Home loans are, as the name suggests, a type of finance product designed to help you buy property. With amounts in the hundreds of thousands and terms of up to 30 years, it’s fair to say that a home loan will be the biggest financial commitment you’ll make.
When the numbers you’re looking at are that big, taking your time to find the best available deal is a no-brainer. Whether you’re after your first home, are in the market for an investment property or are looking to downsize, your ideal mortgage could be just around the corner.
Why apply for a home loan with Savvy
How do home loans work?
There’s a fair bit that makes home loans tick. To truly understand how they work, it’s important to ask a few other questions:
How long are home loan terms?
Home loan terms typically range from 25 to 30 years in length. For smaller loan amounts, such as for buyers with large deposits, terms could be as short as a few years. The longer your loan term, the higher your total interest outlay will be.
How do home loan interest rates work?
Each lender sets its own interest rate, based largely on the Reserve Bank of Australia’s (RBA) cash rate, and adjusts it to match your profile. Things like your credit score, savings history, employment record and current assets and debts all play a role in determining your personalised rate.
Interest is charged based on your outstanding loan balance. This means that you’ll gradually pay less interest as you chip away at your debt. It also means that larger deposits, which result in smaller loan sums, can also save you a considerable amount overall.
What does LVR mean when it comes to home loans?
LVR stands for loan to value ratio and refers to how much of your property purchase will be funded by your bank or non-bank lender. This is expressed as a percentage and is calculated simply by dividing your loan amount by the value of your home.
For example, if you buy a $500,000 home and pay a deposit of $100,000, the remaining $400,000 paid by the bank would mean your LVR is 80%.
How much do I need as a deposit for my home loan?
The amount you’ll need to pay upfront depends on your circumstances. Lenders may allow a deposit as small as 5% of your property purchase price if you have an otherwise strong profile. For those without a long working history or bad credit, for example, the minimum may rise to 20% or more.
It’s also important to consider lenders mortgage insurance (LMI). This is a premium you’ll be required to pay with most lenders if your deposit is under 20%. It can add thousands or more to your debt. However, if you apply with a guarantor or make use of a government scheme, LMI may be waived.
What other home loan fees will I have to pay?
There’s a range of other fees you’ll need to pay throughout the process. These include:
- One-time application fee to cover set-up costs (though these can often be waived)
- Fees paid to your conveyancer to handle the property transfer process
- Property valuation fee to have it formally assessed and valued
- Mortgage registration fee to be paid to your state or territory government
- Monthly fees paid to your lender throughout your home loan repayment (may also be waived)
What is stamp duty on a home loan?
Stamp duty is another cost to consider when buying a home. This is a tax on the purchase of the property to be paid to your state or territory government. It’s usually based on the value of the property, with specifics of the tax depending on the state you live in.
If you’re a first home buyer and meet certain criteria, you may have stamp duty waived on your property purchase. If you’re in this boat, it’s essential to see what the requirements are in your state or territory.
What is home loan refinancing?
Refinancing a home loan is the act of switching to another loan. This is done by taking out a new loan and paying out your existing one. This can be done for a variety of reasons, from taking advantage of a better rate or mortgage features to accessing home equity to fund renovations or other expenses.
How do introductory interest rate and cashback deals work?
Introductory rates and cashback offers are common incentives offered by lenders to entice new customers. Introductory rates can be offered for the first one to 12 months, before reverting to a higher standard rate. Cashback deals may offer you a cash gift straight back into your pocket after your loan is approved. In both cases, it’s essential to consider whether the deal is worth it in the long run.
Is it better to apply for my home loan through a mortgage broker?
Going through a mortgage broker is the most common way that Australians apply for their home loans. According to data from the Mortgage & Finance Association of Australia (MFAA), 74.6% of all new home loans in the September 2024 quarter were written by mortgage brokers.
It’s important to understand the pros and cons of mortgage brokers before you dive into the home loan application process. Here’s what you need to know:
Pros
-
Save on time and effort
What brokers do best is handle all the messy paperwork and mortgage comparisons for you. That gives you more time to go about your business.
-
Stronger negotiating power
With closer relationships with lenders, brokers are often in a better position to negotiate a strong deal on your behalf than you could on your own.
-
Many are free to use
Because brokers are generally paid by commission from the lender, you often won’t have to pay them a cent to engage them for their services.
-
May help compromised profiles get approved
One area where brokers can really prove their worth is when working with borrowers with bad credit or high-risk profiles. They may be able to find a solution where it seems like there are none.
Cons
-
Won’t compare all offers on the market
Brokers are partnered with a range of lenders, but they can’t partner with everyone. Comparing all options on your own may unearth the best deal with more confidence.
-
May not be able to get the best deal for your profile
You go to a mortgage broker to get the best deal, but that isn’t guaranteed to happen. If they’re inexperienced and have a small partnered panel, they may not be best for you.
-
Moves the process out of your hands
If you’re someone who prefers to have control of processes like these and read through and submit everything yourself, a broker may not necessarily be for you.
How to compare home loans
There’s plenty to think about when it comes to comparing your home loan options. Here are some of the key areas to consider:
- Interest rates: of course, the lower the rate, the less interest you’ll pay overall.
- Comparison rates: this is a combined rate that includes your interest and other loan fees. It’s a more accurate reflection of your loan’s total cost.
- Deposit requirements: find out what the minimum required deposit is before you apply. If they want 20% and you only have 10%, look elsewhere.
- Additional payments: if you’re able to pay above the minimum required instalment, you can clear your debt early and save money in the process.
- Redraw facilities and offset accounts: redraw facilities allow you to withdraw from additional payments you’ve made. Offset accounts allow you to store funds in a way that reduces your payable interest. Consider whether these are worthwhile for their cost.
- Repayment frequency: think about whether you want to pay off your home loan on a weekly, fortnightly or monthly basis.
- Early break fees: consider whether you’ll have to fork out to refinance your loan or clear your debt early. These won’t be included in your comparison rate.
Types of home loans
- Variable rate loans: your interest rate is open to change throughout your loan term.
- Fixed rate loans: your interest rate is locked in for a set period, usually between one and five years.
- Split rate loans: a portion of your loan is fixed for a set term while the remainder stays variable.
- Self-employed loans: can make use of things like tax returns and other business financials instead of payslips.
- Construction loans: designed to fund the build process of your new home, with payment to your construction company made in instalments until completion.
- Investment loans: designed for investment property purchases. Compared to standard owner-occupier loans, they come with higher interest rates.
- Bridging loans: fund the purchase of your new home if you’re still waiting for your current one to sell.
- Low doc loans: loans with alternative document requirements for those who may not be able to provide all the standard information to their lender.
- Interest-only loans: come with an introductory period of up to 12 months where only interest is payable and your loan debt remains untouched.
Changes to home loans in 2025
Interest rates
The RBA announced on 21 May that they would be cutting the national cash rate by 25 basis points, taking it to 3.85%. This is the second cut in three RBA meetings in 2025, with a 25-point reduction also ticked off in February.
The 0.50% trimmed from the cash rate over the last three months has provided some much-needed relief for homeowners still paying off their mortgage, having sat at a 12-year high of 4.35% for over a year.
If you had a $600,000 home loan with 25 years left to run and were on the average 6.06% p.a. variable rate (according to Canstar data), the May rate cut would’ve seen you save $91 on your monthly repayments. Those with a $1 million mortgage on the same terms would’ve enjoyed a $152 cut.
The good news for mortgage payers is that experts are forecasting further cuts to the cash rate across the year. Here’s what some of the major players are saying:
- ANZ has forecast only one more 25-point cut for the year, in August, resulting in a cash rate of 3.60%.
- Commonwealth Bank predicts the cash rate will fall by around 50 basis points by the end of the year, which would leave the cash rate at 3.35%.
- NAB’s original forecast had the RBA slashing the rate by 50 basis points in May, followed by 25-point cuts in July, August and November. They have maintained their expectations of the three subsequent cuts, predicting a rate of 3.10% at the end of the year.
- Westpac’s prediction falls in line with CommBank’s, with a 25-point cut in May expected before identical cuts in August and November to finish the year at 3.35%.
With this in mind, let’s take a look at how some of these cuts may impact your home loan:
| Loan amount | Interest rate | Cash rate cut | Monthly repayments after cut | Monthly saving |
|---|---|---|---|---|
| $665,978 | 6.06% p.a. | N/A | $4,316 | N/A |
| $665,978 | 6.06% p.a. | 0.25% | $4,214 | $102 |
| $665,978 | 6.06% p.a. | 0.50% | $4,114 | $202 |
| Repayments based on a 25-year loan term. Loan amount and interest rate based on average home loan data cited by Money.com.au. | ||||
Home loans and HECS-HELP
February saw ASIC and APRA update their industry guidance to allow HECS-HELP and other student loans to be ignored in certain circumstances when calculating mortgage affordability. This came after a push from the Australian Government to boost first-time buyers’ chances of home loan approval.
Under the revised guidelines, banks and other lenders can now look past student loan debts if they’re able to be repaid in the near future. According to mortgage broker Aussie, someone earning an $80,000 salary with a $10,000 HECS-HELP debt could’ve had their borrowing power slashed by around $50,000 before the latest updates.
This change in direction won’t help everyone, such as those who have a long way to go on their student loan repayments. However, it could make a significant difference to you if you’ve almost cleared your HELP debt.
