A home loan is a large amount of money that you borrow from a bank or other lender to buy a house or apartment. As the borrower, you pledge your home as “security” or “collateral” for the loan. This means you give the lender the right to take possession of the property if you fail to repay the loan. In legal terms, this is known as “mortgaging” your home, so home loans are also known as mortgage loans.
Because the amount of a mortgage loan is so large, the lender gives you many years to pay it off. However, the lender also has that claim on the home as security, making the home loan less risky than a personal loan or business loan, so the interest rate is usually lower.
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How much do I need to borrow?
It's important to ask yourself 'how much can I borrow?' during the early stages of your search for a mortgage. Whether you're looking for your first home loan, or refinancing an existing mortgage, it's important to know exactly where your finances stand before approaching a lender.
Everyone has a different financial situation, which is why there's no such thing as a one-size-fits-all home loan. You will need to weigh up your individual circumstances and select a home loan that's suitable for your needs.
A good place to start is the RateCity mortgage calculator. Just enter a few figures and it will give you an idea of what your first home loan repayments may be, as well as a list of lenders offering mortgages that might be right for you.
How long can you pay a home loan for?
The standard amount of time to pay a home loan for is 30 years. However, there are other options. For example, some lenders will allow certain borrowers to pay off their home loan over 40 years. Some borrowers, who want to pay pay off their mortgage faster, might ask for a loan term of 25 years or 20 years.
Also, when people refinance, they often make the loan term of their new mortgage the same as the remaining loan term of their existing mortgage. For example, if they had originally decided to pay their home loan for 30 years, and they then refinanced after seven years, they would choose a 23-year loan term for their new mortgage rather than a 30-year loan term.
There are advantages and disadvantages whether you choose to pay a home loan over a shorter term or a longer term. A shorter loan term means higher monthly repayments but lower total repayments over the life of the loan, while a longer loan term means lower monthly repayments but higher total repayments.
How big does my home loan deposit need to be?
The size of your deposit will likely play an important part when you’re choosing a home loan. When working out how much money you need for a house deposit, keep in mind that the more money you can put down on a property upfront, the more likely a lender will offer you an affordable interest rate.
Many home loans require a deposit of around 20% of the property's value, though there are options available with 10% or even 5% deposits. Keep in mind that low-deposit home loans often require you to pay for Lenders Mortgage Insurance (LMI).
Remember to use home loan comparison tools to help you determine which home loan rates will likely suit your household budget before you apply for a mortgage.
What is Lender's Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is an insurance policy that many lenders require if a borrower has less than a 20% deposit on their mortgage, and thus is considered to be at relatively high risk of defaulting on their loan.
It's important to remember that LMI does not protect a borrower if they're unable to afford their mortgage - LMI only covers the lender's financial risk, and helps to limit their losses if a borrower fails to keep up with their home loan payments.
LMI can add thousands of dollars to the upfront cost of a home loan, so it's often worth considering when estimating whether you can afford a mortgage.
What happens if you miss a home loan payment?
If you miss a home loan payment, two things are likely to happen:
- You’ll be hit with a penalty fee
- Your lender will contact you to ask for an explanation and to request that you immediately make the home loan payment
Most lenders understand that people sometimes miss home loan payments, so if you immediately fix the problem, that will probably be the last you hear of it.
However, if you don’t immediately make the last home loan payment, and if you then miss the next one, the problem will probably escalate. The lender might now start having doubts about your ability to repay the mortgage and keep a close eye on your file.
If you keep missing home loan payments, the lender might conclude that your behaviour will never change. In that case, the lender might decide that the only way to get its money back is to foreclose on the mortgage - that means seizing and selling your home.
Foreclosure is generally a last resort. Lenders don’t like to take this option, so they are highly unlikely to seize your home just because you miss one home loan payment. That said, the moment you miss a home loan payment, you risk suffering serious consequences.
Why should you compare home loans?
Are you in the market for your first home loan? Do you want to know if you're getting a competitive deal on your current home loan? Curious about the cheapest home loan rates available across the industry? Want to find out which bank has lowest interest rate for a home loan that suits your needs? You'll want to consider making a home loan comparison.
RateCity allows you to search, compare and apply for more than 2000 mortgages. Just enter your details to find home loans that suit your finances, with mortgage rates you can afford.
Some benefits of using RateCity for your home loan comparison include:
- Using our mortgage calculator to get an idea of your borrowing power
- Comparing investment home loans, SMSF loans, and line of credit and equity loans
- We compare mortgage rates from some of the biggest lenders in the country, as well as smaller ones you might not have otherwise considered
Which home loan should you choose?
The only person who can decide what is the best home loan for your needs is you. Industry experts can provide facts and figures to help you make a home loan comparison, but the final decision rests with you.
You might be applying for your first home loan or moving up the property ladder. In either situation, it's important to understand the short and long-term financial effects of your decision, and to select a home loan that most accurately reflects your requirements.
Researching options that match your specific needs are necessary. Remember that you're looking for the best home loan to match your needs. While it might not seem obvious, the cheapest home loan rates may not actually be the best rates for your needs, making home loan comparison an integral part of the home loan journey.
It’s important to find the right mortgage for you, so you can rest assured that you have made the right decision, and that you're able to confidently save money in the long term, thanks to affordable home loan rates.
RateCity's Mortgage Guide provides tips and useful information on what to consider when applying for a mortgage. Whether you want to know about how mortgage repayments are calculated, the fees involved with getting a mortgage, or the different features available with some home loans, you are in the right place.
Should I use a mortgage broker?
With so many home loans out there to compare, it can sometimes feel impossible to narrow down your options. This is where a mortgage broker can prove invaluable.
A broker can carry out a home loan comparison on your behalf and present a range of different options, with home loan rates that may suit your budget. This way, you can get a better idea of what home loan products are available, and how much you’ll have to borrow.
Home loan glossary
|Break cost||Fees charged if you exit your loan early; most often applied if you have a fixed interest rate|
|Bridging Finance||A loan that helps you “bridge” the gap between selling one property and buying another. A bridging loan can let you buy a second property while you’re still living in your first, though you risk owing more than you can comfortably afford to repay if your first property doesn’t sell.|
|Capital gain/loss||The money you make (or lose) when you sell a property for more (or less) than you paid for it. If you’re an investor, you may need to pay tax on your capital gains – contact the ATO to learn more.|
|Capitalisation||Adding the cost of your home loan’s upfront fees and charges to your mortgage, to be paid over the long term. While this means you won’t need to pay these fees upfront, the extra interest charges will likely cost you more in total.|
|Capped or Tunnel Loans||A mortgage with limits on its variable interest rate. Capped loans limit how high the interest rate can rise, while Tunnel loans limit both how high and low a rate can go.|
|Comparison rate||Combines a loan’s interest rate and its standard fees and charges into a single percentage figure. Used to help quickly compare the overall cost of different loans. Sometimes called the Average Annual Percentage Rate (AAPR) or Real Rate.|
|Construction loan||A loan used to build a new home, instead of buying an established home. Often lets you access only the money you need to pay for each construction phase (see Progressive Drawdown), which can help you manage your costs while the home is being built.|
|Conveyancing||The legal process of transferring ownership of a property from one party to another. Legal fees on a property purchase are called conveyancing fees, and are paid to your conveyancer or solicitor.|
|Cooling off period||A length of time after exchanging contracts on a property, during which the buyer or seller can back out of the deal.|
|Default||If you fail to make a mortgage repayment on time, and your lender can’t contact you to discuss your late payment, the lender may declare you to be in default of your mortgage. This means the lender can take legal action against you, including repossessing and selling your home. If your circumstances change, and you think you may end up in financial hardship, consider contacting your lender and/or a financial counsellor before you risk defaulting on your loan.|
|Deposit||The money paid upfront towards buying a property. Often expressed as a percentage of the property’s value (e.g. 20 per cent), with the mortgage making up the rest of the purchase price.|
|Deposit bond||An insurance policy that guarantees a buyer will pay the deposit on a property at settlement. Can help you buy property if you don’t yet have a cash deposit available, for example if you’re waiting for the sale of your old house to settle.|
|Equity||The value of a property that you own outright, which can be used as security when borrowing money. Your equity equals the current value of your property, minus what’s currently owing on your mortgage.|
|Extra repayments||Putting more than the minimum required amount of money towards your home loan. This can help you pay off your mortgage faster, and allow you to pay less interest.|
|Fixed rate loan||A mortgage with interest rates that won’t rise or fall for a limited time, before reverting to a variable rate. During the fixed rate period, your repayments will stay the same, for simpler budgeting.|
|Guarantor||Someone who guarantees a home loan on behalf of a borrower, and agrees to take responsibility for the loan if the borrower defaults on their repayments. Most lenders require the guarantor to be a close relative of the borrower, such as a parent or grandparent, with a good credit rating and enough equity in their own property to cover part or all of the deposit.|
|Interest||What your lender charges for borrowing money. Effectively the “price” of “buying” a loan.|
|Interest Capitalisation||An option to add interest charges to your total loan balance for a limited time, rather than paying it as you go. Can help to minimise the cost of repayments, though increasing a loan’s size may mean it takes longer to pay off and costs more in the long term. Often seen on bridging loans and construction loans.|
|Interest only||An option to pay only the interest charges on your home loan for a limited time. This can help lower the cost of your repayments for a limited time, but you won’t reduce the principal you owe. This means your mortgage may take longer to pay off and cost more in total interest.|
|Introductory or Honeymoon rate||A discounted interest rate that applies during a home loan’s initial introductory period (the “honeymoon”), before reverting to the higher standard rate. Can help to keep a home loan more affordable for a new borrower, though it’s important to watch out for the higher payments when the honeymoon period ends.|
|Investment/Investor||If you buy a property to make money, either from rental income or capital growth, you’re an investor, and your property is an investment. Investor mortgages may have different interest rates, fees, and approval criteria than home loans for owner occupiers.|
|Lenders Mortgage Insurance (LMI)||LMI safeguards the lender in case a borrower defaults on their mortgage. LMI is typically required for mortgages with an LVR higher than 80 per cent (AKA a deposit of less than 20 per cent), with the borrower required to pay the cost. The higher the LVR, the more the LMI may cost.|
|Line of credit||Allows you to borrow money by using the equity in your property as security. Often offers flexible withdrawals and repayments, with interest only being charged on what you borrow, similar to a credit card.|
|Loan to Value Ratio (LVR)||The size of your home loan compared to the value of your property. For example, if you paid a 20 per cent deposit on a property, and took out a mortgage for the remainder of its value, you’d have an LVR of 80 per cent.|
|Mortgage||Another name for a home loan. “Mortgaging” a property refers to using it as security or collateral for a loan.|
|Mortgage protection insurance||An insurance policy that can help cover your mortgage payments if you find yourself unable to pay for your home loan, such as due to injury or illness, or losing your job. Sometimes called Income Protection Insurance.|
|Negative gearing||When you pay more interest on an investment property than you make in income from the property. This may effectively lower your taxable income – contact the ATO to learn more.|
|Offset account||A savings or transaction account linked to your home loan, which is included when calculating interest charges and may help you save money over time. For example, if you had a $300,000 home loan and a 100% offset account holding $20,000, you’d be charged interest as if you only owed $280,000 on your mortgage.|
|Ongoing fees||Fees that are charged periodically (e.g. monthly, quarterly or annually) over the life of the loan.|
|Overdraft||A line of credit, typically secured by the equity in your property, allowing you to borrow extra funds if required.|
|Owner-occupier/owner-occupied||If you buy a property and live in the home, you’re an owner-occupier, and your proerpty is owner-occupied.|
|Parental leave||A type of repayment holiday offered by some lenders when you become a parent and go on maternity/paternity leave from your job. Can help you manage your living expenses during this time, though you may need to pay more interest in the long term.|
|Portability||An option to pick up your loan and take it with you when you move house. For example, you could sell your home and buy a new one of equal or lesser value, all without having to refinance.|
|Pre-approval||When a lender agrees in principle to loan you’re the money you need to buy a property, on the condition that the lender confirms the details in your application.|
|Principal and interest loan||The most common home loan payment structure, where each repayment is made up of part of the money you owe (the principal) plus an extra charge from the lender (the interest), until the mortgage is completely paid off and you own the property outright. Sometimes called an Amortising Loan.|
|Progressive drawdown||Used to access (“draw down”) small sums of money from a home loan in stages, rather than as one lump sum all at once. You’ll only be charged interest on the money you’ve drawn down, which can help manage your costs. Often used in Construction loans to pay for each stage of construction as a property is built.|
|Redraw||Taking extra money you’ve previously paid onto your mortgage back out of the loan, and returning it to your bank account. A redraw facility allows you to save on mortgage interest by making extra repayments, while still having access to this money in case you need it. Redraw limits or fees may be involved.|
|Refinancing||Taking out a new loan to replace an old one. Refinancing may allow you to borrow more money (e.g. to buy another property or renovate your current one), enjoy more affordable interest rates and fees, or benefit from more useful features and benefits.|
|Repayment holiday||The option to take a temporary break from loan repayments when you experience proven hardship, such as unexpectedly losing your job or suffering serious injury.|
|Salary sacrifice||Arranging with your employer to have part of your pre-tax income paid directly onto your home loan, bypassing your bank account. May offer tax benefits – contact the ATO to learn more.|
|Security||An asset used to guarantee a loan. In most home loans, the security is the property itself, which can be repossessed and sold if you default on your loan.|
|Settlement||The date when money is exchanged, and the ownership of a property changes hands, as defined in the contract of sale.|
|Split loan||A home loan where interest is charged on part of your balance at a fixed rate, and on part of your balance at a variable rate, providing you with a mix of security and flexibility.|
|Stamp duty||A state government tax on the sale and transfer of land and property. Cost may vary depending on the location and value of your property.|
|Switching fees||The costs involved when refinancing your home loan from one lender to another.|
|Term||The agreed length of time for you to pay your mortgage. If you choose a shorter loan term, each repayment may cost you more, but you may pay less total interest than choosing a longer loan term. Sometimes called the amortisation period.|
|Upfront fees||Fees charged at the start of your home loan to help cover the cost of processing your application. Includes establishment fees.|
|Valuation||A professional assessment of a property’s value. Typically required by a lender before they can approve a home loan application.|
|Variable rate loan||A home loan where the lender may raise or lower your interest rate depending on a range of economic factors, including the national cash rate set by the Reserve Bank of Australia (RBA).|
Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.
To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you.
The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.
The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.
In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.
The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.
Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.
For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.
Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.
Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.
You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.
If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.
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How much should I borrow?
How much should you borrow from the bank when purchasing a property? Working out how much or how little you can afford to borrow is an important first step towards home ownership. It’s important not to borrow more than you can afford to repay, so consider your income and expenses when calculating your mortgage amount.