Buying your first home can be confusing. The terms are new. The process is long. And the numbers can be scary. So if you’re wondering, how do home loans work, you’re not alone.
This guide explains home loans in plain English—no jargon, no fluff—just the real info you need before making a big decision. If you’re looking for help, Sydney Finance Specialists can guide you through the entire process.
What Is a Home Loan?
A home loan, or mortgage, is a loan from a lender used to buy property. You repay the amount you borrow—plus interest—over time, usually 25 to 30 years.
Here’s what’s involved:
- Principal: The amount you borrow.
- Interest: The cost of borrowing.
- Loan term: How long you’ll take to repay the loan.
- Repayments: What you pay back each month or fortnight.
Types of Home Loans in Australia
Variable Rate Home Loan
The interest rate can go up or down over time. Your repayments change based on what the lender sets.
Fixed Rate Home Loan
The interest rate stays the same for a set period (usually 1 to 5 years). You know what your repayments will be.
Split Loan
A mix of fixed and variable. One part stays steady, and the other can change. This gives flexibility with some predictability.
What Deposit Do You Need?
Most lenders want a 20% deposit of the property price. But you can still get a loan with as little as 5%, though it may mean paying Lenders Mortgage Insurance (LMI).
Here’s how it works:
- 20% deposit: No LMI. Lower risk to lenders.
- Less than 20%: You’ll likely need LMI, which protects the lender—not you—if you can’t repay the loan.
What Is Lenders Mortgage Insurance?
LMI is a one-time fee added to your loan (or paid upfront) if your deposit is under 20%. It allows you to borrow more, but it comes at a cost.
Good brokers like those at Sydney Finance Specialists can help you weigh up if it’s worth it or if there’s a way to avoid it.
Are There Any First-Home Buyer Grants?
Yes, if you’re buying your first home, there are a few government schemes you might qualify for:
- First Home Owner Grant (FHOG): A one-off payment if you buy or build a new home.
- First Home Guarantee: You only need a 5% deposit, and the government guarantees the rest, so you can avoid LMI.
These can save you tens of thousands if you’re eligible.
Steps to Getting a Home Loan in Australia
1. Work Out What You Can Afford
Look at your income, debts, spending, and savings. Use online calculators or ask a broker to help you understand your borrowing limit.
2. Save for a Deposit
The more you can save, the less you’ll borrow—and the easier it is to get approved.
3. Get Pre-Approval
A lender will look at your finances and tell you how much you can borrow. This gives you a budget when house hunting.
4. Choose Your Loan Type
Pick between variable, fixed, or split depending on your goals and risk comfort. A broker can walk you through each option.
5. Submit Your Loan Application
You’ll need:
- ID documents
- Proof of income
- Savings history
- Credit details
- Contract of sale (once you’ve found a property)
6. Wait for Final Approval
The lender checks the property and your financials before giving final approval. This can take a few days to a couple of weeks.
7. Settlement
The lender transfers the money to the seller, and the home is officially yours.
Ongoing Costs of a Home Loan
It’s not just repayments. You’ll also need to budget for:
- Council rates
- Strata fees (if buying an apartment)
- Home insurance
- Maintenance and repairs
Mistakes First-Time Borrowers Make
- Borrowing too much and struggling to make repayments
- Not comparing loan options
- Forgetting about extra costs like stamp duty and legal fees
- Not checking if you’re eligible for first-home benefits
Why Work With a Broker?
If you’re still asking, how do home loans work, a finance broker can answer your questions based on your actual situation. They:
- Explain your options clearly
- Compare loans from multiple lenders
- Handle paperwork
- Help you avoid common traps
You can speak to Sydney Finance Specialists for honest advice, without the pressure.
FAQs
- How do home loans work if I’m self-employed?
You’ll need extra documents like BAS statements or accountant letters. Some lenders specialise in self-employed borrowers. - Can I get a home loan with a low credit score?
Yes, but it may affect your interest rate and lender options. A broker can help you find more flexible lenders. - What’s the average time it takes to get approved?
If your paperwork is ready, pre-approval can take 1–3 days. Full approval may take up to 2 weeks. - Is it better to get a loan from a bank or a broker?
Brokers can show you options from many lenders, not just one. This often means better rates or more suitable products. - Can I repay my loan early?
Yes, most loans allow early repayments. Some fixed-rate loans charge a fee for breaking the term, so check first.