Choosing the Right Home Loan Could Save You Tens of Thousands
Taking out a home loan is one of the biggest financial decisions you will ever make - and there is no single "best" loan for everyone. The right choice depends on your income, deposit size, lifestyle, and long-term plans. A difference of just 0.25% p.a. on a $600,000 mortgage can add up to more than $30,000 over 30 years.
With over 2360 home loan products on the market, the sheer number of options can feel overwhelming. This step-by-step guide walks you through exactly what to look for, what to avoid, and how to narrow the field so you can borrow with confidence. If you just want to see today's lowest rates, head straight to our best home loan rates comparison.
Step 1: Understand the Main Loan Types
Every home loan falls into one of three broad categories. Understanding the trade-offs is the first decision you need to make.
Variable Rate Loans
Your interest rate moves up or down whenever your lender changes it - usually in response to the RBA cash rate (currently 3.85%). Variable loans offer the most flexibility: you can typically make extra repayments, access a redraw facility, and switch or refinance without break costs.
The best variable rates currently start from 5.43% p.a. p.a. - see the full variable rate table.
Fixed Rate Loans
Your rate is locked in for a set period (usually one to five years). This gives you repayment certainty, but you will usually face restrictions on extra repayments and significant break costs if you refinance early.
Leading two-year fixed rates start from 5.49% p.a. p.a., while three-year fixed rates start from 5.73% p.a. p.a.
Split Loans
You can split your loan so that one portion is fixed and the rest is variable. This gives you partial rate protection while keeping some flexibility. Many borrowers choose a 50/50 or 60/40 split.
Which is right for you? Read our detailed comparison: Fixed vs Variable Home Loans.
Step 2: Choose Your Repayment Type
Principal & Interest (P&I)
Each repayment reduces the amount you owe plus covers interest. This is the standard option and results in a lower total cost over the life of the loan.
Interest Only (IO)
You only pay the interest for a set period (typically one to five years). Your repayments are lower initially, but you are not reducing the principal - so you will pay significantly more interest over time. IO loans are most common among property investors for tax reasons.
Not sure which to pick? See Principal & Interest vs Interest Only for a full breakdown.
Step 3: Look Beyond the Headline Rate
The advertised interest rate is only part of the picture. Here is what else to examine before you commit.
Comparison Rate
The comparison rate rolls the interest rate and most standard fees into a single percentage, making it easier to compare the true cost of different loans. A large gap between the headline rate and the comparison rate is a red flag - it usually means high fees.
Learn more: How to Read a Comparison Rate.
Fees to Watch
| Fee | Typical Range | Notes |
|---|---|---|
| Application / establishment | $0 – $600 | Many online lenders waive this |
| Ongoing monthly / annual | $0 – $395 p.a. | Can erode rate savings |
| Discharge / settlement | $150 – $400 | Charged when you pay off or refinance |
| Break cost (fixed loans) | Varies widely | Can be thousands of dollars |
| Valuation fee | $0 – $300 | Some lenders cover the first valuation |
Offset Accounts
A 100% offset account is one of the most powerful features a home loan can offer. Money in the linked account directly reduces the loan balance that interest is calculated on. For example, $50,000 in offset on a $500,000 loan means you only pay interest on $450,000.
Read our deep dive: Offset Account vs Redraw Facility.
Redraw Facility
Redraw lets you access extra repayments you have already made. It is less flexible than offset (lenders can restrict access), but most variable loans include it at no cost.
Extra Repayment Flexibility
Check whether the loan allows unlimited extra repayments without fees. Fixed rate loans often cap additional repayments at $10,000 – $20,000 per year.
How Different Lender Types Compare
Not all lenders are the same. Here is a general comparison to help you understand the trade-offs.
| Feature | Big 4 Bank | Online Lender | Credit Union | Mortgage Broker |
|---|---|---|---|---|
| Typical variable rate | Higher | Lower | Mid-range | Access to all |
| Ongoing fees | Often $8–$10/mth | Usually $0 | Usually $0 | Depends on lender |
| 100% offset | Yes | Sometimes | Rarely | Depends on lender |
| Mobile app quality | Excellent | Good–Excellent | Basic–Good | N/A |
| Branch access | Extensive | None–Limited | Regional | N/A |
| Extra repayment flexibility | Good | Good–Excellent | Good | Depends on lender |
Key takeaway: Online lenders typically offer the lowest rates but fewer features. Big 4 banks charge more but provide full-service banking. A broker can help you compare across the entire market - see Mortgage Broker vs Going Direct.
Step 4: Check Your Borrowing Power
Before you fall in love with a property, you need to know what a lender will actually let you borrow.
How Banks Assess You
Lenders use a serviceability assessment that stress-tests your ability to repay at a rate roughly 3% above the actual loan rate. They look at:
- Gross income - salary, rental income, bonuses, overtime
- Existing debts - personal loans, car loans, credit card limits (even if unpaid)
- Living expenses - using the Household Expenditure Measure (HEM) or your actual declared expenses, whichever is higher
- Loan term and type - IO periods reduce borrowing power
HECS-HELP Impact
Your HECS-HELP debt reduces your borrowing capacity because mandatory repayments are deducted from your income. Even a moderate HECS balance of $30,000 – $50,000 can reduce your borrowing power by $30,000 – $60,000 depending on your income level.
Read more: HECS-HELP Debt and Home Loan Impact.
Quick estimate: Use our Home Loan Repayment Calculator to model different scenarios, or read How Much Can I Borrow?.
Step 5: Factor In Upfront Costs
The purchase price is just the start. Budget for these additional costs, which typically add 5–7% on top.
Deposit
Most lenders require at least a 20% deposit to avoid Lender's Mortgage Insurance. However, some loans accept deposits as low as 5%. A larger deposit means a lower loan-to-value ratio (LVR), which usually unlocks better rates.
See: How Much Deposit Do You Need?
Lender's Mortgage Insurance (LMI)
If your deposit is less than 20%, you will almost certainly need to pay LMI. This protects the lender (not you) and can cost anywhere from $4,000 to $35,000+ depending on the loan size and LVR.
Read our explainer: LMI - Lender's Mortgage Insurance Explained.
Stamp Duty
Stamp duty (or transfer duty) is a state government tax on property purchases. It varies significantly by state and property value. First home buyers may be eligible for concessions or exemptions.
Full details: Stamp Duty Guide Australia.
Other Costs
- Conveyancing / solicitor fees: $1,000 – $2,500
- Building and pest inspection: $400 – $800
- Strata report (apartments): $200 – $350
- Loan application fee: $0 – $600
Step 6: Decide - Broker or Direct?
Mortgage Broker
A mortgage broker compares loans from a panel of lenders on your behalf. They are paid a commission by the lender (not by you), and a good broker can save you significant time and find deals you might miss. Brokers now account for more than 70% of all new home loans in Australia.
Going Direct
Applying directly to a bank can sometimes unlock exclusive offers or rate discounts - particularly if you already hold other products with that lender (salary account, credit card, insurance).
Read the full comparison: Mortgage Broker vs Going Direct to the Bank.
Step 7: Apply and Get Pre-Approval
Before you start making offers, get pre-approval (also called conditional approval). This tells you exactly how much a lender is willing to lend you, giving you confidence at auction or during negotiations.
Documents You Will Need
- Photo ID (passport or driver's licence)
- Payslips covering the last two to three months
- Tax returns and notice of assessment (last two years if self-employed)
- Bank statements (savings, transaction, and any loan accounts)
- Details of existing debts (credit cards, personal loans, HECS-HELP)
- Evidence of genuine savings or deposit source
- Contract of sale (if you have found a property)
Conditional vs Unconditional Approval
| Stage | What It Means |
|---|---|
| Pre-approval (conditional) | Lender has assessed your finances and will likely approve you, subject to property valuation and final checks |
| Unconditional (formal) approval | Full approval - the lender has signed off on everything, including the property |
Important: Pre-approval typically lasts 90 days (sometimes 60). If it expires, you will need to reapply, and the lender will reassess your situation.
First Home Buyer Checklist
If this is your first property purchase, make sure you have covered these essentials:
- Checked eligibility for the First Home Owner Grant (FHOG) and stamp duty concessions in your state
- Investigated the First Home Guarantee scheme (buy with as little as 5% deposit, no LMI)
- Saved a deposit of at least 5–20% of the purchase price
- Obtained a copy of your credit report and corrected any errors
- Calculated your borrowing power using a repayment calculator
- Compared at least three to five loan offers from different lenders
- Engaged a conveyancer or solicitor
- Organised building and pest inspections
Get the full rundown: First Home Buyer Grants and Schemes 2026.
Red Flags to Watch Out For
Not every "great deal" is what it seems. Be wary of these common traps:
Honeymoon Rates
Some lenders advertise an ultra-low introductory rate that reverts to a much higher standard variable rate after 12–24 months. Always check what the revert rate is and factor it into your total cost calculation.
Exit Fees and Discharge Costs
While exit fees on new loans were banned in 2011, some older loans and fixed-rate products still carry significant break costs. Always read the fine print.
Extra Repayment Restrictions
Some fixed-rate loans and even certain variable loans cap extra repayments to $10,000–$20,000 per year. If you plan to pay off your loan faster, this is a dealbreaker.
Poor Offset Terms
Not all offset accounts are "100% offset." Some only offer partial offset or only apply to balances up to a certain threshold. A partial offset can cost you thousands compared to a true 100% offset.
Package Deal Pressure
Lenders may offer a "package" discount on your rate if you bundle insurance, credit cards, and transaction accounts. Check whether the package fee ($395 p.a. is common) actually negates the rate discount - for smaller loans, it often does.
Frequently Asked Questions
Ready to take the next step?
Put this guide into action - compare your options now.