Guides & Tools

What Is a Home Loan?

A home loan (mortgage) is money borrowed from a lender to purchase property. You repay the loan over time with interest.

The loan is secured against your property, meaning the lender can take legal action if repayments are not made.

Key Components of a Home Loan

1. Principal (Loan Amount)

This is the amount you borrow.

2. Interest Rate

The cost of borrowing money, charged as a percentage.

3. Loan Term

Most home loans in Australia are 25–30 years.

How Repayments Work

Each repayment includes two parts:

• Interest portion (lender’s charge)
• Principal repayment (reduces your debt)

Early years:

• More goes toward interest

Later years:

• More goes toward principal

Example of a Home Loan

Loan amount: $600,000Interest rate: 6%Term: 30 years

Your repayments are based on:

• Loan size
• Interest rate
• Repayment frequency

Even small rate changes can significantly impact repayments.

Fixed vs Variable Loans

Fixed Rate:

• Locked repayments
• Predictability
• Less flexibility

Variable Rate:

• Changes with market
• Flexible repayments
• Can increase or decrease
• Extra Repayments

Some loans allow extra repayments which can:

• Reduce interest paid
• Shorten loan term
• Save thousands over time
• Offset Accounts

An offset account reduces interest charged by linking your savings to your loan balance.

Example:

• Loan: $500,000
• Savings: $50,000
• Interest charged on: $450,000

Why Understanding Your Loan Matters

Most Australians don’t fully understand how interest affects their long-term financial position. Even a 1% rate change can cost tens of thousands over the life of the loan.

Conclusion

Home loans are long-term commitments. Understanding how they work helps you choose the right structure and save money over time.