What is a home loan and how does it work?
A home loan or mortgage is a type of loan where real estate is used as the collateral. A home loan is used to finance the purchase of a home or investment property so you don't need to pay the entire amount upfront. The borrower then makes monthly repayments, with interest and principal, over a period of time usually between 25-30 years.
How our home loan comparison works
- For owner-occupiers and investors
- For those constructing or renovating a home
- For those refinancing their home loan and those buying their first home
- With principal and interest repayments or interest-only repayments
- With fixed or variable interest rate repayments
With our home loan comparison tables, you can compare the advertised interest rates, the home loan comparison rate (a better reflection of the loan's true value), and what the minimum monthly repayments are based on a loan size of $400,000.
How to choose a mortgage
The interest rate is arguably the most important thing in a home loan, as a lower interest rate can save you thousands (tens of thousands even) of dollars over the course of the mortgage. While getting the lowest home loan interest rate you can is important, it isn't the be-all-end-all, as it's very possible a mortgage with a slightly higher interest rate might be more suitable to your needs.
That's why when assessing a home loan, you should also consider:
1. Does the home loan have an introductory rate?
A home loan can have a low interest rate for the first couple of years, before reverting to a higher interest rate later on.
2. If it's a fixed rate home loan, what's the break cost?
If you break a fixed home loan term, the lender can charge you a break fee which could be thousands of dollars.
3. What type of home loan fees are there?
Lenders charge you various home loan fees when you take out a home loan, from upfront fees which include establishment fees, application fees, conveyancing fees, legal fees, LMI, and government charges such as stamp duty costs. There are also ongoing fees to consider, including redraw fees, late payment fees, switching fees, annual fees, and monthly service fees. There may also be exit fees or break costs when you come to the end of your loan term.
4. Is the home loan interest-only?
Interest-only mortgages can be much cheaper for the first five years or so, but can have much higher repayments at the conclusion of the interest-only period, potentially leading to 'repayment shock'.
Each of these things can make a high-cost mortgage look deceptively low, which is why you should really look at the comparison rate to see a more accurate representation of the loan's cost. Also take into consideration the amount you're borrowing on the loan and the loan term (how long it lasts). Bear in mind that paying more than the minimum repayments can save lots of time and money off your mortgage.