Home loans

Competitive home loan rates for first home buyers, refinance or investment

Home loans

Everything you need to know about financing your new property

If you’re reading this and are hoping to buy property in the future, you’ll almost certainly need a home loan to lend a helping hand for your purchase. Most Australian homeowners have gone through the same process as you will, so you’re certainly not alone. Being approved for a home loan is one thing but managing to find the perfect one to suit your needs is a considerable skill. In this guide, we take a deep dive into all things home loans, how they work, what your options will be and how you can choose the right one for you.

What is a home loan and how does it work?

A home loan is an advanced payment that a borrower receives to facilitate the purchase of property. Almost everyone looking to buy a house today will have to do so with the help of a home loan, thanks to the significant growth in housing prices in Australia over the past few decades.

The funds that are provided to you by your lender are known as the principal, which are subsequently paid back over an extended period (usually 30 years) with added interest and fees. What you’ll have to pay in interest and fees is likely to vary quite significantly between lenders, as are the types of services on offer, so you’ll have to do your research to determine which one is the best for you. Savvy helps potential borrowers find the best home loans with our financial comparison tools that analyse the areas you should be looking to maximise for your loan.

What are interest rates and how do they work on home loans?

An interest rate is one of the fees you’ll be charged for borrowing funds from a lender. This addition to your repayments essentially covers the cost of being able to use the lender’s money instead of your own. It also repays lenders for the risk in handing you a large sum of money; it’s an incentive for them to entrust you with their funds and subsequently pay it all back. Interest charges are one of the main sources of revenue for lenders, as they can amount to significant sums per customer. However, even though you’ll be paying interest, it doesn’t mean that repayments will suddenly become unaffordable. Lenders will always structure your home loan in a way that suits your financial needs and capability. After all, lenders want to ensure that their sum is repaid in full.

For home loans, your repayments and interest are calculated on an amortization schedule basis. This means that the way in which your interest payments are calculated is based upon your outstanding principal, usually on a daily, weekly or monthly basis, rather than the entire sum at the beginning of the home loan. You can calculate how much you’ll be paying in interest over a given period using the following formula:

Principal x (interest rate ÷ number of payments) = total interest paid

We can use an example to determine how much interest we’ll pay over a month and then a year. Let’s say that you’re looking to take out a $500,000 home loan at an interest rate of 3% over a 30-year period, and you’re paying the loan off monthly with repayments of $2,108.02. Using this information, we can work out that the first months’ worth of interest paid will be:

$500,000 x (0.03 ÷ 12) = $1,250

However, because we’re calculating interest continuously based on the home loan principal, that number will gradually reduce over time. We can work out that the principal payment made during the previous month was $858.02, bringing the total balance to $499,141.98. We can now determine that the interest payable for the next month will be:

$499,141.98 x (0.03 ÷ 12) = $1,247.85

Your interest payments as a percentage of your home loan repayments will continue in a gradual downward trend, as you can see in the table below.

Month Principal balance Interest payment Principal payment Updated principal
1
$500,000.00
$1,250.00
$858.02
$499,141.98
2
$499,141.98
$1,247.85
$860.17
$498,281.82
3
$498,281.82
$1,245.71
$862.32
$497,419.50
4
$497,419.50
$1,243.55
$864.47
$496,555.03
5
$496,555.03
$1,241.39
$866.63
$495,688.40
6
$495,688.40
$1,239.22
$868.80
$494,819.60
7
$494,819.60
$1,237.05
$870.97
$493,948.63
8
$493,948.63
$1,234.87
$873.15
$493,075.48
9
$493,075.48
$1,232.69
$875.33
$492,200.15
10
$492,200.15
$1,230.50
$877.52
$491,322.63
11
$491,322.63
$1,228.31
$879.71
$490,442.91
12
$490,442.91
$1,226.11
$881.91
$489,561.00

There are also several different ways that you can structure your interest when it comes to home loans. These will play a major role in how much you’ll end up spending on your home loan overall. At the beginning of the home loan process, you’ll be able to compare between fixed rate home loans, variable rate home loans and split rate home loans

Which types of home loan can I choose from?

Variable rate home loan

The most popular and commonly occurring type of home loan in Australia, variable interest rates are determined by market movement, so they may vary between repayments. This means that you’ll be in the best position to take advantage of any drop in interest rates (should they occur) and save yourself a nice chunk of money on your repayments. Variable rate home loans also afford their borrowers an increased level of flexibility when it comes to paying off their home loan, generally allowing extra or early repayments for no added cost and allow them to switch home loans with no exit fee.

The nature of variable loans is such that, because of the potential for your repayments to change on a regular basis, any attempt by you to accurately plan your finances into the future is hindered. You can’t say for certain that you’ll be paying a certain amount of interest across a given period, which can then allow you to spend your money in a particular way down the track. Additionally, although you can capitalise on rate decreases, you’re also susceptible to any rate increases that your lender may enforce. This can cost you a fair amount if you enter the market at the wrong time.

You can see how a variable rate home loan can save you money on your home loan in the table below.

First 18 months interest Repayments Second 18 months interest Repayments Third 18 months interest Repayments 54-month total (4.5 years)
Fixed rate
3%
$2,108.02
3%
$2,108.02
3%
$2,108.02
$113,833.08
Variable rate
3%
$2,108.02
2.8%
$2,054.47
2.6%
$2,001.70
$110,995.42
Saving
$0
$53.55
$106.32
$2,837.66

*Estimates calculated using a home loan of $500,000 with a repayment term of 30 years.

Fixed rate home loan

Unlike variable interest rates, fixed rate home loans stick to the same interest rate for a pre-determined portion of your loan (usually one to five years). The beauty of this is that if you come across a great interest rate that you’d like to stick with for more than a month or two, you can approach a lender to lock it in for an extended period. This certainty surrounding your interest rates also allow for accurate budgeting into the future, giving you a greater idea of where your finances might be sitting at the end of the fixed term.

However, fixed rate home loans generally won’t afford you the same freedom as variable rate home loans regarding extra repayments and early exits. If you want to refinance your home loan during your fixed term, for example, you’re likely to incur a substantial fee for breaking the agreement early. For this reason, you must be extra careful when choosing which home loan to go with. Furthermore, while locking your interest rate in for an extended period of time can protect you from interest rate rises, it can also bar you from accessing better rates that appear during your fixed term.

First 18 months interest Repayments Second 18 months interest Repayments Third 18 months interest Repayments 54-month total (4.5 years)
Fixed rate
3%
$2,108.02
3%
$2,108.02
3%
$2,108.02
$113,833.08
Variable rate
3%
$2,108.02
3.3%
$2,189.78
3.6%
$2,273.23
$118,278.54
Saving
$0
$81.76
$165.21
$4,445.46

*Estimates calculated using a home loan of $500,000 with a repayment term of 30 years.

Split rate home loan

If you can’t make your mind up, you can choose both variable and fixed! Split rate home loans allow you to fix a portion of your home loan whilst keeping the rest variable. What this essentially does is divide your home loan in two so that you can apply two different sets of interest to the respective loan portions. This will ensure that you can maintain a level of certainty around the fixed portion and potentially secure a great rate, whilst also allowing yourself to make additional contributions to the loan whenever you wish. You also generally get a choice of the ratio of fixed to variable on your home loan, so you can tailor it to suit your preferences. You can see how a split rate home loan could save you money in the table below.

It’s important to note, though, that splitting your home loan in two means that you’re not only paying interest on both, but fees as well. It’s best to avoid having to pay extra fees where possible, but they might be tough to dodge with a split rate home loan. There’s also the potential for you to get your split wrong, which can also hurt your back pocket. For example, if your variable rate increases right after you’ve fixed a small portion of your home loan or it decreases after fixing a suboptimal rate, it could sting.

You’re not limited to interest-based options with home loans, though. You might have more specific needs that aren’t directly met by a standard home loan. The above interest rate options generally still apply across the board to these home loan types.

Interest rate Monthly repayments Repayments after fixed period Total repaid Saving after fixed period
Fixed portion
3.5%
$224.52
Variable portion
4.2%
$2200.58
$2,442.29
$878,191.48
$2,039.43
Total
N/A
$2,425.10

*Estimates calculated using a home loan of $500,000 with a repayment term of 30 years and a fixed amount of $50,000 with a repayment term of five years.

It’s important to note, though, that splitting your home loan in two means that you’re not only paying interest on both, but fees as well. It’s best to avoid having to pay extra fees where possible, but they might be tough to dodge with a split rate home loan. There’s also the potential for you to get your split wrong, which can also hurt your back pocket. For example, if your variable rate increases right after you’ve fixed a small portion of your home loan or it decreases after fixing a suboptimal rate, it could sting.

You’re not limited to interest-based options with home loans, though. You might have more specific needs that aren’t directly met by a standard home loan. The above interest rate options generally still apply across the board to these home loan types.

Self-employed home loan

If you’re a sole trader, you may not meet your lender’s criteria when it comes to providing documentation in relation to your income in the way that a pay as you go (PAYG) employee does. If you’re able to produce documents like tax returns from the previous two financial years and business financial statements, you’ll likely be able to qualify for a full doc (full documentation) home loan. For all intents and purposes, this is the same as a standard home loan.

However, if you can’t produce these for whatever reason, you’ll probably only qualify for a low doc (low documentation) home loan. This type of home loan carries much greater restrictions on maximum loan-to-value ratios, or LVR, and will generally come at higher interest rates. However, if you’re able to produce the required documents eventually, you might be able to convert your home loan into a full doc loan. The table below outlines the documents you’ll need for each type of self-employed home loan.

Non-conforming home loan

This loan can also help self-employed workers, but it isn’t limited to just them. As the name indicates, this type of home loan is designed to help out those who don’t quite fit in with the usual lender requirements for a suitable borrower. This may be because they don’t earn enough income or have enough in savings to qualify for a home loan, that their financial history is marred with imperfections that rule them out of contention or that they’re a recent migrant to Australia and can’t confirm their credit history. Interest rates, fees and the required minimum deposit are all generally higher in non-conforming home loans than the standard.

Investment home loan

Investment home loans are functionally the same as standard home loans, but they deviate slightly from the norm in that the required LVR is generally lower. This means that you’ll have to pay more for your deposit at the start of the loan process. Interest rates are usually higher for investment purchases as well, as lenders see them as greater risks than owner-occupied property. However, investment home loan borrowers may find that they can claim more expenses on tax, such as interest payments, council rates and maintenance costs.

Construction home loan

This type of home loan is designed for those who are looking to build a new property or looking to conduct significant renovations. In contrast to more standard home loans, payments are provided in instalments, known as “progress payments”. These are granted once pre-determined financial milestones have been met. You’ll usually only have to pay interest on the amount you’ve withdrawn, so your repayments will gradually increase the more money you spend.

Line of credit home loan

Alternatively, borrowers can draw from their home equity up to a pre-determined limit to access funds from a line of credit home loan. Home equity is calculated by the amount you owe on your home loan subtracted from the overall value of your property, so this option is generally open to you if you’ve owned your house for a while. Lines of credit can be useful if you’re looking to purchase investment property or renovate your current one, but it can carry greater interest rates than other home loans. You can read more about accessing your home equity here.

Bridging loan

If haven’t been able to sell your property before purchasing your next one for whatever reason, you may look to a bridging loan to help fill the gap. This is a short-term fix to cover yourself between buying and selling, so it’ll usually be capped at six months for you to sell your existing property or 12 if your purchase is being built. Bear in mind also that you’ll have to manage your bridging loan repayments on top of your home loan repayments in the time before you buy.

How much will I need to pay for my home loan deposit?

This depends on the type of home loan you choose to go with, but as a general rule, lenders will always preference home loans of 80% LVR or lower, meaning you’ll likely have to pay a minimum of a 20% deposit on your new property. LVR is calculated by subtracting the cost of your deposit from the price of the property and working this number out as a percentage of the original property value. Basically, it’s the amount that lenders are stumping up to help you buy your property. Take the below example:

$70,000 deposit ÷ $350,000 property value = 0.2 (20% deposit)

Complete property value (100%) – deposit (20%) = 80% LVR

Despite 20% being the preferred deposit amount by many, there are lenders on the market willing to accept deposits of as little as 5% in the right circumstances (namely a strong financial and/or borrowing history). This may be the only option for you if you don’t have enough to cover a larger deposit but increasing your payment upfront can help you avoid having to pay for expenses such as Lender’s Mortgage Insurance (LMI). This insurance is designed to cover your lender if you become unable to repay your home loan and can set you back thousands of dollars.

The main thing you should take away is that the more you deposit, the better it’ll be for you. Let’s outline how the size of your deposit can (quite drastically) change the amount you’ll end up repaying.

Deposit Starting loan balance Monthly repayments LMI Total repaid Saving compared to 5% deposit
5% ($25,000)
$475,000
$2,002.62
$17,480.00
$738,422.90
N/A
10% ($50,000)
$450,000
$1,897.22
$8,820.00
$691,818.53
$46,604.37
15% ($75,000)
$425,000
$1,791.82
$4,887.50
$649,941.67
$88,481.23
20% ($100,000)
$400,000
$1,686.42
$0
$607,109.81
$131,313.09
25% ($125,000)
$375,000
$1,581.02
$0
$569,165.45
$169,257.45
30% ($150,000)
$350,000
$1,475.61
$0
$531,221.08
$207,201.82

*Repayment estimates calculated using a $500,000 home loan at a 3% interest rate to be repaid over a 30-year period. Does not include additional fees.

Compare best home loans and calculate repayments

Compare hundreds of home loan products for you to make the right choice

LenderProduct NameAdvertised RateComparison RateMonthly Repayment
Savvy Variable Refinance Loan 3.89%
fixed
3.91% $551.01
GreaterBank Great Rate Variable Home 3.89%
variable
3.89% $551.01
Macquarie Basic Variable Home Loan 3.89%
variable
3.89% $551.01
AMP Essential Home Loan 3.89%
variable
3.91% $551.01
Bank of Australia Premium Home Loan Fixed 3 Years 3.94%
fixed - 3 yrs
4.63% $551.68
IMB Essentials Investment Loan 4.09%
variable
4.09% $553.71
CBA Fixed Rate Home Loan 3 Years 4.24%
fixed - 3 yrs
5.10% $555.75
ANZ ANZ Standard Variable Home Loan 4.35 - 4.50%
fixed - 2 yrs
4.74 - 4.89% $557.25
Westpac SMSF Investment Property Loan Fixed 2 Years 4.99%
fixed - 2 yrs
5.66% $566.00

* The interest rate of 3.89% p.a. with a comparison rate of 3.91% p.a. is based on a loan amount of $150,000 and a term of 25 years. The comparison rate, monthly repayment and total cost applies only to the example given and may not include all fees and charges. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate. Establishment fees and monthly fees apply only to consumer loans. Commercial use loans may attract different fees.

Explained: how to compare home loans

Here are some of the areas you should use to contrast different lenders in the home loan market.

Top tips for getting approved for your home loan

Keep these pointers in mind when approaching your application to maximise your chances of approval

Assess your financial history and credit score

This will be the first area that lenders look to when considering your application: they’ll want to see that you’re responsible and that they can trust you to repay their funds, as well as whether you have the means to repay it. You can try to increase your credit score by as much as possible before applying by paying off outstanding debts and lowering limits on your credit cards.

Save up as much as you can

Another way of increasing a lender’s trust in you is to show that you can save money effectively. Not only will this make you appear more responsible but utilising these extra funds to put towards a deposit will decrease the money your lender will have to put forward, which in turn will improve your approval chances.

Don’t change jobs

As we said, lenders want to know you have the financial capability to pay off your loan. Part of this is being able to hold down a stable job with a steady income. If you switch jobs before applying for your home loan, your lender will have less faith that your income will stay consistent due to your re-entry into a probationary period.

Establish a safety net

Keeping a buffer of funds available reduces the risk of running out of money considerably. A lender won’t approve your home loan if there’s even a minute possibility that this will happen. Reviewing your current personal insurance cover is also wise in the leadup to a home loan application.

Home loan grants you may be eligible for in Australia

If you fit certain criteria, you might qualify for a helping hand from your state or federal government.

First Home Owner Grant (FHOG)

This is a one-off payment made to eligible home buyers. It was originally introduced in 2000 as a way to offset the affect of the Goods and Services Tax (GST) on homeowners. This option is available to first home buyers in every state and territory except for the ACT. The amount you can receive and specific criteria regarding eligibility varies from state to state, but grant amounts vary between $10,000 and $20,000. 

First Home Loan Deposit Scheme (FHLDS)

FHLDS is a federal government initiative designed to help borrowers unable to provide a deposit of 20% reach that figure, reducing debt and avoiding the need to pay LMI. The Scheme is open to singles or couples looking to purchase a property meeting the following criteria:

  • Income: you must have earned at or below $125,000 as a single or $200,000 as a couple in taxable income from the previous financial year
  • Ownership: you mustn’t have owned property prior nor had any interest in any in any state or territory in Australia
  • Personal requirements: you must be an Australian citizen and 18 years old age or older. If you’re applying as a couple, these must apply to both applicants
  • Savings: you must not have 20% or more of the property value in savings and must pay a minimum deposit of 5%
  • Owner occupier: you must live in your property inside the first six months immediately post-settlement and do so as long as your guarantee is active

 

There are other requirements regarding price caps for property in each state and territory depending on where you choose to buy, so you can access that list here.

Low Income Home Loan Schemes

In addition to FHLDS, each state and territory government (aside from New South Wales) has introduced schemes to help low income-earners fund their home purchase. Here’s out breakdown of each of these and links to find out more about them.

  • Home Buyer Concessions (ACT): this scheme waives stamp or transfer duty for first homebuyers.
  • Home Buyer Initiative (NT): grants buyers access to designated Home Buyer Initiative properties.
  • Queensland Housing Finance Loan (QLD): enables low income-earners to pay as little as 2% for their deposit without paying LMI or other application fees.
  • HomeStart Home Loan (SA): enables low income-earners to pay as little as 5% for their deposit without paying LMI and affords the option to combine a HomeStart Home Loan with that of another lender and borrow up to 30% more.
  • HomeShare (TAS): allows low income-earners to receive up to $100,000, or 30% of their home loan, from the Director of Housing, which is to be repaid over time.
  • HomesVic Shared Equity Initiative (VIC): enables low income-earners to pay as little as 5% for their deposit, which is to be repaid over time.
  • Keystart (WA): enables low income-earners to pay as little as 2% for their deposit without paying LMI.

Frequently asked home loan questions

Take a look at some of the most common queries regarding home loans if you’re still looking for more information

How long is a home loan term?

A home loan term is typically 30 years. Some lenders may offer terms of 25 or 40 years, but you’re most likely to end up with 30.

What is an interest only home loan?

An interest only home loan is a feature of home loans that allows the borrower to only make payments towards interest for the first one to five years of their home loan. This frees up funds in the first part of the repayment process, which is why it’s popular with property investors. However, this will result in you paying more in interest if your lender charges you a revert rate instead of the standard rate.

Can I change to a different home loan after I’ve started repaying mine?

Yes – this is called home loan refinancing and can be done for a variety of reasons, such as to take advantage of a better interest rate, gain access to home equity or consolidate existing debts. You can read more about home loan refinancing here.

Which lender is the best for home loans?

There’s no true answer to this – it depends on what you’re looking for in a lender and a home loan. Banks and credit unions are generally the most accessible in terms of physical branches and services, but that doesn’t mean they’re better than the rest. You’ll be able to find competitive rates between banks, credit unions, non-bank lenders and online home loan lenders. You can compare these on Savvy, where we rank the top home loans and lenders against each other so you can choose the right one for you.

Can I borrow 100% of my property’s value?

Yes – but only if you have a guarantor. This is another person, such as a parent or family member, who acts as an added layer of security for your home loan and becomes liable for the debt should you become unable to repay it. Because of this added security, some lenders will grant funds up to or over 100% of the property’s value. This is useful for borrowers who can’t afford a deposit upfront.

 

Can I be approved for a home loan if I have bad credit?

Yes – while it may be difficult, there are options open to customers with bad credit to be approved for their home loan. Click here to read more about bad credit home loans.

If I’m receiving Centrelink payments, can I still qualify for a home loan?

Yes – provided that your Centrelink payments are supplementary to your main income and are purchasing with a partner who is earning enough to qualify you for your home loan.

Can I negotiate my home loan rates, fees or features with my lender?

Yes – lenders are usually open to negotiations on the various aspects of their home loans if it means you’re more likely to choose them to go with. You also may have some bargaining power if you’re looking to go with your current bank or credit union for a home loan, as they may be more willing to offer affordable rates and less restrictive conditions.

Can I apply to multiple lenders if I haven’t chosen a home loan yet?

No – applying to multiple lenders in quick succession will show up on your credit report, which may put lenders off you. Only apply to one at a time and choose carefully.

Can I get a home loan if I have bad credit?

Yes! Our financial professionals have helped dozens of people with bad credit get approved for a mortgage. Talk to us today to discuss your options.

Home loan case studies

Case study #1: Financing a property with more than 80% LVR

Charlie, 26, and Lucy, 25, want to purchase a house together in Sydney. Both have been working full-time in the same job for several years, with Charlie earning a salary of $55,000 and Lucy earning $65,000 per year before tax. They pool their savings and determine that they have a combined $50,000 to work with for a deposit and home loan closing costs (which add a further 5-6% on top of the deposit price). Because neither have owned property before, they’re eligible to receive a $10,000 First Home Owner Grant from their state government provided that they choose to buy a new home valued at $600,000 or lower.

They find a house they’d like to purchase valued at $500,000, but buying a house at that value would mean that they’d only have enough for a 10% deposit. Adding the $10,000 they received through the FHOG to their deposit brings that figure up to 12%, which would mean they’d require a home loan with a LVR of 88%.

Charlie and Lucy know that applying for a home loan at 88% LVR would result in them having to pay LMI. They work out that the LMI they’ll have to pay on top of their home loan repayments is $5,368. However, they’re willing to proceed despite this, as they’re willing to pay a bit more to secure their home. They approach their lender, who offers the $440,000 home loan at a variable interest rate of 4%, which would make their monthly repayments $2,100.63 per month. Charlie and Lucy are able to secure a mortgage offset account as well as free additional repayments and they determine that these features outweigh the burden of LMI, so they sign off on the loan and secure their new home.

Case study #2: Buying property with high LVR requirements

Michelle, 24, is hoping to buy an apartment to suit her needs, as she wants to move into property ownership rather than renting. She calculates that she has $50,000 in her savings to work with, which is enough to afford a 20% deposit of $40,000 and closing fees on a $200,000 apartment, and that her income and other savings are enough to comfortably support a maximum monthly repayment of $800. She decides to pay off her existing personal loan and credit card debts before applying for her home loan, as that will increase her credit score and show her chosen lender that she’s able to repay loans.

Michelle approaches her current credit union for a home loan, where they can see that she has a clean financial history, has shown her capability to repay debts and holds stable employment with a steady income. However, the lender’s policy on minimum LVR for apartments is at 30%*, which is $20,000 more than Michelle can currently afford. She then goes to ask her parents if they’ll agree to go guarantor on her home loan using equity in their home, which would bring Michelle’s deposit up to 30%. They agree to guarantee her home loan and put forward $20,000 in home equity to help her buy the apartment, so Michelle returns to her lender to continue the application process.

Her lender offers her the chance to repay her loan over 30 years at a rate of 3.5%, as that ensures Michelle’s monthly repayments are below her pre-determined threshold and sit at $628.66. She decides to make her interest rate variable, as she’s willing to risk a possible rate increase in exchange for a guarantee of free additional repayments. Michelle and her lender agree on the remaining terms and she becomes the owner of her very own apartment.

*Why is this? Generally, lenders will have greater restrictions when it comes to the type, size and location of a property that a borrower is looking to purchase. Units, apartments, townhouses and rural properties are seen as slightly more difficult to sell if a borrower becomes unable to repay their home loan, meaning that they may not be able to recoup the loss they made in providing you with loan funds. For units, apartments and townhouses specifically, strata title housing, whereby you own your individual property and a share in the entire land, can complicate property ownership when selling and lenders will look to avoid this as a result.

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