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A mortgage is another term for a home loan, taken out to cover the purchase of a property or land. When you take out a mortgage, you can generally choose the length of time you take to pay it off (typically a few decades). The loan is generally paid off in regular instalments until the full value and payable interest have been covered.

Many would-be homeowners are unlikely to have the full purchase price available up-front, which is why a variety of home loan options exists:

• Principal and interest loan: You repay both the amount borrowed and the interest over the life of the mortgage.
• Interest-only loan: You only repay the interest on your loan for a certain period before the loan rolls over to a principal-and-interest loan.
• Variable-rate home loan: Your interest rate might change throughout the life of your mortgage, in line with factors such as changes to the official cash rate.
• Fixed-rate home loan: Your interest rate remains the same for a fixed period, after which it changes to a variable-rate loan.
• Split loan: Part of the loan is variable and part is fixed.

Here’s what typically pans out when you apply for a home loan:

1. Get all your documents together: When you apply for a loan, lenders tend to want a lot of information about you. This includes your standard ID documents, plus details about your income, expenses, and any money you owe. This is so they can assess whether you’ll be able to make your regular repayments.
2. Apply: You can often apply for home loans either in person or online. A mortgage broker such as Lendi can help you with this part.
3. Receive a pre-approval letter: Also known as ‘conditional approval’ or ‘approval in principle’, a pre-approval shows a lender’s willingness to finance a property up to a certain amount, under certain conditions. While this isn’t a total guarantee of approval from your lender, it vouches for your financial capability and ability to fulfill the loan repayments.
4. Find a property: You can either take part in an auction or find a property through a private sale. Sellers and real estate agents will typically expect you to have pre-approval before letting you participate in the auction or progress the purchase. When you present proof of pre-approval, you can make an offer for a property.
5. Finalise the home loan with a lender: If your offer is accepted, you’ll have to let your lender know so they can proceed with an appraisal. Lenders want to make sure the actual value of the property aligns with the selling price, so they know it’s valued high enough as a loan collateral. If the property value is lower than what you’re buying it for, they might require a bigger down payment from you.
6. Sign the loan documents and complete the settlement: If you haven’t lost a job or taken out a car loan sometime between pre-approval and this step, you’ll likely receive the final approval from your lender. Now it’s time to close on that home loan. You’ll need to pay all the fees and sign all the dotted lines on your mortgage documents. Congratulations, you can now take a photo with the ‘SOLD’ sign and pop the champagne!

Interest rates are one of the many factors to consider when comparing home loans. There are different types of interest rates (expressed as a percentage), and the amount you pay can depend on your lender and the type of agreement you have with them, such as:

• Variable rate: The interest rate fluctuates as cash rates change and the lender makes adjustments. This could either reduce or increase the amount of interest you ultimately have to pay.
• Fixed rate: You can select a fixed rate if you want to lock in the amount you pay over a set period within the loan term.
• Partially fixed rate: You can choose a ‘split loan’, which means a portion of your mortgage is variable and another portion is fixed.
• Introductory rate: Some credit providers may offer what’s known as a honeymoon rate, which is a lower rate applied over a short period (sometimes one or two years) when you first sign up. Afterwards, the interest rate rolls over to the standard deposit rate.

And while it’s not an interest rate, another percentage worth knowing is the home loan comparison rate, which gives you an idea of the overall cost of a loan. It covers not just the interest rate but also other fees and charges. The figure is typically based on the loan term, amount, and repayment frequency.

When it comes to making your loan repayments more flexible, certain features can really come in handy, like offset accounts and redraw facilities.

An offset account is linked to your home loan and can reduce the net balance you’re paying interest on, while allowing you to access that money. It works as a regular transaction account (i.e., to transfer money in and out or receive regular salary) as it offsets against your outstanding loan balance.

A redraw facility lets you make additional payments then withdraw them in the future – if you need to.  Many homeowners use a redraw facility as their ‘rainy day fund’, all while reducing their overall interest costs.

When finding out how much you can borrow, your loan-to-value ratio (LVR) is a good starting point. The LVR represents the percentage of the property’s value that you’re borrowing.

Most lenders prefer a minimum LVR of 80%. That means, in most cases, you’d need a deposit of at least 20% of the property’s purchase price to avoid having to pay lenders mortgage insurance (LMI).

To calculate how much you can borrow with an 80% LVR, you would generally take your deposit amount and multiply it by 4. For example, if you have a $50,000 deposit, you could potentially borrow up to $200,000 to buy a property worth $250,000.

Keep in mind that lenders assess borrowing capacity based on multiple factors such as income, expenses, credit history, and loan terms.

Comparing home loans can give you a bird’s-eye view of different factors that can affect how much you can borrow, for how long, and how much you’ll pay regularly. It can show you different lenders offering varying interest rates, fees and charges, loan features, and repayment terms, among other things.

There are many ways to pay off your mortgage quicker, like refinancing, repaying more frequently (or in larger amounts), and conducting an annual health check.

Aussie homeowners choose to get mortgage insurance for several reasons. Some pay for lenders mortgage insurance (LMI) if they’re borrowing more than 80% of the property’s value.

Others get mortgage protection insurance to cover repayments in the unfortunate case of not being able to because of illness, injury, or unemployment.

A standard home loan term can last anywhere from 25 to 30 years, with some lenders offering loans with terms as long as 40 years.

Although 40-year loans might help you to enter the market sooner (thanks to reduced payments over a longer period), it could potentially add more interest costs to your loan.