Understanding Home Loans

We’ve broken down some of the more confusing words into plain English, so you know exactly what you’re dealing with.

Remember, any advice provided on this website is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should consider whether it is appropriate for your situation.

Home loan language can often feel confusing, but we’re here to help remove some of the mystery.

1. Interest Rates

Every home loan has an interest rate–that’s the cost of borrowing money from the bank. It’s usually expressed as an annual percentage and is used to calculate how much interest you’ll pay back on a loan.

The rate you pay depends on a few factors—like your Loan to Value Ratio, the rate period you choose, and whether you're a new customer.

Let’s say your rate is 6% on a 30-year loan. If you borrow $550,000, you'll pay 6% interest on top of your loan repayments—around $3,298 per month in total. If you kept that same rate for the full 30 years, you'd pay approximately $637,110 in interest.

There's a lot of calculators out there that can give you an idea of what your repayments might look like (checkout Up's here) and how much it could change if interest rates go up or down.

a. Comparison rates

When you're doing your own research into home loans, you'll often see an interest rate listed, with a 'comparison rate' next to it. A comparison rate takes the advertised rate and bundles in all the extras you'll be paying too—like fees and charges. It's designed to give you a more accurate idea of the costs, so you can easily compare it to other rates.

There’s often a lot of hassling and haggling when it comes to home loan rates—but with Up Home, both new and existing Upsiders get the same variable rate. No games, just the best rate we’ve got.

b. 'Fixed' vs 'Variable' rates

Interest rates go up and down, just like the rest of the economy. They respond to supply and demand, geopolitical factors, and even unexpected events—like global pandemics.

That means there's an element of risk, so the bank gives you the option of setting a 'fixed' rate for a period of time, or having a rate that varies as the market changes.

A fixed rate home loan offers a dependable, predictable payment. You won't be able to fix it forever, but you may have the option to keep your interest rate the same for 1-5 years. During that time, your repayments will stay exactly the same.

Some fixed-rate loans have stricter rules around repayments—like limits on how much extra you can pay. Once the fixed rate period ends, the loan usually switches to a variable loan.

A variable rate home loan tends to be more flexible. The interest rate can change over time, so your repayments might go up or down. One upside is that banks are usually more open to you paying it off faster—and if rates drop, you’ll benefit too.

The flip side of all that flexibility is risk—if something major happens in the market, your repayments could increase and become harder to manage. It’s something to keep in mind.

2. ‘Principal & Interest’ vs ‘Interest-only’ Rates

Your loan is made up of two parts: the principal and the interest.

The principal is the amount you borrowed to buy your home. The interest is what you pay the bank on top of that, as the cost of borrowing.

A principal & interest loan is when you put money towards both the actual cost of your home and the interest you have to pay the bank. That means the money you owe on your principal is also reduced over time. If you continue to pay a principal & interest loan for the entire loan period, you’ll own your home outright at the end.

An interest-only loan is one where you don't pay any money towards the principal. You just pay interest to the bank in exchange for living in your home. The principal amount you owe stays the same for the lifetime of your loan, and at the end of the loan term, you'll still owe that money. If you sell, you'll use the sale price to pay out the loan and keep any leftovers.

Interest-only loans are usually used for investments, while principal & interest loans are more common for homes people plan to live in.

3. Repayment frequency

When you get a mortgage, you agree to make regular loan payments to your bank, but most will let you choose the frequency—say, monthly or fortnightly. This can really help with budgeting. If you get paid weekly or fortnightly, you might opt to pay at the same interval.

If your pay is irregular or unpredictable, you might make deposits into your Home Saver and make one bigger repayment each month. You may also have the option to make extra repayments when money’s flowing, helping to reduce what you owe and shorten the life of your loan.

4. Offset accounts

Having a home loan can be a bit of a juggle—you’ve got to prioritise your repayments, but you still need to eat, keep the lights on, and treat yourself every now and then. An offset account can help you save on interest without locking your money away. It doesn’t change your repayment amount, but you could pay off your loan faster.

Here’s how it works: you have a home loan account and a linked offset account—basically a savings account that helps reduce the interest you pay on your loan. The balance in your offset is subtracted from your loan amount when interest is calculated. So if your loan is $320,000 and you have $10,000 in your offset, you’ll only be charged interest on $310,000. This reduced amount is called your Offset Loan Balance.

If you want to pay less interest (you do), dropping your pay into an offset account is a great habit to have. And because it's a savings account, you'll still have access to all the money in there. With Up, you can create up to 50 Savers across both your Up and 2Up accounts—all of which become free 100% offsets on both fixed and variable loans.

Plus, your deposits are protected by the government's Financial Claims Scheme (FCS) for up to $250,000. This is peace of mind you won’t get with non-bank lenders.

5. Redraw facilities

As we mentioned earlier, you might have the option to make extra payments on your home loan when you can afford to—and that's great, because it can shorten the life of your loan.

But what if something unexpected comes up? What if you make an extra repayment and then a big expense rears its head—only to realise that money’s already locked away in your loan?

A redraw facility lets you access any extra repayments you’ve made, if you need to. It means you can withdraw money you’ve paid above your regular loan repayments and use it for other things (although some conditions may apply). Some banks, like Up, don't charge a fee to do this, though be mindful that those savings you made earlier will be lost.

6. The difference between redraw and offset

It's true that there are similarities between the two, but they're not the same.

An offset account is yours. It's money you never actually pay towards your home loan. It stays in its own separate account and you can use it to buy what you need, like a regular transaction account. You can also have your wages paid directly into it, unlike a mortgage account. As long as there's money in the account, you'll pay less interest than you would if it were empty.

A redraw facility isn't a bank account, it's part of your loan's features. You shoot extra money across to your mortgage account and reduce the overall balance, which is why you pay less interest. But you can't just spend that money without first transferring it back to your transaction account—it's hanging out with your regular mortgage payments until further notice.

Money in an offset account is legally yours. Redraw, on the other hand, is money you’ve already paid off your loan—but the bank allows you to access it again. That means they’re not obligated to give it back, and in certain situations, like financial hardship or policy changes, access could be restricted.