Home loan comparison

What is a home loan?

A home loan, also known as a mortgage, is the money you borrow from a bank or lender to purchase a home or investment property.

When you borrow funds from a lender, you then repay the amount according to a loan repayment schedule and the lender charges you interest.

The money you borrow is called the loan principal. The interest your lender charges you is determined by the home loan's interest rate. In 2020, interest rates dropped to the lowest levels they've ever been, meaning it has never been cheaper to take out a home loan.

How much of a deposit do you need?

Australians typically borrow between 80% and 90% of a property's value, which means you need to save or gather together a deposit worth 10–20% of the property's value. The difference between the loan amount and your property's value is the deposit that you must pay. The percentage of your home's value compared to your loan amount is known as your loan to value ratio (LVR).

For example, if you want to buy a home worth $700,000, you'll need to save $70,000 in order to have a 10% deposit. Or you could save $140,000 for a 20% deposit, which will allow you to take out an 80% loan.

The benefit of an 80% loan is that you won't need to pay Lenders Mortgage Insurance (LMI).

For first home buyers, you may even be able to buy a home with as little as a 5% deposit without paying LMI, as part of the First Home Loan Deposit Scheme.

While most banks want to see evidence of genuine savings for your home loan deposit, first home buyers may also have access to other grants and government support to help them make up the deposit.

What is a typical home loan term?

A typical loan term for Australian home loans is 30 years, although you may be able to arrange a loan term of between 25 and 40 years. It may be possible to work with your bank or lender to choose a different length loan term, and with some loans you are able to make extra repayments to pay your home off faster.

How do I avoid paying too much for my home loan?

When you compare home loans, the interest rate is often the first thing borrowers look at. Obviously, the interest rate has the biggest impact on your repayment costs.

But it's also important to look at other details, such as the purpose of your loan (whether you're buying a home or an investment property or you're refinancing an existing loan), your interest rate type (fixed or variable), your repayment type (principal and interest or interest only), and which loan features you need.

There are a few more elements involved in finding the right home loan for you. Ask yourself the following questions:

Why do I need a home loan?

The reason you need the home loan is going to determine the type of home loan you can apply for. If you're borrowing money to buy a home to live in you'll need an owner-occupier mortgage. If you're buying an investment property, you're looking for an investment loan.

If you're looking to buy an investment property, keep in mind that investment loans typically have slightly higher rates than owner-occupier loans. In some cases, an investor may be less focused on finding the lowest possible interest rate and more interested in finding a lender with more generous lending criteria, so that it's easier to get their loan approved.

If you already have a home loan and you haven't reviewed it or made any changes in the last 12 months, it may be time to consider refinancing.

When you refinance your loan, you're essentially transferring your debt from one lender to another. There are a number of home loans for refinancing on the market right now that not only offer competitive interest rates, but that also offer a mortgage cashback of between $2,000 and $4,000, simply for moving your loan.

Of course, before you refinance, you should work out any switching costs before applying for the new loan. Refinancing can save you thousands of dollars in loan repayments, and might only take a few hours of assembling paperwork and payslips to achieve.

Do I want a fixed rate or a variable rate?

You can choose between a fixed or variable interest rate for your home loan. A fixed rate loan has an interest rate that is locked in for a fixed period of time (usually 1 to 5 years), while a variable rate can change at the lender's discretion.

Variable rate home loans

Loans with variable interest rates can change at any time and typically offer more flexibility than fixed rates. There are no breaking costs associated with refinancing a variable rate loan, and these loans are more likely to come with features like extra repayments and offset accounts.

Variable rate home loans are more suitable for those who wish to pay off their home loan as quickly as they can, as extra repayments allow you to make more headway with your loan principal.

When making extra repayments, even small extra contributions add up. For instance, let's assume you have:

• A loan worth $600,000
• Your interest rate is 2.5% on a 30-year variable rate loan
• You make an extra repayment of $100 per week, from day 1 of having the loan

According to our extra repayment calculator, you would pay off your loan 6 years and 4 months sooner, and save more than $58,000 in interest over the course of the loan.

Fixed rate home loans

With a fixed rate loan you can lock in a specific interest rate for a period of time, typically between 1 and 5 years. This means you will know exactly what your repayments will be each month, because the rate won't change for the fixed period.

If your bank or lender increases their variable rate loans, your repayments won't be affected. This applies whether interest rates rise or fall.

Fixed rate loans are less likely to come with offset accounts or allow unlimited extra repayments. And if you want to refinance a fixed rate loan during the fixed period, there is a fixed loan break cost to consider.

In terms of costs, both fixed and variable rates are very low right now. The lowest rates on the market are fixed rate loans, but before you fix, be sure you've considered whether you may wish to sell the property during the fixed rate term. Fixed rate break costs can be very expensive.

What home loan repayment type do I need?

Another decision you'll have to make is your loan's repayment type. You have 2 options: principal and interest, or interest only.

• Principal and interest repayments. With a principal and interest home loan, you repay the money you have borrowed (the loan principal) plus the interest charges at the same time. This means that your monthly repayments are higher, but you're actually paying off your debt and you'll pay less interest in the long run.
• Interest only repayments. With interest only repayments, you can avoid paying off any principal for an early period of the loan. Instead, you just pay the interest charges and ignore the loan principal. But eventually, you'll have to pay the loan back, and making interest only repayments for a while makes the overall loan more expensive.

Most borrowers in Australia opt for principal and interest loans because as you repay the loan, you gradually build home equity and own more of your property. Equity, if you're unaware of the term, refers to the value of your home minus any debt you owe on it. If your home is worth $800,000 and you owe your lender $200,000 then your equity is $600,000.

Why do some borrowers choose interest only loans?

For investors looking to maximise their tax position, interest only investment loans make sense, because interest costs are tax deductible for investors. This means that the entire mortgage repayment is just interest (no principal) and the whole amount can be claimed against your tax. This can help to keep mortgage costs down for landlords.

While interest only repayments don't allow you to make any headway with the loan principal, they do enable you to make progress with other non-tax deductible debts, such as your own home.

For instance, if an investor has an owner occupier home loan and an investment home loan, they may be better off paying the minimum possible amount (i.e. only the tax-deductible interest payment) on their investment loan. By doing this, they can funnel the extra funds into paying as much as possible off their owner occupier loan.

Some owner occupiers choose to make interest only repayments when they're having trouble covering repayments due to job loss or increased expenses, or perhaps because of a short-term financial change, such as being on maternity leave.

Keep in mind that when you choose an interest only loan, you are making no progress on the principal, so you should think carefully and consider getting professional advice from an accountant before choosing this repayment type. It's a good idea to consider how much rental income you are getting for the property when deciding how much you can afford in mortgage repayments. If the rent doesn't cover the mortgage repayment, an interest only home loan could help to keep your monthly costs affordable.

Here's an example of the difference between the 2 repayment types:

Principal and interest vs interest only repayments

Home loan comparison tips from the experts

We spoke to some industry experts for more inside tips on getting a good home loan.

How do I compare home loan interest rates?

A good home loan comparison starts with a careful look at interest rates. The interest rate is a key component of any home loan. The lower the rate, the lower your repayments will be. It's as simple as that.

Here's the difference in repayments between a 3.50% and a 3.00% interest rate (on otherwise identical loans with 20% deposits, and principal and interest repayments).

Over 30 years, that little 0.50% difference in the interest rate could save a borrower an enormous $39,600 in interest charges.

Check out Finder's lowest monthly mortgage rate tracker

What counts as a competitive mortgage rate? It can be hard to judge, especially with rates changing so often. Luckily, Finder has made it easier for you.

Every month, we analyse all the loans in our database and find some of the lowest home loan rates. The graph below shows the lowest fixed and variable rates for home buyers and investors.

The graph clearly shows the current historic low in home loan interest rates. This is due to multiple factors, including successive cuts to the official cash rate in 2019 and 2020, plus the economic impact of COVID-19.

Learn more about finding a cheap home loan

How do I compare mortgage fees and features?

Beyond the interest rate, comparing home loans means looking at the fees and various features that mortgages come with. A loan with the right features gives you more control over your money and unlocks new ways for you to use your mortgage to your advantage.

Comparison rate

The comparison rate does what its name suggests: It helps you compare a home loan against others. This rate is the home loan's interest rate plus the cost of its fees. It is a legal requirement to be displayed on all loans. But it's only a hypothetical calculation (and not necessarily that helpful).

The comparison rate is a useful reminder to always consider the cost of fees and to keep in mind that interest rates will change over the life of a home loan.

Features

Not every home loan comes with the same features, but here are the most common and useful ones:

• Offset account. A 100% offset account is a bank account that's attached to your home loan that lets you save and spend money like a normal savings account. However, any dollar saved in the account temporarily offsets your loan amount, meaning you are charged less interest. This allows you the flexibility of saving your cash while getting a similar benefit that you'd see from making extra repayments. If this feature is important to you, make sure your loan has one, as it is not available with every loan.
• Extra repayments. If your loan allows you to make extra repayments then you can pay it off faster. This will save you in interest charges. These days, most variable rate loans allow extra repayments, although some fixed-rate loans don't. Other fixed-rate loans may allow you to make limited extra repayments, such as a limit of $10,000 per year during the fixed period.
• Redraw facility. A redraw facility is common on home loans that allow extra repayments. It's a feature that allows you to withdraw your extra repayments from your loan and spend them if you need to. In other words, if you've paid off a bit extra on your home loan, you can pull that money back out again. It's helpful in financial emergencies, but less flexible than an offset account. Some lenders charge a redraw fee or restrict how much of your repayments you can access.
• Portability. If your loan is portable it means that you can sell your property and buy a new one with the same home loan. You won't need to refinance, which makes life easier.
• Split facility. Some loans allow you to split your mortgage into both fixed and variable portions. This lets you create a flexible loan that offers the best of both a fixed and variable rate. If interest rates rise, you're partly protected by fixing, and if they fall, your variable portion may fall too.

Loan-to-value ratio (LVR)

The loan-to-value ratio (or LVR) is another way of defining the minimum deposit. Most loans have a maximum LVR of 80%, meaning you need a 20% deposit.

However, many loans also have a maximum insured LVR of up to 95%. This means that you can get the loan with a smaller deposit, but you will need to pay lenders mortgage insurance (LMI) if your deposit is under 20%.

Fees

You're unlikely to go through the mortgage process without paying some fees. You should always factor fees into your home loan comparison.

Examples of home loan fees include:

• Application fees. This is a one-off fee that many lenders charge during the application stage. This fee can run as high as $600.
• Ongoing fees. Some loans come with a monthly or annual fee. This can cost around $120 a year or $10 a month. Package loans often have an annual fee of up to $500.
• Valuation fees. This covers your lender's cost to have your property valued by an expert. It can cost $100 or $200.
• Legal fees. This covers your lender's conveyancing costs.
• Discharge fees. A discharge fee is only charged when you end a home loan, either by refinancing or paying off the loan.

How much can I afford to borrow?

Borrowers typically save a 10% or 20% deposit. This can be a huge amount of money. Here are some simple examples:

Every lender works out your borrowing capacity with their own formula, which means the amount you can borrow will vary between lenders. Their calculations will depend on things like:

• Your income and expenses
• Your debts and liabilities
• Your deposit size
• The value of your property
• Your credit history
• Your employment history

To maximise your chances of getting a loan approved, or borrowing more, you should check your credit score in advance, minimise your spending in the months before applying for a loan and pay down any outstanding credit card or personal loan debts.

Estimate your borrowing power with our calculator

Is there a big difference between lenders?

There are many lenders in the Australian mortgage market. They are all regulated in the same way, but they all offer different levels of service and product ranges. That being said, it's still a really good idea to read reviews from other customers to try and gauge the quality of a lender's customer service before applying.

The Big Four banks

The Big Four are the dominant players across Australian banking. Most customers stick with Commonwealth Bank, NAB, Westpac or ANZ. They all offer banking apps, large customer service teams, extensive branch and ATM coverage, and lots of mortgages to choose from. You won't get the absolute lowest rates on earth with the Big Four, but they are always competitive.

But there are many more lenders in Australia.

Other banks

There's more to mortgages than the biggest players, of course. Most Australian cities and regions have smaller local banks with a range of home loans to consider, and they often cover large areas of the country, think Bank of Melbourne, Bank of Queensland or Bendigo Bank. There are also large lenders with nationwide service and international banks operating locally in Australia. Some of the bigger ones you may be familiar with include AMP, HSBC, ING and Citibank.

Credit unions and non-bank lenders

There is an enormous number of Australian credit unions, non-bank lenders, building societies and other institutions that are member-owned. This means they work for their members and don't pay dividends to shareholders. They're often regional and may not have a presence in every state or territory. Some you may know include: Bank Australia, ME Bank and Australian Unity.

These lenders are usually members of the Customer-Owned Banking Association (COBA), which lists 63 member institutions.

Digital banks, fintechs, neo-banks and online lenders

There are lenders that do business entirely online (with phone support). Lenders such as loans.com.au, Tic:Toc and UBank are examples of online lenders with competitive rates. Some newer players in the market include neobank or fintech lenders like Athena and 86 400, which use apps and big data to offer customers a convenient online mortgage experience.

Specialist lenders

Borrowers in unique circumstances may need finance from a specialist lender. This includes bad credit home loans for borrowers with poor credit histories, and bridging finance and reverse mortgages for older borrowers.

How to compare lenders

Your choice of lender really depends on which one is offering a competitive home loan that suits your needs, but critical in this comparison is finding a lender that is willing to lend to you.

What does this mean? Basically, a lender is taking a risk by lending you money, and every lender has a different appetite for risk, depending on the borrower's financial history and ability to pay back the loan.

Here are some ways that lenders are different in terms of loan applications:

• Property type. Some lenders aren't comfortable lending to people buying apartments in postcodes with a high number of apartment buildings. They see it as a higher risk. They might only lend you 70% of the property value or reject your application.
• Location. Many lenders only lend to borrowers in specific states, while smaller online lenders may specify something like "metro and regional cities only".
• Deposit size. If your deposit is below 20%, you'll find that some lenders will look at your application more closely or simply reject your application. Others will happily lend you 90% or more.
• Borrowing power. Every lender calculates your borrowing power slightly differently. You may find a lender willing to lend you tens of thousands of dollars more than another. Most lenders have borrowing power calculators that you can use to get a better sense of how much they can lend you.

The best way to work out if you have a good chance of being approved is to ask questions before submitting a full application. Let your prospective lender know the postcode you're buying in, your property type and your deposit size (you can provide estimates if you haven't found a place yet but know roughly where and what you are looking for).

If the lender offers pre-approval, then this can be a good way to get a clearer sense of what the lender can offer you before submitting a full application.

There are more factors that borrowers need to consider that are specific to each lender and require you to do some quick research.

• Customer service. Read reviews online to see what kind of customer service you can expect. You can also judge this yourself based on how helpful and responsive a lender is when enquiring with them.
• Application method and speed. If you need a loan organised quickly, then an online lender with a fast application process could be a good option. But if you want some face-to-face guidance from a lending specialist, then a lender with a local office or branch is the way to go.
• Post-settlement service and mortgage tools. Once you get the home loan, your relationship with the lender is just beginning. Check to see if the lender has an app or convenient online service that allows you to track your repayments. If the loan has an offset account, check how you can access any money you've saved. The lender may have online banking but no app, for example.

How do I apply for a home loan?

Once you've finished your home loan comparison you will need to apply for a home loan. But remember that the mortgage is just one part of the home buying process, which also involves a property search, inspections, conveyancing and much more.

Here's a general breakdown of how the home buying and mortgage journey works (although everyone's own experience looks a little different):

1. Figure out your borrowing capacity and budget

Look at your income and expenses to work out how much you can afford to borrow. Look at prices in the area you are keen to buy in and get a realistic sense of your budget. This step will guide your whole buying journey.

2. Save a deposit

You will need at least 5% of the property's value saved up. But having a 20% deposit will put you in a much stronger position when you approach a lender.

3. Find a property

The search for the perfect property can be a long one, but it's important to get it right. Look online, go to as many inspections as you can and find the home or investment that's right for you.

4. Compare home loans

Find a loan that suits your borrowing needs and has a competitive interest rate. You can also consider home loan pre-approval, which is where a lender has a cursory look at your savings, income and expenses, and suggests an amount that they may be willing to lend you. It's not binding but it can help you to know your borrowing capacity while looking for properties.

5. Sign a contract of sale

Once you find your home and your offer or auction bid is successful, you will sign a contract of sale. This is the time to talk to a licensed conveyancer who will look over the contract and guide you through settlement.

6. Apply for a mortgage

Once you've bought your property, it's time to officially apply for a mortgage. You will need documents to establish your identity, payslips and account information, plus the property address.

7. Approval and settlement

Your lender approves your application (fingers crossed) and now you wait until settlement day, the day you legally become the owner of the property and the mortgage begins. There's not much to do but wait at this point, although your conveyancer or lender may request additional information from you. Now is a good time to get your home and contents insurance sorted. Prior to settlement, your conveyancer, the seller's conveyancer and the lender's conveyancer will all communicate and perform the necessary legal checks to complete the transfer of the property title, the provision of funds and stamp duty.

8. Get the keys and move in

After settlement, the place is all yours. Now you have to focus on paying off your mortgage.

How can a mortgage broker help?

With a little research, it's actually pretty simple to find a good home loan yourself. But if you are still a bit confused or have a complicated situation (if you have multiple properties or you're a self-employed borrower) then you can talk to a mortgage broker.

Mortgage brokers in Australia are licensed professionals who can do a home loan comparison for you and find you a suitable loan. Brokers can't compare the whole market, but they have access to a panel of lenders. A broker will not only help you pick a home loan, but they'll also guide you through the paperwork and application all the way to settlement.

The services of a mortgage broker are usually free for the borrower. That's because your lender will pay the broker a commission. Click on the blue button below to organise a chat with a qualified broker. Or you can return to the home loans comparison table at the start of this guide.

Need help with your home loan journey? Talk to a broker

More home loan questions answered

• What's the difference between a home loan and a mortgage?

  To the ordinary person looking to buy a property, there's usually no actual difference between the words "mortgage" and "home loan". They are used interchangeably to mean the money you borrow to buy a property.

  However, if you want to get very technical, a home loan refers to the money you borrow. The mortgage is a legal document that ties you and your property to the lender. In the event you cannot repay the home loan, the mortgage acts as the lender's security and gives it the right to sell your home to recover your debt.

• How long does it take to get approved for a home loan?

  Home loan approval times vary from lender to lender and also depend on how complex your borrowing situation is.

  A lender may be understaffed or very busy when you apply, and an approval might take several weeks. Some online lenders have developed faster digital approvals that allow them to process an application in a matter of days. A big bank may take weeks to approve a loan.

  If you have all your loan paperwork, financial information and identity documents organised, the approval process might be faster.

• Which bank has the best home loan?

  The best home loan looks a little different for every borrower, but it always means a combination of 3 things: a low interest rate, loan features you actually need (such as an offset account) and low fees.

  If you want a loan with flexible options that's easy to refinance, then you probably want a variable interest. If you prefer to know exactly how much you'll be repaying every month without worrying about rate rises, then a fixed interest rate is best for you.

  Every month at Finder, we analyse the home loans from our commercial partners through a strict methodology that includes fees, features and how low the loan's interest rate is. We use this to determine our top picks for the best home loans for investors, refinancers and first home buyers.

• How do I find the cheapest home loan?

  The cheapest home loan essentially means the lowest home loan rate you can qualify for. But it's important to factor in the cost of fees too. And if you want to put some extra savings into an offset account attached to the loan, you can end up paying even less interest. This makes the loan even cheaper.

  And if you really want lower repayments right now, an interest-only loan might be cheaper for you in the short term. However, in the long run, these loans are more expensive because you have to pay back all the interest later.

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