Factsheet: Home loans
ONLINE TEXT VERSION - October 2012
Buying your own home is one of the biggest
financial decisions you'll ever make.
So take the time to consider your options, shop around for the
best deal and find the right loan for your needs and
How do home loans work?
This is how a typical home loan (or mortgage) works:
- Save a deposit: The more you save, the lower
the amount you need to borrow and the less you will pay in interest
over the life of the loan.
- Apply for a loan and get it approved: The
lender approves the loan in principle, enabling you to look for a
property within a set budget. Once you've decided on the loan
amount, you'll need to finalise the loan documents with your
- Offer the property as security: This means you
pay a lower interest rate than for other loans. But, if you fall
seriously behind on your repayments, the lender has the right to
sell your home to get its money back.
Case study: Jie and Ming save $100,000 on their home loan
Jie and Ming saved up a deposit of around $70,000 to buy a
two-bedroom apartment. They used a mortgage calculator to work out
what the monthly repayments would be. They decided they could
afford to borrow $380,000 over 25 years.
They first considered a loan with a variable interest rate of
6.5% but, after comparing online, they found a loan with the
features they wanted at a rate of 6%. This could save them around
$35,000 over the life of the loan.
Jie and Ming also realised that, by making slightly higher
repayments fortnightly (calculated by dividing the monthly payment
by 2), they would end up making an extra monthly payment each year.
This means they could pay off the loan 4 years early and save about
$65,000 in interest.
These two simple steps could save them up to $100,000 over the
life of the loan.
Home loan checklist
- Do a budget: Use MoneySmart's budget planner
or download our free booklet Managing your money. You can also call
ASIC's Infoline on 1300 300 630 to order a free copy.
- Work out what you can afford: Only borrow what
you actually need and can afford. Use our mortgage calculator to
work out your repayments.
- Get a key facts sheet: Ask the lender for a
key facts sheet for each loan you are considering, and compare
interest rates and fees.
- Choose your features: Typically, the interest
rate on a 'no-frills' loan will be lower than on one that offers
more features. So make sure you're not paying extra for things you
- Know who you're dealing with: Lenders and
brokers must be licensed with ASIC (or be an authorised
representative of someone licensed). To check this, search ASIC
Connect's Professional Registers or call ASIC's Infoline on 1300
- Read before you sign: Read the terms and
conditions in the loan contract before you sign anything. Ask
questions if there's something you're not sure about. Never sign
blank forms or leave details for the lender or broker to fill
Work out how much you can
afford to borrow
- How much do you need for a deposit? As a rough
guide, aim to save 20% of the purchase price, plus enough to cover
costs. If you borrow more than 80% of the purchase price, you
may have to pay lenders' mortgage insurance (LMI). This is an
insurance that protects the credit provider from the borrower(s)
not being able to repay the loan.
- How much can you afford to repay? Taking out a
loan will mean you have less money for other things. Use
MoneySmart's budget planner to understand where your money goes.
And use our mortgage calculator to work out how much you can afford
- Can you afford all the costs? Include up-front
costs like stamp duty and legal fees; and ongoing costs like loan
repayments, land and water rates, house and contents insurance, and
- Are you a first-time home buyer? You may be
eligible for a one-off payment through the Australian Government's
First Home Owner Grant
Ask your lender for a key facts sheet
From 1 January 2012, all lenders offering standard home loans
must give you a key facts sheet when you ask them. So make sure you
get one for each home loan you are considering.
Key facts sheets use a set format so you can compare loans and
understand what they will cost in fees and interest.
Look for important information such as:
- Loan amount and term (make these the same on each, for easy
- Type of interest rate
- Personalised comparison rate (interest rate with fees
- Repayment method and frequency
- Establishment fees (if any) and ongoing fees
- Total amount to be paid back (loan amount plus fees)
- What happens if interest rates increase?
- How can I repay my home loan faster?
How do interest rates
||How it works
The rate you're charged goes up and down
Usually able to make extra repayments
Your lender may put the rate up at any time
Allows you to lock in an interest rate, typically for a period
of 1-5 years
May be offered for an introductory or honeymoon period
Reverts to a variable rate at the end of the period
Your interest rate will not go up during the fixed rate
Know how much your repayments will be during this period
Won't benefit from falling interest rates
May not be able to make extra repayments
May be charged a break fee for terminating the fixed rate period
What type of home loan is right
||How it works
Standard loan (principal and interest)
Make regular payments to cover the principal
amount borrowed and the interest charged
As you pay down your loan, you build up equity
(the value of your property, less what you owe)
Fixed, variable and partially-fixed rate loans (see below) are
all variations on a standard loan
As you pay off the principal, the balance goes down
Can usually repay loan in full at any time
A redraw facility may be available at no extra
cost, enabling you to pay in more when you can (to reduce your
interest) that you may redraw later
May have option of an offset account, where the
amount in your savings account is offset against your loan balance
to reduce interest payable
May be charged a break fee for early pay out or refinancing of a
fixed or partially-fixed rate loan
In some cases, a lender may not release your redraw funds when
you want them (so check loan conditions)
Split loan (or partially fixed)
You pay fixed interest for an agreed portion of your loan and a
variable rate on the rest
Know what repayments will be on fixed rate portion
Usually able to make extra repayments on variable rate
May benefit if rate goes down on variable rate portion
Less flexibility than a fully variable rate loan
May be charged a break fee to pay out or refinance the fixed
ASIC Infoline: 1300 300 630
Disclaimer: Please note that this is a
summary giving you basic information about a particular topic. It
does not cover the whole of the relevant law regarding that topic,
and it is not a substitute for professional advice.
© Australian Securities and Investments Commission 2012
Last updated: 08 Sep 2015