Home Loans for Purchasing a House: What to Consider

You're comparing lender rates, but your deposit size matters more than the advertised number

Most lenders advertise their lowest variable rate, but that figure assumes a deposit of at least 20% and owner-occupied status. If you're purchasing with a 10% deposit, the rate you'll actually receive can be 0.3% to 0.6% higher, depending on the lender's loan to value ratio (LVR) pricing.

Consider a buyer who has saved $70,000 and wants to purchase a property for $650,000. Their deposit sits just under 11%, placing them in an LVR band above 90%. Some lenders will price this at their standard advertised rate plus a margin, while others apply tiered pricing where a 90% LVR attracts one rate and 85% attracts another. The buyer also needs to factor in Lenders Mortgage Insurance (LMI), which at this deposit level can add between $15,000 and $25,000 to their upfront costs or loan amount.

In our experience, buyers often lock in on the headline rate during research and feel blindsided when their actual quote comes back higher. The structure of your deposit and how it positions you within LVR bands directly affects what you'll pay, sometimes more than switching between lenders.

Variable rate, fixed rate, or split: what each structure actually delivers

A variable interest rate moves with market conditions, while a fixed interest rate locks in for a set period, usually between one and five years. A split loan divides your borrowing between both.

Variable loans give you flexibility to make extra repayments without penalty, access redraw or an offset account, and take advantage of rate cuts. Fixed loans protect you from rate rises but typically restrict extra repayments to around $10,000 to $30,000 per year and don't allow offsets. A split loan attempts to balance both, letting you hedge against rate increases on a portion while keeping access to features on the rest.

As an example, a buyer borrowing $520,000 might fix $260,000 for three years and leave the remainder variable. If rates rise during that period, half their loan remains unaffected. If rates fall, they still benefit on the variable portion and avoid being locked into a high rate across the full amount. The downside is managing two products simultaneously, each with its own repayment calculation and feature set. If you're planning to pay down the loan quickly or might need to sell within a few years, a variable structure usually makes more sense. If your budget is tight and certainty matters more than features, fixing part or all of the loan can deliver that.

Principal and interest versus interest only: how the structure affects your equity position

Principal and interest repayments reduce your loan balance each month, while interest only repayments cover the cost of borrowing without touching the principal.

For owner-occupied purchases, most lenders default to principal and interest because it builds equity and reduces risk. Interest only is more common for investment loans where tax treatment and cash flow take priority, but some buyers use it short-term during ownership if they're managing renovations or bridging between properties.

If you're purchasing your home and planning to live in it, paying down the principal from the start improves your borrowing capacity for future lending and positions you to refinance without needing LMI again. Interest only might lower your repayments temporarily, but you're not reducing what you owe, and when the interest only period ends (usually after five years), your repayments jump as you begin amortising the full loan over the remaining term. For most people buying a home to live in, principal and interest makes more financial sense unless there's a specific short-term reason to preserve cash flow.

Home loan pre-approval: why the assessment happens before you find the property

Home loan pre-approval tells you how much a lender is willing to let you borrow based on your income, expenses, and credit profile. It's conditional approval issued before you've chosen a property, valid for three to six months depending on the lender.

Pre-approval doesn't guarantee final approval, but it does confirm the lender has assessed your financial position and is comfortable lending up to a stated amount. The final step, formal approval, happens once you've signed a contract and the lender values the property. If the valuation comes back lower than the purchase price, the loan amount may be reduced or the deal can fall through if you can't cover the gap.

Getting pre-approval before you start attending opens or making offers gives you a clear ceiling on what you can afford and signals to agents and vendors that you're a serious buyer. In situations where multiple offers are in play, a pre-approved buyer often has an advantage because there's less financing risk.

Offset accounts and how they reduce interest without extra repayments

An offset account is a transaction account linked to your home loan. The balance in the offset is subtracted from your loan balance when calculating interest, which reduces what you pay each month without making extra repayments.

If you have a loan amount of $500,000 and keep $30,000 in your linked offset, you're only charged interest on $470,000. The $30,000 stays accessible, unlike extra repayments that may be locked in redraw or subject to lender approval to withdraw. This makes offsets useful for managing irregular income, saving for renovations, or holding funds you might need in the short term.

Not all lenders offer offset accounts, and some charge a higher rate or annual fee for loans that include one. The value depends on how much you can realistically keep in the account. If you're living pay to pay and the balance rarely exceeds a few thousand dollars, the interest saving might not justify a higher rate. If you're holding $20,000 or more consistently, the reduction in interest can outweigh the cost.

Portable loans and what happens when you sell before the term ends

A portable loan allows you to transfer your existing home loan to a new property without breaking the contract or paying discharge fees. Not all lenders offer portability, and the conditions vary.

If you're on a fixed interest rate home loan and you sell your property, breaking the loan early can trigger significant exit costs. Portability lets you avoid that by moving the loan to your next purchase, keeping the same rate and terms. The catch is that settlement on your sale and your new purchase need to align closely, usually within a few weeks. If there's a gap, the lender may require you to discharge the loan and reapply, which defeats the purpose.

We regularly see buyers who fix their rate, then need to relocate within two years for work. If they hadn't checked portability at the outset, they're stuck choosing between exit fees or delaying their move. If you think there's any chance you'll sell or upgrade within the fixed period, confirm whether the loan is portable and under what conditions before you sign.

What lenders assess when you apply for a home loan

Lenders assess your income, employment stability, existing debts, living expenses, and credit history to determine how much they'll lend and at what rate. They also consider the property's value and your deposit size.

Your borrowing capacity isn't just about your salary. Lenders apply a serviceability buffer, usually around 3%, on top of the current interest rate to ensure you can still afford repayments if rates rise. They also factor in all existing commitments, including credit card limits even if you don't carry a balance, personal loans, buy now pay later accounts, and other mortgages. In a scenario like this, a buyer earning $95,000 with a $15,000 credit card limit and $8,000 remaining on a car loan will have their borrowing capacity reduced by the potential repayments on those commitments, even if they're up to date.

Reducing or closing unused credit before you apply can improve your borrowing position. Lenders don't just look at what you owe, they look at what you could owe if you maxed out every facility.

Mortgage Guardian works with a panel of lenders across Australia, which means we can access home loan options that suit different income types, deposit levels, and property scenarios. If you're ready to apply for a home loan or want to compare rates based on your actual financial position, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions