What Is a Home Loan?
A home loan (also called a mortgage) is money you borrow from a lender — usually a bank or non-bank lender — to purchase a property. You then repay the loan, plus interest, over an agreed period (typically 25–30 years).
How Does a Home Loan Work?
When you take out a home loan:
- The lender gives you a lump sum to buy the property
- The property acts as security for the loan — meaning the lender can sell it if you don't repay
- You make regular repayments (usually monthly or fortnightly) covering both principal (the amount borrowed) and interest
- After the loan term ends, you own the property outright
Key Terms to Know
- Principal — the amount you borrow
- Interest rate — the percentage charged on your outstanding loan balance
- Repayment — your regular payment covering principal + interest
- Loan term — the length of your mortgage (e.g. 30 years)
- LVR (Loan-to-Value Ratio) — your loan amount as a percentage of the property's value
- Deposit — the upfront cash you contribute (typically 5–20%)
- LMI (Lenders Mortgage Insurance) — insurance paid by the borrower if the deposit is below 20%
Types of Home Loans
Variable Rate
Your interest rate moves with the market. Repayments can go up or down. Usually comes with flexible features like offset accounts and extra repayments.
Fixed Rate
Your rate is locked in for a set period (1–5 years). Repayments are predictable, but you may miss out if rates fall. Break costs apply if you exit early.
Split Loan
Part of your loan is fixed, part is variable. Balances certainty with flexibility.
Interest-Only
You only pay interest for an initial period (usually 1–5 years). Repayments are lower, but you don't reduce the principal.
How Much Can You Borrow?
Lenders assess your borrowing capacity based on:
- Your income and employment
- Your existing debts and expenses
- Your credit history
- The size of your deposit
- The property value