Home loans: What are they and how do they really work?

Rates and Fees verified correct on October 22nd, 2016

What is a home loan feature 2

Find out how you can use a home loan to buy the home of your dreams.

Home loans at a glance

  • Terms of between 25 - 30 years
  • Interest rate lower than a credit card or personal loan
  • Make repayments every month, fortnight or week
  • Offered by banks, credit unions, building societies and non-bank lenders

A home loan is a loan that provides the funds you need to buy a house. They’re an essential financial product for the vast majority of Australians who want to buy property, and are offered by banks, building societies and credit unions across the country. Let’s take a closer look at home loans in Australia.

How do home loans work?

Whether you’re buying a house, unit or apartment, most of us don’t have enough money tucked away to cover the full purchase price. In order to get the full amount needed to buy a property, we need to borrow money through a home loan.

In Australia, home loans are fairly simple to understand. The first step in the process occurs when you contact a bank or other financial institution to loan you the money you need to buy a home. When combined with the deposit you have saved, the loan funds cover the home’s purchase price, stamp duty and other legal costs.What is a home loan diagram

In order to access the necessary funds, you’ll need to agree to pay back the amount you borrow from the lender within a specified timeframe. This is usually between 25 - 30 years. However, not only will you need to repay the lump sum amount you borrow (the principal), but also the interest that accumulates on that amount over time. Interest is a fee that your lender will charge you in return for lending you the money, and is shown as a percentage.

The principal of a home loan can accumulate interest charges at either a fixed or variable rate, depending on what you choose. Fixed rate home loans lock in an agreed rate for a number of years. This offers the security of consistent repayment amounts and protect you against interest rate rises, but you may miss out on interest savings if interest rates fall.

Compare fixed rate home loans

Variable rate loans are a more popular option. They rise and fall in line with market fluctuations, allowing you to take advantage of interest rate drops but also meaning you are exposed to any rises. This means your repayments can rise or fall over the life of your loan.

Compare variable rate home loans

Once you’ve successfully purchased a home, you must then pay off the principal and interest of your home loan over the ensuing years. Many lenders offer a choice of repayment schedules to suit your budget – choose from weekly, fortnightly or monthly repayments – and some lenders also allow you to make additional repayments so you can pay off your debt ahead of schedule.

You can make your repayments through an automatic payment from an account you choose, or you can manually transfer the money from your account into your home loan account.

Where do I get a home loan from?

In Australia, home loans are offered through banks, credit unions, building societies and non-bank lenders.

You can find out more about how they differ to each other in our home loans guide.

What if I can't pay my loan off?

Lenders have whole teams devoted to borrowers who are going through tough times and can't pay their loan off. Sometimes they'll put your repayments on hold or reduce them until you get back on your feet, so it makes sense to call them as soon as possible.

If you miss a loan repayment, your lender will send you a letter letting you know and charge a late fee.

If a repayment is more than 90 days late the lender will send a default notice, giving you a further 30 days to pay off the missed repayment. Failing to do this can result in the lender taking possession of the property to sell it and recoup their costs.

Find out more about this process in our article on home loan defaults.

Can I move my home loan to another lender if I see a better deal?

Yes, this is known as refinancing and is encouraged in the Australian home loan market. Remember that there can be fees to leave your home loan and there will be the fees of the new home loan. You can find out everything about the process in our refinancing guide.

Are home loans in Australia different to the rest of the world?

The basic home loan structure in Australia is very similar to home loans in other countries all around the world. However, the types of loans available and their popularity can differ in other countries. For example, in the United States, fixed rate mortgages are a much more popular option than adjustable (variable) rate mortgages.

Where noticeable differences often occur is in interest rates. Rates are influenced by a wide range of economic factors and can differ substantially from one country to the next. For example, while home loan interest rates in India in June 2016 were above 9.00% p.a., in Australia you could find loans with interest rates well below 4.00% p.a. (variable).

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