How do home loans work in Australia?
A home loan (or mortgage) is a loan secured against a property. You borrow money from a lender to purchase or refinance a property, then repay the loan with interest over a set term, usually 25 to 30 years.
BaseRate's public application journey focuses on car, business and asset finance. The mortgage calculator is educational only and does not present home-loan offers. BaseRate does not charge you to use the service. If an introduced asset-finance loan settles, the financier pays BaseRate a commission.
Fixed vs variable rates
A fixed rate home loan locks your interest rate for an agreed period, typically 1, 2, 3 or 5 years. Your repayments stay the same regardless of what happens to interest rates in the market. At the end of the fixed term, the loan usually rolls onto a variable rate.
A variable rate home loan moves with the market. When the Reserve Bank of Australia (RBA) changes the cash rate, your lender typically adjusts your rate accordingly. Variable loans usually offer more flexibility, such as offset accounts, redraw facilities and extra repayments.
Understanding LVR
LVR (Loan-to-Value Ratio) is the amount you are borrowing expressed as a percentage of the property value. For example, borrowing $400,000 on a $500,000 property gives an LVR of 80%.
Lenders typically offer the most competitive rates to borrowers with an LVR of 80% or below. If your LVR exceeds 80%, most lenders will require you to pay Lenders Mortgage Insurance (LMI), which protects the lender, not you, in the event of default.
Offset accounts explained
An offset account is a savings or transaction account linked to your home loan. The balance in the offset account reduces the outstanding loan balance for the purpose of calculating interest. If you have a $500,000 loan and $50,000 in an offset account, you only pay interest on $450,000.
Not all home loan products include an offset account. When comparing loans, check whether the offset feature is included, whether there is a fee, and whether it is a full or partial offset.
When does refinancing make sense?
Refinancing means replacing your existing home loan with a new one, either with your current lender or a different one. The most common reasons to refinance are:
- Your fixed rate is expiring and you want to secure a competitive variable rate
- Your property has increased in value, reducing your LVR and improving your rate eligibility
- You want to access equity for renovations or investment
- You want to consolidate other debts into a single lower-rate loan
- Your income has grown and you now qualify for a better product
Before refinancing, factor in any exit fees from your current loan and the establishment costs of the new one. BaseRate can help you calculate whether the savings outweigh the switching costs.
What is BaseRate?
BaseRate is a digital finance platform. We are not a bank or lender. BaseRate does not charge customers to use the service. If an introduced loan settles, the financier pays BaseRate a commission. Our platform helps you estimate repayments, explore options and move through a credit application process online at your own pace.
