What is a mortgage?
Answer
A loan for purchasing property
Explanation
A mortgage in Australia is a loan secured against a residential property, used most commonly to fund the purchase of a home. The lender (a bank, credit union, or non-bank lender) holds a registered mortgage over the property until the loan is fully repaid. If the borrower fails to make repayments, the lender can ultimately sell the property to recover the debt.
Most Australian home loans are 25 or 30 years in term. The standard loan structure is principal-and-interest amortisation, where each scheduled repayment covers some interest plus some principal, gradually reducing the balance. Interest-only loans are also available, particularly for investment properties, where the borrower pays only interest for an initial period (typically one to five years) before switching to principal-and-interest repayments. The Australian Prudential Regulation Authority has tightened rules around interest-only lending since 2017.
Loan-to-value ratio (LVR) measures the loan amount as a percentage of the property's value. Most lenders prefer an LVR of 80 per cent or less (a 20 per cent deposit). Higher LVRs are common for first-time buyers but require Lenders Mortgage Insurance (LMI), a one-off premium added to the loan that covers the lender if the borrower defaults. LMI typically costs 1 to 5 per cent of the loan amount and is most commonly paid by borrowers with deposits below 20 per cent. The First Home Guarantee scheme allows eligible first-time buyers to skip LMI with as little as a 5 per cent deposit.
Mortgage features can substantially reduce the total cost of the loan. Offset accounts let the borrower link an everyday transaction account to the loan; the balance of the offset account reduces the loan balance for interest calculation, saving interest while keeping funds accessible. Redraw facilities let borrowers withdraw extra repayments they have made above the minimum. Split loans divide the balance between fixed and variable rates. Refinancing to a different lender (or negotiating with the existing lender) can reduce the rate substantially, with most lenders offering refinance rebates of 1,500 to 4,000 dollars to attract switchers.
Why this matters for your test
A mortgage is the largest loan most Australians ever take out, and recognising the role of LVR, LMI, offset accounts, and refinancing helps new citizens manage the cost over a 25 or 30 year term.
Source: Australian Citizenship: Our Common Bond (2024)
