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Published November 4, 2022

Mortgages and Home Loans in Australia

Home loans are not overly complicated, but having a rudimentary understanding of mortgage fundamentals will give you a head start as you set out on the great Aussie home ownership journey.

Buying a house may be the biggest single purchase or investment you ever make in your life. So, before taking on a home loan, or mortgage, it pays to have a good understanding of the basics.


What is a mortgage?

A mortgage is a home loan agreement used to purchase a residential property. You repay the loan in instalments over a period of time, usually 20 to 30 years. This specified number of years can sometimes be shorter, depending on the amount you need to borrow. 

Is a mortgage a home loan?

‘Mortgage’ and ‘home loan’ may seem synonymous. And that’s for a good reason: both describe the loan you’ll take out in order to purchase a property. However, there’s a difference between the two terms. 

  • A home loan is the money borrowed to buy a house or property. It allows the borrower (mortgagor) to make the property purchase.
  • A mortgage is a loan agreement between the borrower and the lender. It is the legal arrangement that protects the lender (mortgagee) from default. 

Despite this semantic distinction, the terms are often used interchangeably. 

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How do home loans and mortgages work?

A home loan lets you buy a property without cash. You’ll need to put some money down right away — called the house deposit — and repay the rest over time to the lender who issued the loan. Lenders are usually banks but can sometimes be another type of financial institution, such as a building society or industry lender.

Home loans are similar to other types of loans taken out for other significant purchases, such as a car: you borrow the money to pay the seller. 

When you have a mortgage, you don’t own the property in your own right until you repay the loan in full.  If you cease to make the required repayments and default on your mortgage, the lender can take possession of the property.

As you repay your mortgage, you’ll start earning equity, essentially partial property ownership. After paying off your home loan, you become the sole owner of the property.

As a mortgage holder, you can refinance the loan or sell the property anytime. Upon completion of the sale, you’ll need to repay the amount you still owe the lender.

» MORE: How to build and increase the equity in your home

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Home loan features

Choosing the best home loan for you depends on your financial circumstances and personal goals. To make this important decision, make sure you understand how home loans vary.

Types of home loans

There are thousands of home loan products on the Australian marketplace and no shortage of home loan types, including:

  • Owner-occupier
  • Refinance
  • Guarantor
  • Investment
  • Low-doc
  • Reverse mortgage
  • Construction
  • Bridging
  • Line of credit
  • Interest only

A financial adviser can provide plenty of information about any or all of the above. 

Owner-occupier is the most common type of mortgage. It is also the only option usually applicable for a first-time home buyer with a regular income, house deposit savings, and the desire to live in the property once purchased. 

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Home loan interest rates

Interest is money charged by a lender on top of the principal (the amount you borrowed to buy the house), which is payable over the mortgage term. The interest rate reflects the amount of interest charged by the bank and determines how much you’ll pay the lender in exchange for borrowing the money. 

As you repay your mortgage, usually fortnightly or monthly, some of each payment will go towards interest. Your total mortgage repayment figure will also account for principal (the amount you’ve borrowed from the lender), fees and other charges. 

Fixed vs. variable rate home loans

The interest you’ll pay depends on your loan’s interest rate and whether it is fixed or variable. Put simply, you’ll need to decide whether you want to lock in a set rate to pay for a given time or if you’d prefer a constantly changing rate.

Both of these loans have pros and cons.  

Fixed rate home loans

A fixed interest rate stays the same for a set time, usually five years. Lenders often provide this option as an incentive to borrow from them. 

Fixed interest rate loans are suitable in certain situations, such as what we’re experiencing now, with interest rates steadily rising. They are also good for budgeting purposes, as they provide you, as a first-home buyer, with certainty regarding your repayment commitments. 

Generally speaking, the longer the fixed rate term you can negotiate, the better, although you won’t get the benefit of rates falling should that eventuate.

Variable rate home loans

A variable home loan has a constantly changing rate, and most mortgages in Australia take this form. As discussed above, you may start with a fixed rate, but these almost always move to a variable rate after a relatively short period, usually less than five years. 

Unlike fixed loans, variable home loans provide less certainty, so they may require some budgetary adjustments. This is especially true if the rate starts to rise at an alarmingly high pace, for example, in times of rampant inflation. 

Split home loans

If you can’t choose between a fixed or variable interest, your lender may offer you a partially fixed rate. In this case, you break up your mortgage into two parts — say 50/50 — and pay fixed and variable interest on each portion. 

Not all lenders offer the option to split your home loan, so you’ll need to discuss this with them.   

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Home loan term lengths

You’ll also need to consider the length of the loan. 

If you are younger, a longer mortgage — say 30 years — may seem more attractive because your monthly repayments will be less than they would be over a shorter period and potentially less stressful. 

On the other hand, the shorter the mortgage period, the less interest you’ll have to pay in the long run, which might save you thousands of dollars over the course of your mortgage. 

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Home loan approval

Getting approved for a home loan starts with proving your eligibility and working with a lender to choose the amount you’d like to borrow. 

Home loan eligibility and criteria

Before a lender deems you suitable to lend money to and approves your home loan, you’ll need to satisfy several prerequisites. These requirements may differ slightly from lender to lender, but they all require the same key information before proceeding. 

First, a lender will require personal details, including your name, address, evidence of citizenship or permanent residency, and age. 

Next, you will need to provide detailed information about your financial situation to determine your ability to repay the loan over the agreed-upon mortgage term.

Finally, to determine whether you qualify for a loan, the lender will factor in your credit report and score and assess three chief factors. 

  1. Income and expenses, which will show how much money you regularly have coming in and how much you can therefore afford to borrow. The lender will want to see things like your bank account statements and rental history.
  2. Employment history, which the lender will check to establish a pattern of stability. This depends on your type of employment but usually entails providing payslips and a record from your employer. If you are self-employed as a freelancer or contractor, you’ll likely need to provide proof of regular income through bank statements, tax returns and possibly a letter from an accountant. 
  3. Assets and liabilities, which include anything of value that you own and any existing loans and credit card debts. Assets usually include term deposits, savings accounts, cars or other vehicles, shares, or even stamp and coin collections, but each lender’s definition of assets will differ. It’s in your interest to talk to your lender if you’re unclear about what to include in your loan application.

Once you satisfy the eligibility requirements, the lender will pre-approve you to borrow a set amount of money. Now you can start the house hunt. 

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Deciding how much to borrow

After finding a potential home, you’ll work with your lender to decide how much you actually need to borrow.

First, the lender will assess the value of your desired property, considering a range of factors, including its size, age, condition, and location. 

Next, the lender will consider the amount you have saved as a deposit. They’ll compare that to the property’s value to arrive at the loan-to-value ratio (LVR) for your mortgage. If your deposit is less than 20% of the property’s total cost, you may have to pay lenders mortgage insurance (LMI).

Finally, you’ll receive final or unconditional approval for your mortgage and can start the process of buying your new home. 

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About the Author

Alan Hartstein

Alan Hartstein has worked in publishing for over 25 years as a writer and editor across broadsheets, tabloids, magazines, trade publications and numerous forms of digital content. Alan was initially attracted to journalism through his love of words and their ability to make an impact in the world. Alan’s main areas of expertise are in business IT, financial services and fintech, but he also thoroughly enjoys writing comedy sketches and arts-related content, which can include everything from ballet and opera reviews to TV and movies. Alan is based in Sydney, Australia.

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