowers to purchase with a smaller deposit.
Your deposit requirements can depend on:
- The property’s purchase price and valuation
- Your income and existing financial commitments
- The lender’s loan-to-value ratio (LVR) limits
- Whether Lenders Mortgage Insurance applies
- Your eligibility for government home buyer schemes
Eligible first home buyers may also be able to purchase with a deposit as low as 5% through the Australian Government 5% Deposit Scheme, without paying LMI. (Source: Australian Government)
You’ll also need to budget for expenses beyond the deposit, including stamp duty, legal fees, inspections and moving costs.
Understanding your home loan borrowing capacity
Before searching for a property, it’s worth understanding how much a lender may be willing to lend.
Borrowing capacity is generally assessed using:
- Your income and employment history
- Existing loans and credit card limits
- Regular living expenses
- Your savings and available deposit
- Your credit history
- Your ability to manage higher interest rates
Two borrowers earning similar incomes can have different borrowing capacities depending on their expenses and financial commitments.
Getting an indication of your borrowing capacity early can help you establish a realistic property budget before making an offer.
Choosing the right home loan features
The interest rate is important, but the features of your mortgage can also affect your repayments and financial flexibility.
Some common features to compare include:
- Fixed interest rates: Provide repayment certainty for an agreed period
- Variable interest rates: Can move up or down as the lender changes its rates
- Offset accounts: May reduce the interest charged by linking an eligible transaction account to your mortgage
- Redraw facilities: May allow access to additional repayments, subject to lender conditions
- Split loans: Combine fixed and variable portions within the same mortgage arrangement
Some features may come with additional fees or restrictions, so it’s worth comparing the overall cost of the loan rather than focusing only on the advertised interest rate.
Principal-and-interest vs interest-only repayments
How you repay your mortgage can have a significant impact on your finances over time.
With principal-and-interest repayments, each payment reduces the outstanding loan balance while covering the interest charged. This gradually builds equity in the property as the loan is repaid.
Interest-only repayments generally cover just the interest for an agreed period, leaving the principal unchanged.
The main differences are:
- Principal-and-interest repayments gradually reduce your debt
- Interest-only repayments may be lower during the interest-only period
- Interest-only loans generally cost more in total interest if the principal isn’t reduced during that period
- Repayments may increase when an interest-only period ends
For owner-occupiers, principal-and-interest repayments are a common choice for gradually paying off the mortgage.
The process of applying for a home loan
Knowing what to expect during the home loan application process can help you prepare before purchasing a property.
1. Review your financial position
Assess your income, expenses, savings and existing debts to understand your borrowing capacity and establish a suitable budget.
2. Compare home loan options
Review lenders, interest rates, fees and loan features to identify mortgage options that suit your circumstances.
3. Arrange pre-approval
Pre-approval provides an indication of how much a lender may be prepared to lend, subject to its conditions and final assessment.
4. Find and assess a property
Once you’ve established your budget, you can begin searching for a suitable property and completing the necessary inspections.
5. Secure formal approval
The lender will assess the property and finalise your application. Once approved, loan documents are completed and settlement can proceed.
When should you review your existing home loan?
Home loans aren’t something you need to arrange once and never revisit. Your financial circumstances, interest rates and lending options may change over time.
It may be worth reviewing your mortgage if:
- Your fixed interest rate is approaching its expiry
- Your property’s value has increased
- Your income or financial circumstances have changed
- You want access to different loan features
- You’re considering renovating or upgrading your home
Refinancing may allow you to access a different interest rate, adjust your loan structure or consolidate eligible debts. However, switching costs and any applicable fees need to be considered before making a change.
Common home loan mistakes to avoid
When choosing a home loan, common mistakes can include:
- Borrowing more than you can comfortably afford
- Choosing a mortgage based only on the interest rate
- Overlooking upfront fees and ongoing loan costs
- Not understanding fixed-rate restrictions
- Assuming pre-approval guarantees final approval
- Not comparing loan features and repayment options
These mistakes can increase your borrowing costs or limit your flexibility later.
Working with a mortgage broker can help you compare lenders, understand your borrowing options and structure a loan around your circumstances.
Ready to explore your home loan options?
If you’re planning to purchase a home or review your existing mortgage, understanding your borrowing options is a sensible place to start.
We can help you:
- Understand your home loan borrowing capacity
- Compare home loans from different lenders
- Explore deposit requirements and available schemes
- Review interest rates, repayments and loan features
- Arrange pre-approval and navigate the home loan application process