A financial institution typically provides a home loan to help successful applicants buy a property. Usually, you must contribute to the property purchase in the form of a deposit – a lump sum of cash that you have saved over time. The financial institution then advances you the remainder of the funds (known as the principal) to purchase the property and takes out a mortgage over it.
You are then required to repay the loan via weekly, fortnightly or monthly instalments over a set period (e.g. 30 years), as well as interest and fees. If you cannot repay your loan, the financial institution can sell your property to recoup the money they lent you.
Your lender typically calculates the interest on your home loan at the end of each day. At the end of each month, your lender will add your daily interest charges for each day of the month. This is the monthly interest amount generally found on your bank statement.
Let’s take a look at how your daily interest charge is calculated on a home loan. Say your loan balance is $400,000 with an interest rate of 4.5% per annum. First, you would multiply the home loan balance (400,000) by the interest rate (0.045) and then divide it by the number of days in the year:
($400,000 x 4.5%)/365 = $49.31)
It’s worth keeping in mind though that lenders utilise something called an amortisation schedule, which lets the lender lay out every single scheduled repayment you’d need to make to pay off your home loan (if you didn’t refinance or otherwise change your home loan). The lender then decides how much of each repayment will be comprised of interest charges and how much will go towards your home loan principal, with lenders typically opting to ‘frontload’ much of your home loan interest.
This in turn means that the home loan repayments you’re making in the early stages of your loan term will likely not be making too much of a dent in your loan principal, but later on in the loan term your repayments will make much more of an impact on the principal and have a smaller interest component.
Your repayments will depend on:
If you know the above details, find out how much your loan repayments could be using our handy home loan repayment calculator.
There are a few costs and fees to budget for when buying property. Some of these include:
Once you’ve settled into your new home, you’ll also need to budget for your ongoing insurance premiums, rates and water charges. If you’re purchasing a unit or townhouse, don’t forget to budget for any applicable body corporate fees as well as your regular home loan repayments.
Not necessarily, as it depends on the overall strength of your financial position, including your income, expenses, assets, liabilities and the size of your deposit. A guarantor provides additional security to the lender by providing a guarantee of repayment, usually by using the equity in a property they own as security.
However, a guarantor should be aware of the personal risk. Should the borrower (you) default on loan repayments, they will be held liable to pay back the amount owed to the lender. If you’re considering providing a guarantee, you should seek independent legal and financial advice to understand how this could impact you.
A home loan is a financial product a lender (e.g. a bank) uses to lend money to a home buyer and involves you signing a loan contract. A mortgage is the formal agreement you have with your lender which sets out the terms of the home loan and gives the lender the authority to take ownership of your home if you end up unable to meet your home loan repayments.
Some of the different main types of home loans include:
We’ve written a guide to the different types of home loans, which you can refer to for more information on several different home loan categories.
You’ll need to work out your disposable income to determine your borrowing power. Your borrowing power is calculated by deducting your regular expenses from your regular income; this determines how much you’d have left over to repay a home loan.
Our guide to borrowing power has a built-in borrowing power calculator and all the information you need on how borrowing power works.
The First Home Owner Grant was introduced by the Australian Government to help Australians with their first home purchase. The grant is available in most of Australia (except the ACT), but the total amount and eligibility rules vary between each state and territory.
Some lenders can lodge an application for the First Home Owners Grant (FHOG) on your behalf, but you can also apply directly through your state or territory’s FHOG online application portal.
There’s no such thing as an objectively good or bad rate. To find a rate that works for you, you’ll generally want to:
Whether a rate is competitive or not rests on what the rest of the market looks like, which is why it’s crucial to do a thorough comparison of your home loan options.
Home loan pre-approval, also known as conditional approval, is an approval of the home loan amount from the lender in principle. Final approval will still be subject to a full assessment of your home loan application and the property.
Although pre-approval is an excellent indication of your borrowing power, the status of your home loan application is still subject to the lender’s conditions being met, such as the provision of supporting documents (e.g. payslips, source of income and assets) and typically a property valuation.
If you don’t have a credit history (i.e. have never had a car loan, credit card, mobile phone contract or other), obtaining a regular home loan could be tricky. Having a credit history demonstrates your ability to repay loans and debts, which is why it’s an important thing to be able to show the lender.
Existing debt on its own won’t necessarily impact your ability to get a home loan, but it can affect the amount of money you can borrow for a home loan. When reviewing your application for a home loan, the lender has to consider your financial situation (e.g. your income, ongoing commitments and living expenses). They perform this check to ensure you have sufficient income to meet these expenses and the proposed loan without putting you under undue financial strain. So, if you’re considering buying a home, you may want to look at our borrowing power calculator first.
Yes, loans are available from lenders to purchase a vacant block of land, whether you’re looking to build now or down the track. The lender may want to see evidence of your intention to build within 12 months of acquiring the land, as well as evidence that you can repay a future construction loan.
There are options available for retirees to get a home loan, but it will ultimately depend on your personal and financial position, including your assets and income streams. Retirees may find it challenging to get a home loan as lenders will generally deem retirees as a heightened borrowing risk due to their life expectancy, their ability to pay back a loan with a term of 25-30 years and their source of regular income.
You will typically require a minimum amount of 5% of the property’s value for your deposit, although this will vary between lenders. It’s important to factor in the minimum deposit amount plus costs, like lender’s fees, legal, registration and search, stamp duty, building and pest inspections. That being said, if you borrow more than 80% of the property’s value, you will also need to factor in LMI, which is either paid upfront or added to your loan amount. While taking the extra time to build up a larger deposit can be frustrating, the less you borrow, the lower your repayments will be.
Aside from the typical costs of buying a home listed earlier on, there are a few fees and costs that you may want to budget for when purchasing an investment property, including:
You’ll also need to budget for council rates, water charges and regular home loan repayments. If you’re buying a unit or townhouse, you will need to factor in body corporate fees on top of your other costs.
An interest-only home loan is a type of home loan in which you’re only required to pay off your interest charges for the repayment period and not pay anything towards your home loan principal.
These types of home loans can have advantages for property investors, but will typically be more expensive overall compared to a standard principal and interest home loan of the same value.
You may want to speak to one of our home loan specialists or a financial advisor if you’re unsure whether an interest-only home loan is right for you.
Most home loan features are available for both investors and owner-occupiers, and the two types of home loans generally function similarly. However, some lenders may charge higher rates for investment properties if the associated risks are higher, and the fees charged on investment home loans may also be higher.
Negative gearing is when the annual cost of owning your investment property – interest repayments, strata fees, maintenance and other property-related fees – is more than the income you make from that property. This loss can typically offset your taxable income for the year.
Landlord's insurance (or investment insurance) can cover your investment property against damage or theft caused by the tenant, damage from specified weather events (e.g. flooding, fire damage) and loss of rent due to a tenant’s default. It will also cover you for any liability if someone is injured while on your property.
It’s essential to have a good idea of your ongoing costs once you’ve bought a house and everything is settled. Some of the ongoing costs of owning a home include the following:
Do some research before buying to put together a reasonable estimate of what your ongoing costs might look like.
A redraw facility allows you to withdraw money from the ‘pool’ of extra repayments you’ve made that are above and beyond the minimum monthly requirements. However, there could be drawbacks, including redraw fees, a limited number of free redraws and minimum or maximum redraw amounts.
Depending on your type of home loan, making additional repayments may reduce the interest you’re charged on your loan's principal. Just bear in mind that, depending on your loan type, making additional payments on your home loan may attract fees (if stipulated by your lender in your loan contract). This is usually the case with fixed rate home loans specifically.
Suppose you’re in a position to make supplementary payments on top of your regular repayments. In that case, you can use our extra repayment calculator to see how much interest you could save over the life of your loan by making extra home loan repayments.
Congratulations! Paying off a home loan is a huge milestone. Once your loan balance reaches $0, you’ll still need to have your mortgage discharged, or the bank or lender will still have a mortgage lodged on your Certificate of Title.
To remove or discharge the mortgage, there will be some paperwork you need to complete with the bank. In return, they’ll provide you with a Discharge of Mortgage document that you need to lodge at the titles or lands office in your state – after that, the home is all yours.
Whether you can salary sacrifice your home loan repayments is up to your employer. Speak to them to find out whether salary sacrificing your home loan is an option, and if this is in line with your lender’s terms and conditions. Bear in mind that there may be additional administrative fees your employer may charge for this service. You may also want to talk to a tax specialist to determine whether salary sacrifice is right for you.
Depending on your type of home loan, you may be able to pay it off faster by taking advantage of a few tips:
If you want to add your spouse to your home loan, the lender will need to re-assess your and your partner’s financial situation to confirm whether the pair of you can service the new home loan. Check with your lender for their rules regarding adding someone to a home loan.
Is your home in need of some renovations? Provided you’ve built up enough equity and meet your lender’s borrowing criteria, you may be able to apply to increase your home loan amount to fund your home renovations. Check to see which home loans suit your needs by using our free online comparison service.
Most home loans require one minimum monthly repayment as part of your loan contract. However, most lenders will let you choose your repayment frequency (i.e. weekly, fortnightly or monthly).
Refinancing is the process of switching home loans to one offered by a different lender. Refinancing and switching home loans may save you money, but it’s important to understand the pros and cons before deciding whether or not this switch is right for you. Some of the advantages of refinancing may include obtaining a lower interest rate or consolidating your debts, while a disadvantage could be the cost and time involved in switching.
Depending on the terms and conditions of your current home loan, the standard refinancing process will generally begin with checking to see what your current lender will charge you to switch home loans to another product or a different lender.
From here, you can compare home loan products to check if you can track down a better deal. If you do decide to refinance, you’ll first need to receive formal loan approval from the new lender. Once you’ve received approval, you’ll have to arrange a mortgage discharge form (sometimes called a release form) with your current lender. The two lenders will then liaise in order to facilitate the transferral of your loan from your old lender to your new lender. The release form will remove the existing mortgage and a new mortgage for the new lender mortgage will take its place.
If you’re just looking to renegotiate your home loan with your current lender, this will typically be a simpler process; however, depending on your circumstances your current lender may require you to demonstrate an ability to repay the existing loan. It’s also worth noting that the negotiations involved may be time-consuming.
The amount of money you can borrow when refinancing depends on your borrowing power at the time. Your borrowing power will be affected by current interest rates and the difference between your income and expenses. It will also be affected by the value of the property in question, as borrowing more than 80% of the property’s value will typically incur LMI, meaning higher overall borrowing costs.
To get an estimate, try out our borrowing power calculator.
Depending on your lender and current home loan, you may have to pay discharge fees or a break fee when refinancing to a different lender.
Additionally, you may need to consider any fees that apply when getting a new loan, such as application fees and property or valuation fees. However, these costs could seem trivial compared to the money you’ll save by refinancing.
A home loan default is when a borrower cannot meet the repayments on their home loan. Depending on the lender, a fee will be charged for missing a mortgage repayment if the borrower has exceeded a repayment timeframe (e.g. 90 days). Not only will a late fee be charged to your home loan, but you’ll also be paying additional interest.
Defaulting on your mortgage will be listed on your credit history and can have negative implications for future loan applications. If defaults are continual, a lender may be forced to sell your property to recoup the borrowed amount.
Put simply, the principal is the amount of money you have borrowed from your lender to purchase a property. Interest is charged to you over the life of your home loan based on this amount.
A line of credit is an account or loan with a credit limit that can be attached to your home loan. A line of credit allows the borrower to access funds from the account as often as needed, staying within the credit limit. You can use a line of credit for various things, including home renovations or purchasing a car. A line of credit limit is fixed and does not decrease as you repay the loan. The lender will normally specify a date as to when the loan has to be repaid in full.
A comparison rate helps you compare the actual cost of home loans by encompassing the interest rate, fees and charges payable during the term of the loan, all of which is shown as a single interest rate. If you’re comparing different loans from multiple lenders, the comparison rate will enable you to find out how much a given home loan will cost you in addition to the standard interest rate.
A key facts sheet is a summary of a home loan designed to give customers an idea of a given home loan’s ongoing repayment costs based on their desired loan size.. This includes interest rates, account fees, the principal of the loan, repayment cycles and how changes to interest rates can impact your repayments.
A key facts sheet uses a clear format to help you compare home loans and understand the costs involved, such as fees and interest. The type of information you will find on a key facts sheet includes:
The key fact sheet will also model your potential repayments based on your nominated loan amount in order to demonstrate what your costs might look like over the cost of the loan if you took it out.
LVR stands for loan to value ratio, which is the size of the home loan relative to the value of the property, expressed as a percentage. For example, if your home is worth $500,000 and the loan amount is $400,000, the loan’s LVR would be 80%.
LMI stands for lenders mortgage insurance. It is insurance taken out by the lender to protect them should the borrower not be able to repay the loan. This is generally required for loans with a LVR greater than 80%. The borrower bears the cost of LMI and can choose to either pay it upfront or capitalise it into their home loan.
