The Ultimate Guide to Home Loans: Everything You Need to Know

Thinking about applying for a home loan? Before you head to the bank or start researching different lenders, it’s a good idea to learn more about the types of loans available, any additional costs involved and what you should be looking out for when you compare financial products. Home loans may seem quite complicated, but our handy guide breaks down all the key information you need to know.

Also known as a mortgage, a home loan is a type of loan that allows you to purchase property. This type of loan typically uses the property you are purchasing as security, meaning that if you’re unable to meet your financial obligations, the lender may require the property to be sold in order to recoup the money lent to you.

More often than not, home loans will have a repayment term of 25 or 30 years, with the full value of the amount borrowed needing to be repaid within this period of time. Repayments are made over the course of the loan term and are commonly made weekly or monthly.

Much like any financial product, there are several different types of home loans available, with each suited to different people and circumstances. Some of the most common types of home loans include:

Fixed-rate home loans

What is a fixed-rate home loan?

A fixed-rate home loan is a type of home loan that has an interest rate that won’t fluctuate or change for a certain period of time. The interest rates attached to this type of home loan are typically ‘fixed’ for anywhere up to five years. Even though the interest rates set by the Reserve Bank of Australia may increase and decrease throughout the life of your loan, having a fixed interest rate provides some certainty around how much your repayments will cost, making it easier to manage your monthly budget.

While fixed-rate home loans are great for avoiding potential uncertainty, they do lack flexibility, meaning that you may miss out on a better interest rate if your interest rate is locked in for a certain amount of time.

Who is a fixed-rate home loan best suited to?

Fixed-rate home loans are best suited to borrowers who prefer knowing how much they’ll need to repay each fortnight or month. Offering greater security than variable-rate home loans, they may be a better option if you’re living on a tighter budget with little room for unexpected repayment increases.

Variable-rate home loans

What is a variable-rate home loan?

Much like the wider market, the interest rates that accompany a variable-rate home loan will increase and decrease throughout the life of this type of loan. While this may allow you to take advantage of lower interest rates, there is some uncertainty attached as your fortnightly or monthly repayments could also increase with the introduction of interest rates higher than current home loan rates.

Variable-rate home loans may be worth considering if you prefer to have greater flexibility and would like to have the opportunity to take advantage of lower interest rates if they are introduced during the life of your loan. It is important to remember, however, that there is no certainty that your interest rates will remain the same for an extended period of time.

Who is a variable-rate home loan best suited to?

Variable-rate home loans are best suited to those looking for greater flexibility in their home loan repayments. Following market trends, borrowers who take out this type of home loan may enjoy lower interest rates but may also see their interest rates increase too.

Split home loans

What is a split home loan?

A split home loan is a type of home loan that takes advantage of the positive aspects of both fixed-rate home loans and variable-rate home loans. Under this type of loan, half the mortgage is treated like a fixed-rate loan, while the other half has a variable interest rate. If variable-rate loans offer too much uncertainty for your liking, split home loans offer a good middle ground.

Who is a split home loan best suited to?

Split home loans are best suited to those who enjoy the flexibility that accompanies variable-rate home loans but would also prefer some of the security that comes with fixed-rate home loans.

Interest-only home loans

What is an interest-only home loan?

An interest-only home loan sees the borrower only pay interest rather than repaying the sum that was borrowed. Although this type of loan offers advantages to some, it’s not a type of loan that’s suited to a regular home buyer, with the amount of interest owed increasing over time.

Who is an interest-only home loan best suited to?

Interest-only home loans are best suited to investors or those who are looking to sell their property in just a few short years.

Although the amount that you borrow (the principal) makes up the majority of the costs involved in your home loan, interest and any other applicable fees can see the total amount that you need to repay increase. Learn more about what each cost involves below:

Fees

Fees are common expenses that accompany home loans. Before you settle on a lender and loan, be sure to investigate common fees such as:

Upfront fees

Upfront fees are one-off expenses that are typically paid when you take out a new loan. The most common form of upfront fees are application fees. While many lenders do charge application fees to cover the costs of processing your application, some don’t. If you’re looking to save some extra money, look for a lender that doesn't charge this additional fee.

• Account-keeping fees: Sometimes known as service fees, account-keeping fees typically cover any administrative costs involved in maintaining your loan.
• Annual fees: Similar to account-keeping fees, annual fees are charged by lenders to help cover the administration costs associated with your loan.

Interest rates

When a lender advertises a home loan, there are typically two different interest rates displayed: the advertised rate and the comparison rate.

• Advertised rates: The advertised rate is the interest rate that the lender will charge in addition to the amount that is borrowed. This figure doesn’t include any additional fees or charges that the lender may apply to an approved loan.
• Comparison rates: Comparison rates were introduced to help Australian borrowers understand the total costs involved in taking out a home loan, taking both the advertised rate and any relevant fees and charges into account. With this rate, which is calculated using a $150,000 loan with a 25-year term as a base, loans from different lenders are more easily compared. If a comparison rate is much higher than an advertised rate, it can be an indicator that the loan has expensive application fees or an interest rate that increases over the loan term.

As a general rule of thumb, a good savings goal to have for a home loan deposit is 20% of the total purchase price. On top of this, it’s also sensible to have a little extra on hand to cover the additional costs involved in buying a home that aren’t covered by the deposit. A deposit of this size helps to show the lender that you are financially secure and provides them with a larger amount of collateral if you were to default on your home loan repayments.

Depending on the lender that you choose, you may not need to save a full 20% deposit. Some lenders require a deposit of just 5%, but having a smaller deposit does mean that you will need to pay lenders mortgage insurance (LMI).

The size of your deposit will vary depending on the price of the home you’re planning to purchase, the deposit requirements of your lender and the size of the loan that you are approved for.

When you’re looking to take out a home loan, it’s important to weigh up the different options available to you. With so many different features and criteria to compare, it’s good to start with the basics, including:

• The advertised interest rate
• The comparison rate
• The size of each fortnightly or monthly repayment
• The loan term
• Any one-off fees, such as application fees
• Any ongoing fees, such as account-keeping fees or annual fees
• Any additional features, such as account redraw and account offset

If you already have a mortgage, considering finding another mortgage that has a lower interest rate to save money. At ClearScore, you can find your loanScore, a number that indicates how healthy your mortgage is and whether you can find a better deal by comparing your loan to thousands of others.