Home loan basics

Worked examples

Offset account impact: $600,000 loan at 6.5% with $50,000 in offset from day one

Without an offset account, a $600,000 loan at 6.5% over 30 years costs approximately $765,000 in total interest. Keeping $50,000 in an offset account from the start reduces the interest-bearing balance to $550,000 each month, saving roughly $3,250 in interest in year one alone. Over the full loan term, a consistently maintained $50,000 offset saves approximately $234,000 in total interest and cuts about 5 years off the loan term.

Extra repayments: $600,000 at 6.5%, adding $500/month from year one

An extra $500/month reduces the principal faster in the early years when the interest-to-principal ratio is highest. On a $600,000 loan at 6.5%, an additional $500/month from year one shortens the loan term by approximately 8 years and saves roughly $240,000 in total interest. The same $500/month starting at year 10 saves considerably less (approximately $94,000) because less term and principal remain.

First home buyer: $580,000 loan at 6.5% over 30 years, 20% deposit on $725,000 home

A first home buyer purchasing a $725,000 property with a 20% deposit of $145,000 takes out a $580,000 loan at 6.5% over 30 years. Monthly repayments are $3,666 and total interest over the life of the loan is approximately $740,000, bringing the total amount repaid to around $1,320,000, roughly 2.3 times the original loan. A useful stress test: if rates rise to 8%, the monthly repayment increases to $4,256, an extra $590 per month. The deposit required also depends on your state; use the Stamp Duty Calculator to add stamp duty and other upfront costs to your deposit planning.

Calculator assumptions

Common mistakes

Focusing on the monthly repayment and ignoring total interest

A $600,000 loan at 6.5% has a monthly repayment of roughly $3,792, which may feel manageable. But over 30 years, the total interest paid is approximately $765,000, meaning you repay about 2.3 times the original loan. Comparing loans on repayment amount alone obscures the true long-term cost. Total interest is the more important figure for any loan you plan to hold to maturity.

Not stress-testing for rate increases

Variable rate loans move with RBA decisions. If rates rise 1.5% from your current rate, that adds roughly $570/month to a $600,000 loan. Most lenders already stress-test serviceability at 3% above the loan rate, but borrowers should do their own check. A useful rule: if a 2% rate rise would make repayments unmanageable, the loan may be too large for your current income.

Comparing advertised rates without checking the comparison rate

The advertised interest rate excludes fees. The comparison rate (required to be disclosed by Australian lenders) factors in most standard fees and gives a truer picture of cost. A loan advertised at 5.89% may have a comparison rate of 6.10% once fees are included. For loans with offset accounts or redraw, also check whether there are ongoing monthly fees.

Assuming extra repayments save the same regardless of timing

Extra repayments made in the first 5 years of a loan reduce the principal during the period when the outstanding balance, and therefore the interest charged each month, is highest. The same dollar amount paid in year 20 saves far less because the remaining balance is much smaller. Front-loading extra repayments produces significantly better outcomes over the full loan term.

Frequently asked questions

What is the current mortgage interest rate in Australia?

Variable home loan interest rates in Australia typically move in line with the RBA cash rate and currently range from around 5.5% to 7.5% depending on the lender, loan type, and your LVR (loan-to-value ratio). Owner-occupier principal-and-interest loans receive the lowest rates. Always compare the comparison rate rather than the advertised rate, as it includes most fees and gives a more accurate cost.

What is the standard home loan term in Australia?

The most common loan term in Australia is 30 years, though 25 years is also popular. Shorter terms (15–20 years) mean significantly higher monthly repayments but far less total interest paid over the life of the loan. A $600,000 loan at 6.5% costs roughly $765,000 in interest over 30 years, but only around $474,000 over 20 years.

What is an offset account and how does it reduce interest?

An offset account is a transaction account linked to your mortgage. Instead of earning interest on your savings, the balance reduces the principal you are charged interest on. If you have a $600,000 loan and $50,000 in your offset, you pay interest on $550,000. This can shave years off your loan and substantially reduce your total interest, all while keeping your savings accessible.

What is LVR and how does it affect my interest rate?

LVR (Loan-to-Value Ratio) is your loan amount expressed as a percentage of the property's value. Borrowing $480,000 against an $800,000 property gives an LVR of 60%. Lenders offer lower rates to borrowers with lower LVRs because the loan is less risky. Borrowing above 80% LVR typically triggers Lenders Mortgage Insurance (LMI), which can cost tens of thousands of dollars.

Can I make extra repayments on my Australian mortgage?

On most variable-rate loans, yes, and it is one of the best things you can do. Extra repayments reduce your principal immediately, cutting the interest charged in every future month. Many fixed-rate loans cap extra repayments at $10,000–$30,000 per year during the fixed period. Check your loan contract or ask your lender before making large lump-sum payments on a fixed loan.

What other costs should I budget for when buying a home?

Beyond the loan repayments, budget for stamp duty (typically 3–6% of the property price depending on your state), conveyancing and legal fees ($1,500–$3,000), building and pest inspection ($400–$800), lenders mortgage insurance if your LVR is above 80%, and ongoing costs like council rates, strata fees, and building insurance. First home buyers may be eligible for stamp duty exemptions or concessions.

What is the difference between an offset account and a redraw facility?

Both reduce the interest you pay, but access works differently. A redraw facility lets you make extra repayments directly into the loan and withdraw them later if needed, though access may involve minimum amounts, processing delays, or fees, and some lenders have the contractual right to freeze or reduce redraw access, which affected borrowers during the COVID-19 period. An offset account, by contrast, keeps your money in a separate account you can access like normal banking, with no such restriction. Offset is generally preferred for flexibility, though some loans charge a higher rate or ongoing fee for the feature.

Should I choose a fixed, variable, or split rate home loan?

Variable rate loans offer flexibility, unlimited extra repayments, offset accounts, and the ability to refinance without break costs. They carry rate risk: repayments rise when the RBA lifts the cash rate. Fixed rate loans provide certainty for the fixed term (typically 1–5 years), but extra repayments are often capped and break costs can be substantial if you sell or refinance before the term ends. A split loan fixes a portion of the debt for certainty while keeping the rest variable for flexibility and offset benefits, a common compromise for Australians who want some of both. The right choice depends on your income stability, the likelihood of selling or refinancing during the fixed period, and your own risk tolerance. Predicting RBA cash rate movements is notoriously difficult even for professional economists.

How this calculator works

Methodology and Sources

Related guides

• Home Loan Basics: How Mortgages Actually WorkPrincipal and interest, fixed vs variable, loan terms, and what extra repayments are really worth.
• Offset Account vs Redraw ExplainedBoth reduce your mortgage interest but the tax and flexibility differences matter.
• First Home Buyer GuideBorrowing power, government schemes, stamp duty, LMI, and the costs first home buyers underestimate.
• Emergency Fund: How Much Do You Need?How much to hold in reserve once your income is committed to a mortgage repayment.