Mortgage Basics Explained

Principal and interest vs interest-only

A principal and interest (P&I) loan is the standard structure: each repayment covers both the interest charged and a portion of the amount you originally borrowed (the principal). Over time, you own more of the property outright and the loan balance shrinks to zero by the end of the term.

An interest-only (IO) loan means your repayments only cover the interest for a set period (commonly 1–5 years) — the principal doesn't reduce at all during that time. Repayments are lower in the short term, but you pay more interest overall across the life of the loan, and once the interest-only period ends, repayments jump to cover the full P&I amount over the remaining, shorter term. IO loans are more common for investment properties (where the interest is often tax-deductible) than for owner-occupied homes.

Fixed, variable, and split rate loans

A variable rate moves up or down with the market and your lender's own settings, generally tracking RBA cash rate movements. Around 98% of new owner-occupier loans in Australia are variable. Variable loans usually come with more flexibility — offset accounts, free extra repayments, and easier refinancing without break costs.

A fixed rate locks in your rate for a set period, typically 1–5 years, giving repayment certainty regardless of what the RBA does. The trade-off is less flexibility — extra repayments are often capped (commonly $10,000–$20,000 a year), and exiting a fixed loan early can trigger break costs.

A split loan divides your borrowing between fixed and variable portions — for example 60% fixed, 40% variable — giving you partial certainty while keeping some flexibility.

What the comparison rate actually tells you

Lenders advertise an interest rate, but also have to publish a comparison rate alongside it. The comparison rate factors in most fees and charges into a single annualised percentage, making it easier to compare the true cost of two different loans that might have different fee structures. A loan with a low headline rate but high ongoing fees can end up with a higher comparison rate than a loan with a slightly higher rate but no fees. Always compare comparison rates, not just headline rates — but note the comparison rate is calculated on a standard loan amount and term, so your actual cost will vary based on your own loan size and features.

Offset accounts vs redraw facilities

An offset account is a linked transaction account — the balance in it reduces the amount of your loan that interest is calculated on. $20,000 sitting in an offset against a $500,000 loan means you only pay interest on $480,000, while your money stays fully accessible for everyday spending. Offset accounts commonly carry an annual or monthly fee.

A redraw facility lets you make extra repayments onto your loan, then withdraw ("redraw") that extra amount later if you need it. It achieves a similar interest-saving effect to an offset account, but the money isn't sitting in a separate everyday account — some lenders cap how much or how often you can redraw, and redrawing on a fixed loan can trigger fees.

LVR and Lenders Mortgage Insurance

Your LVR (Loan to Value Ratio) is your loan amount as a percentage of the property's value. An $800,000 loan on a $1,000,000 property is an 80% LVR. Above 80% LVR, lenders generally require Lenders Mortgage Insurance (LMI) — a one-off premium (often $10,000–$40,000+ depending on loan size and LVR) that protects the lender, not you, if you default. First home buyers can often avoid LMI entirely through the government's First Home Guarantee scheme with just a 5% deposit — see our deposit savings guide for details.

Where rates sit right now

As of mid-2026, the RBA cash rate sits at 4.35% following three rate rises earlier in the year. The average advertised variable owner-occupier rate is around 6.9%, though competitive lenders offer rates from roughly 5.7–6% for well-qualified borrowers with strong deposits. Rates change regularly — always check current rates with a lender or broker rather than relying on figures in an article, and use the Mortgage Calculator to see how a specific rate affects your own repayments.

Refinancing basics

Refinancing means replacing your current home loan with a new one — either with your existing lender or a different one — usually to get a lower rate, access equity, or change loan features. It's generally worth considering if you have at least 20% equity in your property (to avoid LMI on the new loan) and if the savings from a lower rate outweigh any exit fees, discharge fees, or new establishment costs. Refinancing activity in Australia has been running near record highs through 2026 as borrowers shop around in response to rate movements.