What is the difference between P&I and interest-only?

A principal and interest (P&I) loan has repayments that reduce both the principal and interest with each payment. An interest-only (IO) loan has repayments that cover only the interest; the principal stays the same during the IO period (typically 1-5 years for investment properties). IO loans have lower short-term repayments but cost more overall because you're not paying down the debt. P&I loans build equity faster and are the standard for owner-occupiers. IO loans are more common for investors who want to maximise cash flow and tax deductibility.

What fees come with a mortgage?

Upfront fees: loan application/establishment fees ($0-$1,000, sometimes negotiable), mortgage registration and settlement fees (government fees, typically $100-300), and valuation fees ($300-600). Ongoing fees: monthly or annual service fees ($0-$395 per year), fee-free offset account maintenance (sometimes charged). Exit fees: discharge administration fee when you pay out the loan ($200-400). Fixed rate break costs can be substantial if you exit a fixed loan early. Always ask for the full fee schedule before committing.

What is LMI and when do I pay it?

Lenders Mortgage Insurance is a one-off premium you pay when your deposit is less than 20% of the property value. It protects the lender if you default and the property sale doesn't cover the outstanding loan. The cost is typically 1-4% of the loan amount depending on the deposit size, loan-to-value ratio, and your risk profile. On a $500,000 loan with a 10% deposit, LMI might be $8,000-15,000. It can sometimes be added to the loan but this means you pay interest on it too, increasing the total cost.

How do extra repayments affect my loan?

Making extra repayments on a $500,000 loan at 6% over 30 years can save hundreds of thousands of dollars and years off the loan. Even $200 extra per month on a $500,000 loan at 6% saves approximately $75,000 in interest and cuts 4 years off the loan term. Most Australian variable rate home loans allow unlimited extra repayments. On fixed loans, there is typically an annual limit (often 10% of the outstanding balance) beyond which extra repayments incur a small fee.

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Frequently Asked Questions

How much deposit do I need for a home loan?

Most Australian lenders require at least 5% of the property value as a genuine deposit, though 20% is the standard target to avoid Lenders Mortgage Insurance (LMI). LMI protects the lender if you default and the property sale doesn't cover the loan. On a $600,000 property, LMI might cost $15,000-25,000 depending on your deposit size and whether you're a first home buyer. Some lenders offer 'no LMI' products for first home buyers with 15-20% deposits, or you can save to 20% and avoid it entirely.

What is the difference between principal and interest vs interest-only?

A principal and interest (P&I) loan has repayments that reduce both the principal and interest with each payment, building equity over time. An interest-only (IO) loan has repayments covering only the interest; the principal stays constant during the IO period (typically 1-5 years, commonly used for investment properties). IO loans have lower short-term repayments but cost more overall because you're not paying down the debt. P&I loans are the standard for owner-occupiers and build equity faster.

What is equity in a home?

Equity is the difference between what your home is currently worth and what you still owe on your mortgage. For example, a $700,000 home with a $450,000 mortgage leaves you with $250,000 in equity. Equity increases as you make repayments and if property values rise. You can access this equity through a refinance or line of credit to fund renovations, investments, or other expenses. In Australia, using equity wisely can be a powerful wealth-building strategy.

How much can I borrow for a mortgage?

Lenders typically use a multiple of your annual gross income to determine borrowing capacity, often 4-6x. For a single applicant earning $80,000, you might borrow up to $480,000. However, this depends on your expenses, existing debts, whether you're on a single or dual income, and your credit history. Lenders also assess your living expenses using the household expenditure measure (HEM) as a baseline. Getting pre-approval from a lender gives you a clear picture of your actual borrowing power before you start house hunting.

The Psychology of Money by Morgan Housel is a great read, it reframes financial decisions in ways a calculator can't.

Should I fix or variable my home loan rate?

Variable rate loans offer more flexibility (extra repayments without penalty, offset accounts, redraw facilities) and can save you money if interest rates fall. Fixed rates provide certainty about your repayments for a set period, protecting you if rates rise, but typically cost 0.3-0.5% more initially. Many Australian borrowers use a split loan strategy, fixing part of their mortgage for certainty while keeping part variable for flexibility. The right choice depends on your income stability and how much flexibility you need.

What is offset account and how does it work?

An offset account is a transaction or savings account linked to your home loan. The account balance reduces the interest you pay on your mortgage dollar-for-dollar. If your loan is $400,000 and you have $50,000 in your offset account, you pay interest only on $350,000. On a 6% loan, that $50,000 saves $3,000 per year in interest. The saving compounds because paying less interest means more of each repayment goes to principal, shortening your loan term. Offset accounts are most powerful in the early years of a loan.