Buying a home is one of the biggest financial decisions most people will ever make, and getting the financing of your purchase right is just as significant. A mortgage isn’t just a short-term commitment, in fact it’s likely to be with you for 20 to 30 years, which means even small differences in your loan structure, interest rate or fees can add up to thousands of dollars over time.
That’s why it’s vital to look beyond interest rates when you’re comparing home loans to find the best option. Scrutinising things like home loan features, flexibility, fees, repayment options and even the home loan lender’s customer service can help make a massive difference to your overall experience and long-term financial wellbeing.
Our seven-step guide to choosing the best home loan for your situation is designed to put you in the driver’s seat so you feel more in control, avoid expensive mistakes and set yourself up for financial success in the long term. It’s especially suitable for first home buyers with handy calculators, links and tips for mortgage success.
Step 1: Work out how much you
can borrow
Before you start house hunting, it’s important to understand how much you can afford to borrow and comfortably repay over time. This will help you set a formal budget and avoid financial stress down the track.
Lenders calculate your ‘borrowing power’ using a range of things to work out how much they’re willing to lend you, including the following:
- Your income – This includes your salary, any rental income, bonuses, government payments, or other regular earnings. The higher and more stable your income, the more you may be able to borrow.
- Existing debts – Financial commitments like credit card balances, personal loans and car loans reduce your borrowing capacity because they take up a portion of your available income.
- Living expenses – Lenders look closely at how much you spend on everyday things like bills, groceries, transport and entertainment to make sure you can still meet your loan repayments after covering your basic needs.
- Credit history – A good history of repaying debts on time can boost your chances of approval and may also give you access to more competitive interest rates.
Use Homestar’s borrowing power calculator to see exactly how much you may be able to afford to borrow.
How much do you need for a deposit?
Most lenders require a deposit of at least 5% to 20% of the property’s value. A 20% deposit is ideal to avoid Lenders Mortgage Insurance (LMI).
The First Home Guarantee allows eligible first-home buyers to buy with just a 5% deposit and no LMI.
Remember, a bigger deposit means lower repayments and potentially better loan terms. And don’t forget to budget for extras like stamp duty, legal fees and moving costs.
Read more about deposits.
Step 2: Know the different types of home loans
Not all home loans are the same, and each loan type has its advantages and disadvantages. Understanding the main types of loans will help you choose the best one for your situation.
Fixed rate loan vs Variable rate loan
With a fixed rate home loan, the interest rate stays the same for a set period, usually between one and five years. This is great when you are starting out as repayments are a fixed amount so it’s easier to control your budget.
On the downside, this means if interest rates fall, you are locked into your fixed rate until the set period ends, so if you want to move to a new rate there may be early exit fees to pay.
Selecting a variable rate home loan means the interest rate can rise or fall over time with the market. These types of loans are typically more flexible, allowing you to make extra repayments or exit early without penalty. They also come with extra home loan features like an offset account or the ability to redraw or split your loan.
The downside? If interest rates rise, so too does your loan repayment amount which means budgeting is less predictable.
Split rate loans
A split rate loan (also known as a split loan) is a combination of fixed and variable components. The main goal of a split rate loan is to balance the stability of fixed rates with the flexibility of variable rates. Basically, you are protected from rate rises on the fixed portion of the loan, conversely if rates go down, you can benefit on the variable portion.
These types of loans can be a little more complex, and fees may be higher, but some home loan customers find they enjoy the benefits. Check out the Homestar Split rate loan calculator.
Interest-only loans
An interest-only home loan is a type of mortgage where, for a set period (usually one to five years), you only pay the interest on the loan, not the principal (the amount you borrowed).
These type of home loans can be great for first home buyers who wish to purchase a property sooner without feeling overwhelmed with paying both the interest and the principal.
On the downside, while monthly payments are initially lower than a traditional mortgage, after the interest only period ends monthly payments increase significantly because you must start paying both principal and interest.
When it comes to choosing the right type of loan, there’s no one-size-fits-all. Fixed loans offer stability, while variable loans give more flexibility. A combination of both can suit some borrowers too. You should consider your lifestyle and risk tolerance when making a decision, and check out Homestar’s Home loan comparison tool.
Step 3: Compare interest rates and the comparison rate
For anyone buying a property, it’s natural to be attracted to the loan with the lowest interest rate – but there’s more to it than that. The interest rate only shows the cost of borrowing, not the extra fees that might come with the loan.
That’s why it’s important to look at the ‘comparison rate’ too. This rate gives you a more realistic picture of what the loan will actually cost over time because it combines the interest rate with most of the upfront and ongoing fees.
Even if a loan has a low interest rate, high fees can make it more expensive in the long run – and that won’t always be obvious unless you check the comparison rate. In fact, a slightly higher interest rate with fewer fees might save you more overall.
Try using Homestar’s Comparison rate calculator to make sure you are comparing like for like.
Homestar Finance was awarded the prestigious Canstar Outstanding Value Award for Variable Home Lender in 2025. This recognises a solid commitment to providing exceptional value and home loan features that are truly appreciated by home loan borrowers.
Read more about the award and discover Homestar’s interest rate guide.
Step 4: Look beyond interest
rates – features that matter
When comparing home loans, it’s easy to focus only on the interest rate. But some home loan features can actually help you pay off your loan faster, save on interest and give you more flexibility along the way. These features might not seem important upfront, but they can make a big difference over time – especially if your financial situation changes.
Offset account: This is a transaction account linked to your home loan. The money in it offsets your loan balance, so you only pay interest on the difference. As an example, if your loan is $500,000 and you have $20,000 in your offset account, you’ll only be charged interest on $480,000.
Using your offset account as your everyday bank account, depositing salary, savings, and emergency funds, means every dollar kept there helps reduce the interest charged on your loan, potentially saving you thousands over the life of your mortgage. Try our calculator here.
Find out more about offset accounts.
Redraw facility: If you’ve made extra repayments on your loan, a redraw facility lets you access that money if you need it. It offers flexibility if unexpected expenses come up, like car repairs or medical bills.
Read about the difference between an offset account and a redraw facility.
Flexible repayment options: Choosing a repayment structure that fits with your budget and lifestyle can make a significant difference over time. One smart strategy is to make fortnightly repayments instead of monthly, a move which can shave years off your loan term and save you thousands in interest over the life of your mortgage.
Read more about the benefits of fortnightly repayments.
Extra repayments: This feature lets you make additional repayments whenever you want, without penalty. Even small extra payments can significantly reduce your interest over time and help you pay off your home sooner.
Use Homestar’s Extra Home Loan Repayments Calculator to see how much you could save on your home loan.
Loan portability: Planning to move in the future? Loan portability allows you to take your existing loan with you when you buy a new home. That means you won’t need to refinance or start a whole new loan, saving time and fees.
Step 5: Understand the costs
and fees involved
When you’re buying a home, it’s easy to concentrate on the deposit and loan amount – but there are several other costs you need to take into account. Some fees are upfront, and others are ongoing, and they can add up quickly, so it’s important to include them in your budget from the start.
Loan application or setup fee: This is a one-off fee charged by your lender to process and set up your loan. Not all lenders charge this, but it’s common.
Property valuation fee: Your lender will usually require a property valuation to confirm the market value of the home before final approval. This fee may be passed on to you.
Legal and conveyancing fees: These cover the cost of a solicitor or conveyancer to handle the legal side of your property purchase, including checking contracts, conducting searches and transferring ownership.
Lenders Mortgage Insurance (LMI): If your deposit is less than 20% of the property value, most lenders will require LMI which is a one-off insurance premium that protects them if you default on the loan. This can cost thousands, so it’s an important cost to budget for. There are also schemes available to some home buyers that can help avoid it.
Ongoing loan service fees: Some lenders charge monthly or annual fees to manage your loan. While these may seem small, they can add up over time.
Exit or break fees: If you choose to lock in a fixed interest rate but want to change or pay off the loan early, you could face break fees. These can sometimes be expensive, so it’s worth understanding the terms before you commit one way or another.
Stamp Duty
Stamp duty is a tax collected by each state and territory in Australia when purchasing a property. The amount of stamp duty depends on things like the property’s sale price, whether the property will be your primary residence and your location.
Homestar’s handy stamp duty calculator can help you work out the amount of stamp duty that you need to pay based on your property’s price and location.
Getting a clear picture of all the costs involved will help you set a more accurate budget and feel confident when making offers or applying for a loan.
Step 6: Take advantage of
government schemes
Buying your first home is a big financial step but there are several government schemes designed to make it more affordable for first-home buyers in Australia. These programs can help reduce upfront costs, boost your deposit or allow you to enter the market sooner with less saved.
First Home Owner Grant (FHOG): This is a one-off, tax-free payment from your state or territory government, typically up to $10,000 (more in some regions). It’s usually available if you’re buying or building a new home and meet certain eligibility requirements, such as being an Australian citizen or permanent resident and planning to live in the property.
Learn more about the FHOG and check eligibility.
First Home Guarantee: As mentioned earlier, this federal scheme allows eligible first-home buyers to purchase a home with just a 5% deposit, while the government guarantees the remaining 15%, helping you avoid paying Lenders Mortgage Insurance (LMI). It’s a great option if you have a steady income but are struggling to save a full 20% deposit.
Learn more about the First Home Guarantee scheme.
First Home Super Saver Scheme (FHSSS): This program allows you to make voluntary contributions into your superannuation account, then withdraw them later to use towards your home deposit. Because super contributions are taxed at a lower rate, this scheme can help you save faster and more efficiently than in a regular savings account.
Find out more about the First Home Super Saver scheme.
Stamp Duty concessions or exemptions: Several states and territories offer reduced or waived stamp duty for first-home buyers, depending on the value of the property and whether it’s new or existing. This can save you tens of thousands of dollars, depending on where you’re buying.
Access more information about Stamp Duty in each state.
Each scheme has different eligibility criteria and limits, so it’s worth checking what’s available in your state or territory — and applying early, as places in some programs (like the First Home Guarantee) are limited each financial year.
Step 7: Get on the front foot
with pre-approval
Home loan pre-approval provides a conditional ‘green light’ from a home loan lender that indicates how much you can borrow, based on an initial review of your financial situation.
For first home buyers, pre-approval provides clarity and confidence – helping you focus your property search within a realistic budget. It also demonstrates to real estate agents and sellers that you’re serious about buying, which can give you an advantage in competitive markets.
To apply for pre-approval, you’ll generally need to provide Identification (passport or driver licence), recent payslips and bank statements, proof of your deposit or savings, and a summary of your current assets and liabilities.
The process can often be completed within a few days. It’s not a final loan approval, but it’s an important step in your home buying journey. Remember that most pre-approvals are only valid for a set time, usually three to six months, so it’s best to apply when you’re ready to seriously start house hunting.
For more on what’s involved, check out the Homestar guide to pre-approval.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.
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