Home loans: how they work in Australia

What a home loan is

Savings.com.au describes a home loan as money advanced by a lender so that someone can buy a home or an investment property. Savings.com.au adds that the borrower pays it back with interest in regular instalments across a term, typically 25 to 30 years. Savings.com.au notes that while the debt stands, the lender holds the property as collateral; this arrangement is called a mortgage.

Savings.com.au says the principal is the amount borrowed, and repayments typically include both that and the interest charged, unless the loan is interest-only. Mozo explains that a loan can also be split between a fixed-rate part and a variable-rate part, so part of the debt carries a set rate while the rest remains variable.

How lenders assess an application

Mozo says lenders look beyond today's repayment figure. Mozo reports that the Australian Prudential Regulation Authority requires a 3% serviceability buffer, so an application is checked at the contract rate plus three percentage points.

Savings.com.au notes that a borrower usually needs at least 5 per cent of the property's value, a loan-to-value ratio of 95 per cent, and that most lenders ask for 20 per cent before lenders mortgage insurance is avoided. Savings.com.au says identification, payslips and bank statements form part of an application, and notes that approval commonly takes four to six weeks.

What people compare

Savings.com.au describes a comparison rate as rolling a loan's interest rate and most upfront and ongoing fees into one percentage figure, and notes that lenders are required to display it beside the advertised rate. Savings.com.au suggests that a wide gap between the two can point to hefty set-up or account fees.

Savings.com.au describes an offset account as sitting alongside the loan as a transaction account, and the balance in it is subtracted from the debt when interest is worked out. Savings.com.au describes a redraw facility as working the other way, letting extra repayments be taken back out. Mozo reports that a record $42.9 billion was externally refinanced by owner-occupiers in the March 2026 quarter, and sets out what switching can involve: an exit fee from the current lender, government charges to register the mortgage, and sometimes lenders mortgage insurance where equity has slipped under 20 per cent of what the property is now worth. Mozo puts a typical break-even at 12 to 24 months for most borrowers.

The terms that come up

Other words appear often in the paperwork. Savings.com.au notes that a higher loan-to-value ratio, or LVR, generally means a higher rate. Savings.com.au defines equity as the property's value minus what is still owed on it. Mozo describes a bridging loan as short-term finance that lets a buyer hold two properties at once while an existing home sells, typically interest-only and lasting six to 12 months. Mozo explains that portability lets a borrower keep an existing rate and loan structure when moving the mortgage to a new property.