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What is a mortgage?

What is a mortgage?

A mortgage is where you borrow a large amount of money to buy real estate, using the property you’re purchasing as collateral to secure the loan. You’ll then pay this money back to the lender, plus interest, over a long loan term – typically 20 to 30 years.  

Is a mortgage the same as a home loan?

Yes. While the legal process of securing a loan with the property you’re buying is known as ‘mortgaging’ the property, the terms ‘mortgage’ and ‘home loan’ effectively mean the same thing.

Who offers mortgages? 

Home loans are most commonly available from banks. However, you can also get a home loan from non-bank mortgage lenders, such as:

What different types of home loans are available? 

Apart from shopping around for the lowest interest rate on home loans, you need to consider the types of mortgage products that the banks, credit unions and building societies offer.

Whether you are after a variable or fixed rate mortgage, or a principal and interest (P&I) or interest-only loan, shopping around for home loans can make all the difference when deciding which home loan product is suitable for you.

Variable rate mortgage

Variable loans are the most popular type of mortgage products in Australia. With this type of home loan, your lender determines the rate of interest you will pay – if the lender increases rates, your repayments most likely rise. Alternatively, if rates fall, so will the interest on your repayments. Generally, variable rate mortgages are a cheaper mortgage product than a fixed rate mortgage, especially over the long term. But it’s worth using a mortgage calculator to check before signing on the dotted line.

Fixed rate mortgage

Fixed rate mortgages commonly have a set interest rate for a period between one and five years, or longer. Because the rate never changes during the agreed period, a fixed rate home loan is a mortgage product that can give you greater financial confidence to regularly meet your mortgage repayments, regardless of changing economic conditions. The disadvantage is that fixed rate mortgages generally lack the flexibility of a variable home loan.

Principal and interest (P&I) home loans

If you choose to pay principal and interest on your mortgage product, repayments will be higher than with an interest-only option, as you are paying interest owing as well as repaying some of the capital borrowed. This particularly suits buyers planning to own their own home outright one day, or those who prefer to have consistency in their monthly repayments.

Interest-only home loans

If you choose to make interest-only payments, you won’t pay off any of the capital. Consequently, repayments are lower than with a P&I loan. Generally, interest-only loans are more suited to investors, who aim to profit from the income and capital growth generated by the property – with the capital to be repaid in full, in one go, when the property is sold.

All of these mortgage products come with different rates, fees and features for example ‘honeymoon’ rates or redraw facilities – and the best way to choose the right mortgage product for you is to do plenty of research before signing on the dotted line. Why not compare home loans or try our mortgage repayment calculator today.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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