Home loans explained
The key home loan choices in plain English, from repayment types and rate types to offset accounts, LMI and the government's 5% Deposit Scheme.
The short version
- Principal and interest loans pay down your debt; interest-only loans don't, for a while.
- Variable, fixed and split rates each trade off flexibility and certainty.
- Offset accounts and redraw can both cut interest, but work differently.
- Eligible first home buyers may buy with a 5% deposit and no LMI.
A home loan is likely the biggest debt you’ll ever take on. Knowing the main choices helps you ask the right questions and compare loans with confidence.
Repayment types: P&I vs interest-only
Principal and interest (P&I) repayments cover the interest plus part of the amount you borrowed (the principal). Each repayment chips away at your debt, so you own more of your home over time.
Interest-only repayments cover just the interest, usually for a set period such as five years. Your repayments are lower at first, but your debt doesn’t go down. When the interest-only period ends, repayments jump, because you then repay the whole debt over a shorter time.
Most people buying a home to live in use P&I. Interest-only is more common with investors.
Rate types: variable, fixed or split
| Rate type | How it works | Pros | Cons |
|---|---|---|---|
| Variable | Rate can go up or down at any time | Often allows extra repayments, offset and redraw | Repayments can rise |
| Fixed | Rate is locked for a set time, often 1–5 years | Certain repayments | Break costs if you change or pay off early; extra repayments often limited |
| Split | Part fixed, part variable | Some certainty and some flexibility | Can be more complex to manage |
When a fixed period ends, the loan usually rolls onto a variable rate. That rate may be higher than rates offered to new customers, so it’s worth checking.
Offset vs redraw
Both can save you interest, but they’re not the same.
- An offset account is a separate transaction account linked to your loan. The balance is subtracted from your loan before interest is worked out. You can use it like a normal account.
- Redraw lets you take back extra repayments you’ve already made into the loan itself.
Offset accounts held as a separate deposit account are covered by the Financial Claims Scheme. Money in redraw is part of your loan, and your lender may limit or change access to it.
Deposits and lenders mortgage insurance (LMI)
If your deposit is less than 20% of the property’s value, lenders usually charge lenders mortgage insurance (LMI). LMI protects the lender, not you, if you can’t repay. It can cost thousands of dollars and is often added to your loan.
You’ll also need money for upfront costs, such as stamp duty (in many cases), legal or conveyancing fees, inspections and loan fees. Your state or territory may offer first home buyer concessions or grants.
The 5% Deposit Scheme (Home Guarantee Scheme)
The Australian Government’s 5% Deposit Scheme, formerly the Home Guarantee Scheme, helps eligible buyers purchase with a smaller deposit and no LMI. The government guarantees part of the loan instead. It’s run by Housing Australia through participating lenders.
Since 1 October 2025:
- There’s no limit on places and no income caps.
- First home buyers can buy with a 5% deposit. You count as a first home buyer if you haven’t owned property in Australia in the last 10 years.
- Single parents and legal guardians with at least one dependant can buy with a 2% deposit. They don’t need to be first home buyers.
- You must be an Australian citizen or permanent resident and live in the home. You generally need to move in within six months of settlement.
The property price must be under a cap for its area. Caps for capital cities and listed regional centres are (2026–27):
| State/territory | Capital city and regional centres | Rest of state |
|---|---|---|
| NSW | $1,500,000 | $800,000 |
| VIC | $950,000 | $650,000 |
| QLD | $1,000,000 | $700,000 |
| WA | $850,000 | $600,000 |
| SA | $900,000 | $500,000 |
| TAS | $700,000 | $550,000 |
| ACT | $1,000,000 | – |
| NT | $750,000 (Darwin) | $600,000 (rest of NT) |
Regional centres are Illawarra, Newcastle and Lake Macquarie, Central Coast, Coffs Harbour–Grafton, Mid North Coast and Richmond-Tweed (NSW), Geelong (VIC), and the Gold Coast and Sunshine Coast (QLD).
Comparing loans
Look at the comparison rate, which includes most fees. For home loans it’s based on a $150,000 loan over 25 years, so check the real fees for your own loan size. Also compare features: offset, redraw, extra repayments and ongoing fees.
Next steps
- Check your eligibility and the price cap for your postcode at https://firsthomebuyers.gov.au
- Get your free credit reports and fix any mistakes before you apply.
- If you’re already struggling with home loan repayments, call the National Debt Helpline on 1800 007 007.
Work out your numbers
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Sources and further reading
- Housing Australia – Unlimited places, higher property price caps for first home buyers from 1 October 2025
- First Home Buyers (Australian Government) – 5% Deposit Scheme FAQs
- APRA – Financial Claims Scheme: protecting depositors and policyholders
- Commonwealth Bank – Comparison rate warning (standard home loan comparison basis)
General information only. This video doesn't take into account your objectives, financial situation or needs. Figures are for 2026–27 and can change. Check the official sources above.