What is a Home Loan?
A home loan (also called a mortgage) is money borrowed from a bank or lender to buy a property. You pay it back over time, usually 25 or 30 years, with interest.
Here's the simple version: the lender gives you a large amount of money, you buy the property, and then you make regular repayments (monthly, fortnightly or weekly) until the loan is fully paid off. The property itself is used as security, meaning if you stop paying, the lender can sell it to recover their money.
Tom and Lisa want to buy a $750,000 house in Brisbane. They've saved $150,000 (a 20% deposit). They borrow the remaining $600,000 from a lender at 5.99% over 30 years. Their monthly repayment is about $3,593. Over 30 years, they'll repay a total of ~$1,293,000, the original $600,000 plus ~$693,000 in interest.
That interest number might seem huge, and it is. That's exactly why understanding how home loans work matters. Small differences in rate, term, and structure can save you tens of thousands of dollars.
The Key Players
- Borrower (you), the person taking the loan and making repayments
- Lender, the bank or financial institution providing the money (e.g., CBA, Westpac, Macquarie, or a non-bank lender)
- Broker, an independent expert who compares lenders for you (that's what we do at Lendera, across 60+ lenders, at zero cost to you)
- Property (security), the asset the lender holds as collateral until the loan is repaid
Key takeaway: A home loan is not just a debt, it's a financial tool. How you structure it determines how much it costs you, how fast you pay it off, and what options you have down the track.
Principal vs Interest
Every home loan repayment has two parts:
- Principal, the actual loan amount you're paying down (reducing what you owe)
- Interest, the cost of borrowing, charged by the lender (this is their profit)
In the early years, most of your repayment goes toward interest. As time goes on and you owe less, more of your repayment goes toward principal. This is called amortisation.
How the Split Changes Over Time
On a $600,000 loan at 5.99% over 30 years:
Year 1 of your loan
Year 15 of your loan
Year 28 of your loan
In Month 1, Tom and Lisa's $3,593 repayment breaks down to: $598 principal + $2,995 interest. They're only reducing their loan by $598 that month.
By Year 15, the same $3,593 repayment is: $1,520 principal + $2,073 interest. More is going toward their actual debt.
By Year 28: $3,150 principal + $443 interest. Nearly all of it reduces the loan.
Why this matters: This is why extra repayments early in your loan are so powerful. Every extra dollar you pay goes straight to principal, and reduces the interest you'll pay on every future repayment. Even $100/month extra in the first few years can save you tens of thousands.
Loan Terms: 20, 25 or 30 Years?
The loan term is how long you have to pay back the loan. Most people choose 25 or 30 years, but the term you pick has a massive impact on what you actually pay.
$500,000 loan at 5.99%:
30 years: $2,994/month • Total interest: $578,000
25 years: $3,220/month • Total interest: $466,000
20 years: $3,581/month • Total interest: $359,000
Going from 30 to 25 years costs you an extra $226/month but saves you $112,000 in interest. That's money that stays in your pocket instead of going to the bank.
So Why Do People Choose 30 Years?
- Lower minimum repayments, easier on your cash flow
- Flexibility, you can always pay extra, but you can't lower minimum repayments if times get tough
- Borrowing power, lenders assess you on the minimum repayment, so a longer term means you can borrow more
Pro tip: Many people take a 30-year loan but make repayments as if it were 25 years. This gives you the safety net of lower minimums if your circumstances change, while still saving on interest. The extra goes straight to principal.
Repayment Frequency: Monthly, Fortnightly or Weekly
Most people default to monthly repayments, but switching to fortnightly or weekly can save you thousands, without paying any extra.
$500,000 loan at 5.99%, 30 years:
Monthly: $2,994/month (12 payments/year) = $35,928/year
Fortnightly: $1,497/fortnight (26 payments/year) = $38,922/year
Weekly: $748/week (52 payments/year) = $38,896/year
Fortnightly payments look the same as monthly (just halved), but there are 26 fortnights in a year vs 24 half-months. You effectively make one extra monthly payment per year without noticing.
Result: You pay off the loan ~4 years earlier and save approximately $76,000 in interest. Same money, different timing.
- Monthly, simplest, aligns with most bills. 12 payments per year
- Fortnightly, aligns with most pay cycles. 26 payments = 1 extra month per year. Best balance of convenience and savings
- Weekly, similar savings to fortnightly. Some lenders calculate interest weekly which gives a tiny additional advantage
Fixed vs Variable Rate
This is one of the biggest decisions you'll make. Let's break it down properly.
Fixed Rate
Your interest rate is locked in for a set period (usually 1-5 years). Your repayments stay exactly the same, no surprises.
- Budget certainty, you know exactly what you'll pay
- Protected if rates go up
- Break costs if you want to exit early or refinance
- Usually can't make unlimited extra repayments
- No offset account on most fixed loans
Variable Rate
Your rate moves up or down with the market (influenced by the RBA cash rate). Repayments can change at any time.
- Benefit immediately when rates drop
- Make unlimited extra repayments
- Full offset account available
- No break costs, refinance anytime
- Repayments go up if rates rise
In early 2022, fixed rates were around 2%. Many borrowers locked in, thinking rates would stay low. By 2024, those fixed terms expired and they rolled onto variable rates of 6%+. Their repayments on a $500k loan went from ~$2,120/month to ~$3,000/month, a $880/month jump. If they'd been on variable the whole time, the increase would have been gradual.
Lesson: Fixed rates give you short-term certainty, but you need a plan for when the fixed period ends.
What About a Split Loan?
You can split your loan, for example, 60% variable and 40% fixed. This gives you some rate protection while keeping the flexibility of extra repayments and offset on the variable portion. It's a common middle ground.
Not sure which rate type suits you?
A broker can model both scenarios with your actual numbers.
P&I vs Interest Only
There are two ways to structure your repayments:
Principal & Interest (P&I)
Each repayment pays down some of your loan and covers the interest. This is the standard, you're actually reducing your debt with every payment.
- Loan gets smaller over time
- Lower total interest over the life of the loan
- Higher monthly repayments than IO
- Builds equity faster
Interest Only (IO)
You only pay the interest, your loan balance stays the same. After the IO period (usually 1-5 years), it reverts to P&I with higher repayments.
- Lower repayments during IO period
- Loan balance doesn't decrease
- Higher total interest over the life of the loan
- Common for investment loans (interest is tax-deductible)
$500,000 loan at 6.00%, 30-year term:
P&I repayment: $2,998/month
IO repayment: $2,500/month (for first 5 years)
IO saves $498/month initially, but after 5 years, the loan resets to P&I over the remaining 25 years, and repayments jump to $3,222/month. Plus you've paid $150,000 in interest over those 5 years without reducing your loan by a single dollar. Total interest over 30 years is ~$95,000 more with IO.
Warning, the IO cliff: When your interest-only period ends, repayments can jump 20-30%. Many borrowers get caught off guard. If you choose IO, always plan for the revert.
When Does Interest Only Make Sense?
- Investment loans, the interest is tax-deductible, and you might want to direct extra cash toward paying down your non-deductible home loan instead
- Short-term cash flow needs, renovating, between jobs, or building a deposit for another property
- Never for your own home long-term, the interest isn't tax-deductible, and you're not building equity
Offset Accounts & Redraw
These are two of the most powerful loan features in Australia, and most people don't fully understand them.
Offset Account
An offset account is a transaction account linked to your home loan. The money sitting in it offsets your loan balance, so you're charged interest on a lower amount.
You have a $500,000 loan at 6.00% and $50,000 in your offset account.
Interest is calculated on $450,000 (not $500,000). That $50,000 saves you $3,000 per year in interest, every year it sits there.
Over 30 years, keeping $50,000 in offset could save you ~$86,000 in total interest and cut about 4 years off your loan. Your salary, savings, tax refunds, anything sitting in that account is working for you 24/7.
Redraw Facility
Redraw lets you access any extra repayments you've made above the minimum. For example, if you've paid $10,000 ahead of schedule, you can "redraw" that $10,000 if you need it.
Offset
- Separate transaction account
- Instant access to your money
- Loan balance stays the same on paper
- Better for investors (tax reasons, we cover this in Module 5)
- Usually only on variable or package loans
Redraw
- Part of your loan account
- May have restrictions on access
- Loan balance actually decreases
- Can create tax issues for investors (covered in Module 5)
- Available on most loan types, even basic ones
Quick rule: If you're an owner-occupier and just want somewhere to park your savings, both work well. If you ever plan to convert your property to an investment, use offset, not redraw. The tax implications are significant (we'll explain in Module 5).
Try It Yourself
Put in some numbers and see how loan amount, rate and term affect your repayments. Play around with it, that's the best way to learn.
1. Change the term from 30 to 25 years, see how much interest you save
2. Drop the rate by 0.50%, that's roughly what refinancing could save you
3. Try your actual numbers if you have a loan (or the property price minus your deposit if you're buying)
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Knowledge Check
Let's see how much you picked up. Don't worry, this is just for you. No scores, no judgement.
In the early years of a home loan, most of your repayment goes toward:
You have a $600,000 loan and $40,000 in your offset account. Interest is charged on:
What happens when an interest-only period ends?
Taking a 30-year loan instead of 25 years on a $500,000 loan at 5.99% means you'll pay roughly how much MORE in interest?
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Module 1 Complete!
You now understand the fundamentals of how home loans work. Next up: finding out whether you can actually borrow, and how much.
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