The Australian home loan, explained

Next update. The Reserve Bank's next decision on the cash rate is due on 3 November 2026. We will update the rates and figures in this article after it.

A home loan runs for decades, is secured over the borrower's home, and is priced and sized under rules that few borrowers ever see. What it costs comes down to four things: the amount, the rate, the term and the way it is repaid. Everything else, from the offset account to the fixed period and the lender's tests, works through those four.

This article explains how an Australian home loan works, part by part, with a model you can adjust. It is Part 2 of The architecture of lending: Part 1 explains why loans are priced as they are, and this part applies that to the loan most people know.

Average new owner-occupier home loan in Australia, June 2026, and $842,000 in NSW

$731,000

ABS

Share of new home lending by banks and other deposit-takers that went to investors, June quarter 2026

35.6%

APRA

New home lending at six or more times the borrower's income, against a limit of 20%

5.6%

APRA

The home loan market at a glance

Two official sources count new home loans, and they count different things. APRA, the prudential regulator, collects from authorised deposit-taking institutions (ADIs: banks, building societies and credit unions) the loans they fund each quarter, including the shares lent at high ratios of loan to value and of debt to income.¹ The ABS counts new loan commitments, firm offers of a loan that borrowers have accepted, seasonally adjusted and excluding refinancing.⁷

Reported data

The home loan market at a glance, June quarter 2026

New home loans funded

$200.5 billion

June quarter, up 6.8% on a year earlier

APRA¹

Investor share of new lending

35.6%

Share by value; 34.1% a year earlier

APRA¹

New lending at 80% or more of value

29.7%

Loan to value ratio of 80% or more, share by value; 30.4% a year earlier

APRA¹

New lending at six times income or more

5.6%

Owner occupiers 3.7%, investors 8.9%; the limit is 20% for each

APRA^1,3

Non-performing home loans

1.01%

Share of ADIs' home loans by value, June 2026; 1.04% a year earlier

APRA¹

New loan commitments for dwellings

$97.6 billion

June quarter, down 5.2% in the quarter and up 6.8% on a year earlier

ABS⁷

Average new owner-occupier loan

$731,000

June 2026; $842,000 in NSW

ABS⁷

Loans to first home buyers

29,319

June quarter, worth $18.4 billion

ABS⁷

APRA counts new loans funded by banks, building societies and credit unions, and its shares are of the value lent or owed, not the number of loans. The ABS counts new commitments accepted by borrowers, seasonally adjusted and excluding refinancing, except the average loan size, which is the original series. The two measure different things and are not directly comparable.

How a home loan works

Principal, interest and the term

A home loan rests on three numbers. The principal is the amount borrowed. The interest rate is the price of the money, charged on whatever is still owed. The term is the number of years over which the loan must be repaid. The lender takes a mortgage over the property as security: if the loan is not repaid, the lender can in the end sell the property to recover what it is owed. Part 6 explains how that security works and when it can be enforced.

Most loans are principal and interest. Each repayment pays the interest due for the month and repays some of the principal, and the repayment is set so that the last one clears the loan at the end of the term. The split between the two changes over the life of the loan, and it explains most of what follows.

Take the first scenario in our model: a $1 million home bought with a 20% deposit of $200,000, so the loan is $800,000, at an assumed rate of 6.25% a year over 30 years. The repayment is $4,926 a month. Of the first repayment, $4,167 is interest, exactly what an interest-only loan of the same size would charge; only the rest reduces the debt. Each dollar repaid trims the next month's interest a little, so the part that goes to principal grows month by month, slowly at first. After ten years, a third of the term, $674,000 of the $800,000 is still owed. For most of the term, interest is the larger part of each year's repayments, and the balance falls fastest in the final years, which is why the line in the drawing below curves rather than falling straight.

Over the full term the borrower pays $973,000 in interest, 122% of the amount borrowed, and repays $1,773,000 in all. That is the price of using a large sum for up to 30 years, and most of it is paid in the first half of the term, while the balance is highest.

Illustrative model

Model: a home loan, month by month

Choose one of the five scenarios, or move the controls to set your own loan. The drawing shows how each year's repayments divide between interest and principal, and what is still owed at the end of each year.

20% depositFirst home, 5% depositInvestor, five years interest only$50,000 in an offset accountRate one point higher

Without JavaScript the model shows one scenario: 20% deposit.

The purchase

Property price

$1,000,000

−+

Deposit, share of the price

20%

−+

The loan

Interest rate

6.25%

−+

Loan term

30 years

−+

Interest only at the start

0 years

−+

Average balance in an offset account

$0

−+

Monthly repayment $4,926loan $800,000

Monthly repayment at the start

$4,926

Monthly repayment, principal and interest

$4,926

Interest over the loan

$973,000

Still owed after ten years

$674,000

The loan is 80% of the price, so it sits at the line above which lenders may charge lenders mortgage insurance.

Over the full term the loan costs $973,000 in interest, 122% of the amount borrowed.

A lender tests the repayments at 9.25%, three percentage points above the rate: $6,581 a month.

Balance and repayments, year by year

Principal repaid in the yearInterest paid in the yearOwed at the end of the year, right scale

The model shows mechanics, not the cost of any real loan: the rate of 6.25% is our assumption, not a lender's price, and the note says what the model leaves out.

Interest only, and what happens when it ends

On an interest-only loan, the repayments cover only the interest for an agreed period, and the balance does not fall unless the borrower pays more.¹⁰ When the period ends, the loan becomes principal and interest, and the whole balance has to be repaid over the years that are left. That is why the repayment jumps.

The investor scenario borrows the same $800,000, at 6.5%, with five years of interest only. For those five years the repayment is $4,333 a month. From the start of the sixth year it is $5,402, because the full $800,000 must now be repaid over 25 years rather than 30. Had the same loan been principal and interest from the start, the repayment would have been $5,057 throughout. Interest only lowers the early repayment by trading it for a higher one later, and it costs more in total: $1,080,000 of interest over the loan, against $1,020,000 on principal and interest. After ten years the interest-only loan still owes $724,000; the other, $678,000.

Lenders are told to plan for the jump. APRA's guidance expects them to assess an interest-only borrower's ability to make principal and interest repayments "for the specific term over which the principal and interest repayments apply", leaving out the interest-only period.¹¹ The investor is therefore tested at 9.50% on a 25-year repayment, $6,990 a month, rather than the $6,727 a 30-year principal and interest loan would need. For owner occupiers, the same guide expects interest-only loans to be approved only where there is "a sound and documented economic basis" for them, and not because the borrower cannot afford principal and interest.¹¹

Interest-only lending is one of the kinds of lending APRA's credit risk standard allows it to limit (APS 220, Attachment C, paragraph 7(d)),² and it needs more capital. The Reserve Bank noted in October that the share of new lending originated on interest-only terms has increased over the past year.¹² Each lender sets the length of the period. On the standard variable rate loan of the Commonwealth Bank (CommBank), for example, it is up to five years for owner occupiers and up to 15 years for investors, provided at least five years of the term remain (page with rates effective 9 October 2026).¹³

Variable, fixed and split

A variable rate can change during the loan. In practice it moves mostly with the cash rate, and sometimes without it, when a lender's own funding costs or pricing change; Part 1 explains why. The Reserve Bank raised the cash rate four times in 2026, from 3.60% to 4.60%,⁸ and by August the banks had passed the first three increases on to deposit and lending rates. Variable mortgage rates rose by nearly 75 basis points (a basis point is a hundredth of a percentage point) between January and June. A rise can take around three months to reach a borrower's scheduled repayment, because of minimum notice periods and the way repayment cycles fall.¹⁴

A fixed rate is set for an agreed period, after which the loan usually reverts to a variable rate. New fixed mortgage rates follow movements in swap rates for the same term, which lenders typically reference, the Reserve Bank notes.¹⁵ In our reading, a swap rate already carries the market's expectation of the cash rate over that term, so a fixed rate records what the market expected when it was set, not what will happen. The borrower knows the repayment for that period, but a fixed loan may limit extra repayments and may not offer redraw or an offset account, and break fees may apply if the loan is changed or repaid during the fixed period.¹⁰ The amount of a break fee is set by the lender's contract, within the law: the National Credit Code lets a court review unconscionable interest and other charges (section 78).¹⁶

The pandemic showed both sides of fixing. Most of the borrowers who fixed at low rates in 2020 and 2021 were sheltered through the rises of 2022, and many then rolled onto much higher variable rates in 2023 and 2024.^17,18,19 By 2025 the fixed share of outstanding loans had fallen to a historical low of less than 5%, and only a small share of new lending by the major banks has been at fixed rates since late 2023.¹⁵ Part 1 charts how the fixed loans slowed the pass-through of the 2022 rises.

A split loan divides one loan into parts, usually one fixed and one variable, so the borrower holds some certainty and some flexibility. Whether a lender offers it, and on what terms, is lender policy.

Whatever the type, small changes in the rate move the repayment a long way: in the model, each percentage point adds $532 a month to the 20% deposit loan. The table shows the repayment on the same loan at rates from 5.25% to 9.25%, over three terms.

Illustrative model

Monthly repayment on the $800,000 loan, by interest rate and term

Interest rate	Term 20 years	Term 25 years	Term 30 years
5.25%	$5,391	$4,794	$4,418
6.25%	$5,847	$5,277	$4,926
7.25%	$6,323	$5,782	$5,457
8.25%	$6,817	$6,308	$6,010
9.25%	$7,327	$6,851	$6,581

Principal and interest, with no interest-only period and no offset. The last row, 9.25%, is the scenario's rate of 6.25% with APRA's minimum buffer of 3 percentage points added: the rate a lender tests the loan at.

Offset accounts and redraw

Two features let spare money work against the loan, and they are often confused.

An offset account is a transaction or savings account linked to the loan. Its balance is counted against the loan, so interest is charged only on the difference: on a $550,000 loan with $30,000 in the offset, interest is charged on $520,000. Instead of earning interest, the money in the account is offset against the loan.¹⁰ It stays in the borrower's own account; the Reserve Bank counts offset balances among the major banks' at-call deposits.¹⁵

A redraw facility works the other way round. The borrower pays extra into the loan itself, which reduces the balance, and the lender lets the borrower take the extra out again later.¹⁰ Once paid in, that money has repaid debt. Taking it back means drawing on the loan again, on the loan's terms, and there may be fees, limits on the number of redraws and minimum amounts.¹⁰ On CommBank's standard variable rate loan, for example, redraw has no fee, a $1,000 minimum over the counter and none electronically (page with rates effective 9 October 2026).¹³

For each dollar, the two save the same interest. The difference is who controls the money. A lender assessing a new application considers "the amount available for redraw" on an existing loan alongside the borrower's other debts, APRA's guidance says.¹¹ It gives no equivalent instruction for an offset balance: it lists the existing loan's balance, not the balance less any offset, and how a lender counts the money in an offset account is its own policy.

Both are now common. Over the past five years, the share of housing loan facilities with an offset account rose from around 40% to 55%, and the share with redraw from around 70% to 80%, the Reserve Bank says.¹⁵ Together they hold large buffers: the median borrower could cover more than a year of scheduled repayments from offset and redraw balances.¹²

In the model's offset scenario, the borrower keeps an average of $50,000 in an offset account for the life of the loan. The repayment does not change, so the interest saved repays principal sooner: the loan costs $230,000 less in interest, $744,000 in all, and is repaid in 314 months, 46 months early.

Threefold Capital interpretation

Offset accounts and redraw compared

Feature	Offset account	Redraw
What it is	A transaction or savings account linked to the loan	Extra repayments made into the loan, which the lender lets the borrower take out again
Whose money it is	The borrower's, held in a deposit account	Repaid: it has reduced the debt, and taking it out draws on the loan again
Effect on interest	Interest is charged on the balance less the offset; the account earns none	Interest is charged on the lower balance
Getting it back	On the account's terms	On the loan's terms, with possible fees, limits on the number of redraws and minimum amounts
In a new loan application	No equivalent instruction in APRA's guidance on assessing applications	The amount available for redraw is considered with the borrower's existing debts
How common	Around 55% of housing loan facilities, up from around 40% five years earlier	Around 80%, up from around 70%

Lenders set the terms of each feature. CommBank's are given in the text as an example.

Deposits, loan to value and lenders mortgage insurance

The loan to value ratio (LVR) is the loan divided by the value of the property that secures it,¹¹ as the lender values it: APRA's credit risk standard requires the security to be valued before the loan is drawn, by a valuer, an internal appraiser or an automated method, including desktop and kerbside assessments (APS 220, Attachment A, paragraphs 3, 5 and 8).² Borrow $450,000 to buy a $600,000 home and the LVR is 75%.²⁰ If the lender's valuation comes in at $570,000 instead, the same loan is 79% of value; which figure a lender uses when the price and the valuation differ is its own policy. The LVR is the lender's first measure of its margin of safety: the higher it is, the less the property's price can fall before a sale would no longer repay the loan.

Above an LVR of 80%, a borrower may need to pay lenders mortgage insurance (LMI). It is usually a one-off cost, paid at settlement or added to the loan, and it protects the lender if the borrower cannot repay. It does not protect the borrower or a guarantor,²⁰ and it does not reduce what they owe. CommBank's guide to its low deposit options, for example, says that once the insurer has paid the bank's claim after a sale, it "may then seek to recover the remaining shortfall debt" from the borrowers and any guarantor.²¹

The 80% line is market practice, not law: Moneysmart says a borrower "may" need to pay LMI, and that some lenders accept a deposit as small as 5%.²⁰ APRA has set no formal limit on lending at high LVRs. It requires each ADI to set its own limits and to scrutinise high-LVR lending (APS 220, paragraph 52),² gives higher-LVR loans higher capital requirements,²² and regards LVRs above 90%, including any LMI premium added to the loan, as clearly exposing a lender to a higher risk of loss.¹¹ Insurance does not replace the lender's own checks: in APRA's words, "LMI is not an alternative to loan origination due diligence."¹¹

Lenders also look at where the deposit comes from. APRA's guidance notes that lenders typically require a deposit drawn mainly from the borrower's own funds, and that a prudent lender would have limited appetite for counting money that is not genuine savings, such as a gift from a family member; a deposit that has to be repaid belongs in the serviceability test (APG 223, pp. 20 and 21).¹¹ What counts as genuine savings is each lender's policy.

Price follows the same scale. On CommBank's standard variable rate loan with its Wealth Package, the owner-occupier principal and interest rate is 6.74% at an LVR of 70.01% to 80%, 7.04% at 80.01% to 90% and 7.99% at 90.01% to 95%, or 0.30 and 1.25 percentage points above the first (rates effective 9 October 2026, including a discount the bank was offering).¹³ The bank's comparison rates, which fold in most fees and are worked out on a $150,000 loan over 25 years, are 7.11%, 7.41% and 8.35%.^13,23 These are one lender's prices on one product, not a market average.

In the model, the first home buyer scenario buys a $750,000 home with a 5% deposit. The loan is $712,500, an LVR of 95%, and the repayment $4,387 a month, before any LMI. With a 20% deposit on the same home, the loan would be $600,000 and the repayment $3,694. The model charges the same rate on both, so if a lender prices higher LVRs higher, as the bank above does, the gap is wider than the model shows.

The 5% Deposit Scheme

The Australian Government 5% Deposit Scheme lets eligible first home buyers buy with a deposit as small as 5%, and the Family Home Guarantee lets eligible single parents and single legal guardians buy with 2%. Both may help a buyer avoid LMI.²⁴ Under the scheme, first home buyers take out high-LVR loans without paying LMI, because the Government guarantees up to 15% of the property's value if the borrower defaults.¹²

In our reading of the arithmetic, a 5% deposit means a loan of 95% of the value, and a guarantee of up to 15% of the value leaves the lender exposed on about 80% of it, the level above which LMI may otherwise apply. The guarantee is given to the lender. The buyer still borrows 95% of the price, pays interest on all of it, and bears any fall in the property's value.

The scheme was expanded in October 2025. The Reserve Bank says the share of high-LVR lending has increased since then but remains low overall, because first home buyers account for a small share of housing credit, and that liaison with banks suggests hardship and arrears among participants remain contained. Its chart of new lending measures high LVR as 90% or more of value, a share that rose sharply in late 2025 from a low level.¹² APRA's broader measure, lending at 80% or more of value, was a little lower in the June quarter than a year earlier (29.7% against 30.4%),¹ so the increase sits in the highest band, where the scheme's 95% loans fall. First home buyers took up 29,319 new loans in the June quarter, worth $18.4 billion, 10.0% more by value than a year earlier.⁷

Each program has its own eligibility rules, which Moneysmart says may cover income, property value, deposit size, where the buyer wants to buy and whether they have owned a home before.²⁴

The comparison rate, fees and the term

An advertised interest rate leaves out the fees. The comparison rate combines the interest rate and most fees and charges into a single percentage.²⁵ The National Credit Code makes it compulsory in advertising: Part 10 of the Code deals with comparison rates, section 160 requires one in an advertisement that states an annual percentage rate,²⁶ and it must be no less prominent than the interest rate (section 164).²⁷ ASIC notes that the rule applies to advertisements for fixed-term credit, and that a comparison rate leaves out government fees and charges, and charges made only in certain circumstances.²⁸

It is worked out on a standard loan. CommBank's page, for example, says its comparison rates are "calculated on a $150,000 secured loan, over a 25-year term" and are "true only for examples given and may not include all fees and charges".²³ The bank's $395 annual fee for its Wealth Package¹³ is about 0.26% a year of $150,000 and about 0.05% of $800,000, by our calculation. On a loan much larger than the standard, the comparison rate overstates what fixed fees add; on a smaller one, it understates it.

Fees. Beyond the rate, a home loan can carry package fees, such as the bank's above,¹³ fees for an offset account or a higher rate for having one, redraw fees, and break fees on a fixed rate.¹⁰ Buying the property also brings stamp duty and legal costs.¹⁰ A broker who charges the borrower a fee must first have the borrower sign a quote, and cannot ask for the fee before providing the service.²⁹ Each lender's key facts sheet shows the total amount to be repaid.¹⁰

The term. A longer term lowers the repayment and raises the interest, because the balance stays high for longer. On the 20% deposit loan, a 25-year term means a repayment of $5,277 rather than $4,926, and interest of $783,000 rather than $973,000. The table sets that against three other changes a borrower might weigh.

Illustrative model

What one change is worth on the 20% deposit loan

Change	Monthly repayment	Interest over the loan
Interest rate one point higher	+$532	+$191,000
Term of 25 years instead of 30	+$352	−$190,000
Deposit of 30% instead of 20%	−$616	−$122,000
An average of $50,000 in an offset account	$0	−$230,000

Each line changes one assumption from the 20% deposit scenario: a $1 million home and an $800,000 loan at 6.25% over 30 years. The offset leaves the repayment unchanged and repays the loan sooner.

Five loans side by side

Four of the five scenarios borrow $800,000; the first home buyer borrows $712,500.

Illustrative model

What the five scenarios assume

Assumption	20% deposit	First home, 5% deposit	Investor, five years interest only	$50,000 in an offset account	Rate one point higher
Property price	$1,000,000	$750,000	$1,000,000	$1,000,000	$1,000,000
Deposit, share of the price	20%	5%	20%	20%	20%
Interest rate	6.25%	6.25%	6.50%	6.25%	7.25%
Loan term	30 years	30 years	30 years	30 years	30 years
Interest only at the start	0 years	0 years	5 years	0 years	0 years
Average balance in an offset account	$0	$0	$0	$50,000	$0

Illustrative model

Five loans compared

Result	20% deposit	First home, 5% deposit	Investor, five years interest only	$50,000 in an offset account	Rate one point higher
Amount borrowed	$800,000	$712,500	$800,000	$800,000	$800,000
Loan to value ratio	80%	95%	80%	80%	80%
Monthly repayment at the start	$4,926	$4,387	$4,333	$4,926	$5,457
Monthly repayment, principal and interest	$4,926	$4,387	$5,402	$4,926	$5,457
Monthly repayment at the test rate	$6,581	$5,862	$6,990	$6,581	$7,169
Extra a month for each point on the rate	$532	$474	$510	$532	$553
Interest over the loan	$973,000	$867,000	$1,080,000	$744,000	$1,165,000
Interest, share of the amount borrowed	122%	122%	135%	93%	146%
Total repaid	$1,773,000	$1,579,000	$1,880,000	$1,544,000	$1,965,000
Still owed after ten years	$674,000	$600,000	$724,000	$631,000	$690,000
Months to repay	360	360	360	314	360
Interest saved by the offset	$0	$0	$0	$230,000	$0

Repayments and interest at a constant rate, before fees, lenders mortgage insurance and stamp duty. The test repayment uses the rate plus 3 percentage points, over the years left after any interest-only period.

How a lender decides how much to lend

A lender's question is not whether the borrower can make today's repayment, but whether they could keep paying if things got harder. Australian rules answer it with a set of tests. Some bind the ADIs APRA regulates, some are APRA's guidance on prudent practice, and the rest are each lender's own policy. Here a bank includes building societies and credit unions, which APRA regulates in the same way.

The buffer. Under APRA's credit risk standard, a bank must test whether a borrower could meet repayments at an interest rate at least 3.0 percentage points above the rate the borrower will pay, ignoring any discounted introductory rate (APS 220, Attachment C, paragraph 4). APRA can set the minimum anywhere from 2.0 to 5.0 percentage points.² It raised the buffer from 2.5 to 3 points in late 2021,¹² and left it at 3 at its review in May 2026.³⁰ APRA calls it "an important contingency for risks over the life of the loan".²² Its guidance adds that a prudent lender would also use a floor, a minimum test rate, without saying where the floor should be.¹¹

For the 20% deposit loan in the model, the test rate is 9.25% and the test repayment $6,581 a month, against a real repayment of $4,926. The lender wants to see room for the larger figure in the household's budget.

Living expenses. The lender asks what the household spends, and checks the answer. APRA's standard says expense benchmarks "must not be used as a substitute" for asking (APS 220, paragraph 45(d)),² and its guidance expects lenders to use the greater of the borrower's declared living expenses and an appropriately scaled benchmark, such as the Household Expenditure Measure (HEM).¹¹

Income. APRA's guidance expects discounts of at least 20% on most types of income other than salary, and a haircut of at least 20% on expected rent. Income is checked against payslips and tax returns, and repayments on a HELP student loan come off gross income before anything is left for the mortgage.¹¹ The discounts a lender actually applies are its own policy.

Existing debts. Other debts are tested at the buffer and floor too, and for an existing home loan the lender considers its balance, rate, remaining term and any amount available for redraw.¹¹

Debt to income. A debt to income ratio (DTI) compares a borrower's total debts with their income: a household with an income of $100,000 a year before tax and debts of $600,000, the new loan included, has a DTI of six. APRA defines the measure exactly in a reporting standard, ARS 223.0.³¹ Since 1 February 2026, a bank may make no more than 20% of its new owner-occupier lending, and separately no more than 20% of its new investor lending, at a DTI of six or more.³ Bridging loans for owner occupiers and loans to build or buy new dwellings are exempt.³¹ The limit applies only to the new lending of ADIs, so non-bank lenders are outside it.³² APRA's reason is that "highly indebted households are more likely to encounter difficulties servicing their loans when economic conditions deteriorate".³²

In the June quarter, 5.6% of new ADI lending was at a DTI of six or more: 3.7% of owner-occupier lending and 8.9% of investor lending, well below the limits.^1,12 The limit caps the share of each bank's new lending, not any single loan, so a bank can still make a loan at six times income while the rest of its lending leaves room.

Part 3 turns these tests into borrowing power, with a model of what the buffer and this year's rate rises do to the amount a household can borrow.

Threefold Capital interpretation

How a lender tests a home loan, and where each test comes from

Test	What it asks	Where it comes from	What kind of rule
Repayments at a higher rate	Repayments tested at least 3 percentage points above the loan's rate, ignoring introductory discounts	APS 220, Attachment C, paragraph 4	Prudential standard, binding on banks
A minimum test rate	A floor under the test rate	APG 223, p. 11	Guidance; the level is lender policy
Living expenses	The greater of declared expenses and an appropriately scaled benchmark such as HEM	APG 223, p. 14; APS 220, paragraph 45(d)	Guidance, under a binding rule that benchmarks cannot replace inquiries
Less certain income	Discounts of at least 20% on most income other than salary, and on expected rent	APG 223, pp. 12 and 13	Guidance; the discounts applied are lender policy
Existing debts	Tested at the buffer and floor, including any amount available for redraw	APG 223, p. 11	Guidance
Interest only	Principal and interest repayments over the years after the interest-only period	APG 223, p. 12	Guidance
The deposit	Mainly the borrower's own funds, with limited weight on gifts; repayments on a borrowed deposit counted in the test	APG 223, pp. 20 and 21	Guidance; what counts as genuine savings is lender policy
Loan to value	Each bank sets its own limits; above 90% is clearly higher risk	APS 220, paragraph 52; APG 223, p. 20	Binding duty to set limits; the limits are lender policy
Debt to income	No more than 20% of new lending at six times income or more, for owner occupiers and investors separately	APRA, from 1 February 2026	Prudential limit on each bank's lending, not on each loan
Not unsuitable	Inquiries, verification and an assessment that the loan is not unsuitable	NCCP Act ss 130, 131 and 133; ASIC RG 209	Law, for every licensed lender
Insurance above 80% of value	Lenders mortgage insurance may be charged	ASIC Moneysmart	Lender policy and market practice

APRA's standards and guidance apply to banks, building societies and credit unions. The responsible lending obligations apply to every licensed lender, including non-banks.

Responsible lending, brokers and the law

The duty not to lend unsuitably. The responsible lending obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 apply to credit licensees, the lenders and brokers licensed to provide or arrange consumer credit. Before making a loan, a lender must make reasonable inquiries about the borrower's requirements and objectives and their financial situation, take reasonable steps to verify that financial situation, and assess whether the loan is unsuitable; it must not make an unsuitable loan.⁴ For a lender, the inquiries are in section 130, the test of unsuitability in section 131 and the prohibition in section 133.³³ A loan is unsuitable if it is likely that the borrower could not meet the repayments, could meet them only with substantial hardship, or that it would not meet their requirements and objectives (RG 209.8). Each obligation is a separate civil penalty provision, and it is not enough for a lender merely to rely on what the borrower tells it (RG 209.11 and RG 209.50).⁴

Which loans the law covers. The National Credit Code applies to credit for a natural person or a strata corporation, provided wholly or predominantly for personal, domestic or household purposes, or to buy, renovate or improve residential property for investment, or to refinance such credit (section 5(1)).²⁶ A home loan to an individual, owner occupier or investor, is inside it. A loan to a company is outside it, and so is a loan to an individual mainly for business. A borrower's declaration that a loan is for business does not take it outside the Code if the lender knew, or would have known after reasonable inquiries, that it was really for a Code purpose (section 13).²⁶ Part 4 explains business lending, which works under different rules.

Brokers. Most new home loans now reach a lender through a broker, around 65% in 2025 on the Reserve Bank's estimate, as Part 1 sets out.¹⁹ Since 1 January 2021, a mortgage broker must act in the consumer's best interests when giving credit assistance (section 158LA of the Act) and, where there is a conflict, give priority to the consumer's interests (sections 158LB and 158LF).⁵ ASIC's guide says the duty does not necessarily require a broker to look beyond its panel of lenders, and offers no safe harbour, no set of steps that guarantees compliance.⁵ Lenders generally pay brokers a commission, a percentage of the loan with an upfront and an ongoing part, which the broker must disclose,²⁹ and volume-based and campaign-based benefits for brokers have been banned since the same date.³⁴

Owner occupiers and investors

Investors took 35.6% of new lending funded by ADIs in the June quarter, up from 34.1% a year earlier,¹ and 38.0% of new loan commitments by value, by our calculation from the ABS's figures.⁷ The Reserve Bank says investor credit growth "picked up strongly over 2025 but has slowed recently".¹² It also attributes the recent fall in housing prices partly to "changes to negative gearing and capital gains tax discount policies".¹² This article does not cover tax, and an investor's arithmetic now depends on those changes as well as on the rate.

The rules treat the two differently. APRA says investor loans "are typically not riskier in terms of default rates", but that strong investor credit growth has in the past been associated with household debt rising across the economy, particularly when interest rates are low.³² Investor lending is one of the kinds APRA may limit (APS 220, Attachment C, paragraph 7(c)),² and its debt to income limit applies to investor lending separately. Investors are the ones nearer that limit, at 8.9% against 3.7% in the June quarter;¹ owner occupiers, APRA notes, typically borrow at lower DTIs.³²

Capital is the other difference. Under APRA's standard capital rules, an investor loan, like an interest-only loan, falls in "other standard residential property" and carries a higher risk weight than an owner-occupier principal and interest loan at the same LVR (APS 112, Attachment A, paragraph 14 and Table 1);³⁵ Part 1 shows what a higher weight does to the rate. Banks that APRA allows to use internal ratings-based models work out their own risk weights,³⁶ and every lender prices on its own costs. On CommBank's standard variable rate loan, the investor principal and interest rate at an LVR of 70.01% to 80% is 6.94% (comparison rate 7.31%), 0.20 percentage points above the owner-occupier rate (rates effective 9 October 2026).¹³

For the law on lending, the line falls elsewhere: an individual investor's home loan is inside the National Credit Code (section 5(1)(b)(ii)),²⁶ with the same responsible lending protection as an owner occupier's.

Reported data

Owner occupiers and investors in new lending, and how the rules treat them

Measure	Owner occupiers	Investors
Share of new lending funded, June quarter 2026	61.9%	35.6%
Same share a year earlier	63.6%	34.1%
New lending at six times income or more	3.7%	8.9%
New loan commitments, June quarter 2026	$60.5 billion	$37.1 billion
Change in the quarter	−1.9%	−10.2%
Average new loan, June 2026	$731,000	$708,000
Standard risk weight at an LVR of 60.01% to 70%	30%	40%
Limit on new lending at six times income or more	20%	20%

Loans funded are by banks, building societies and credit unions, and APRA's shares are of the value lent; commitments are seasonally adjusted and exclude refinancing; average loan sizes are the original series for June 2026. The risk weights are APRA's standard ones, which banks using internal ratings-based models do not apply.

When a borrower falls behind

Most borrowers keep up. At June 2026, loans 30 to 89 days past due were 0.54% of ADIs' home loans by value, and non-performing loans, those 90 days or more past due or unlikely to be repaid in full, were 1.01%.^1,2 The Reserve Bank says the share of housing loans more than three months behind has increased a little in 2026 but remains around pre-pandemic levels. It estimates that around 2% of variable-rate owner-occupier borrowers have income that does not cover their scheduled repayments and essential expenses.¹²

Hardship. The National Credit Code provides for changes to a loan on the grounds of hardship (section 72, "Changes on grounds of hardship").²⁶ The lender must give the outcome of a hardship request in writing within 21 days, Moneysmart says,³⁷ and a lender that refuses must give its reasons.^10,6 The banks that have adopted the Banking Code of Practice, called Code banks here, ask customers in financial difficulty to contact them as soon as possible (paragraph 167), commit to working with the customer towards a sustainable solution (paragraph 175), and will say in writing whether they will help, and why (paragraph 184). The Code's examples of help include interest-only payments for a short period, a longer term to reduce repayments, and postponing or deferring payments, and it notes that these can mean paying more interest over the loan.³⁸

The credit report. Since 1 July 2022, under the Privacy Act 1988, a credit provider must tell a credit reporting body about a hardship arrangement. It shows as a sign beside the affected repayments, cannot be used to calculate a credit score, and is removed a year after the arrangement's final repayment, or for a permanent change to the loan, a year after it began.³⁹

If arrears are not resolved. For a home loan under the National Credit Code, a lender cannot begin enforcement until it has given the borrower a default notice allowing at least 30 days to remedy the default (section 88).^16,6 It can send one the day a repayment is overdue, or wait until the repayment is 90 days or more overdue, Moneysmart says.³⁷ The notice must tell the borrower of the right to give a hardship notice and to seek a postponement of enforcement (section 94), and section 89A limits when a lender that has received a hardship notice can begin enforcement.^16,6 Under the Australian Banking Association's guideline, Code banks stop collections while they consider one.⁶ Over land in New South Wales, a lender then enforces by selling under the power in section 58 of the Real Property Act 1900, after serving a written notice that complies with section 57(3),⁴⁰ in the way Part 6 describes.

A complaint the bank does not resolve can go to the Australian Financial Complaints Authority (AFCA), free of charge,^38,37 and an AFCA determination binds the bank once the customer accepts it.⁴¹

How we read it

What follows is our interpretation of the main choices in a home loan; the right answer depends on the borrower.

Interest only. Interest only is a decision about cash flow, with a known bill attached: it lowers the repayment now, raises it later and costs more over the loan. The useful test is the lender's own: could the household meet the principal and interest repayment over the shorter term that remains, at a rate several points higher? If the answer depends on income that has not yet arrived, the interest-only period is not buying time; it is borrowing against hope.

Fixing. A fixed rate buys certainty for a period. It is not a way to outguess the cash rate: its price already holds the market's view, so in broad terms fixing comes out ahead only if rates rise by more than was expected when it was set. The useful questions are how much of the repayment needs to be certain, what flexibility the borrower gives up, such as extra repayments, an offset or redraw, and what it would cost to leave early. A split loan answers the first with a proportion rather than all or nothing.

Offset and redraw. The choice between them is about control and access, not interest. Which matters more depends on whether the money might be needed again, and on the fees and limits of the particular loan.

The term. A longer term is cheap each month and expensive over a life, as the table of changes above shows. Treating the contracted term as a maximum and the repayment as a choice keeps both options open: a borrower who can pay more can make extra repayments, where the loan allows them, without committing to the higher figure.

The buffer as a personal test. The lender's test rate works as a personal test too. A household that could not meet the repayment at the test rate without strain is at the edge of what a lender will allow, whatever the approval says. Planning on the test repayment leaves room for rates to rise; planning on the real one relies on rates staying where they are.

Conclusion

An Australian home loan is a simple contract with a long tail. Its cost is set mostly by the rate and by how long the money is borrowed: on our model's $800,000 at 6.25%, interest over 30 years comes to 122% of the amount borrowed, and one point on the rate adds $532 a month. Interest only, fixed periods, offset and redraw change when the money is paid and who controls it more than they change the arithmetic. The lender's tests ask whether the loan would survive a harder year, and the law sets what a lender must do before it lends and before it enforces. In our view, the loan that serves a household best is one it could still carry at the lender's test rate.

Method and sources

Cut-off. This article uses information published on or before 12 October 2026. The ABS's next lending indicators, for the September quarter, are due on 11 November 2026.

Sources. We use the original publisher of each figure and rule: APRA, the ABS, the Reserve Bank, ASIC and Moneysmart, the Office of the Australian Information Commissioner, AFCA, federal legislation, NSW Land Registry Services and the Banking Code of Practice. The National Credit Code's default and hardship rules are described as Moneysmart and the Australian Banking Association's financial difficulty guideline set them out. CommBank's pages, read on 12 and 13 October 2026, are used only for that bank's published terms, as one lender's prices, not a market average. Some descriptions of offset, redraw and break fees come from ASIC's 2017 Moneysmart booklet.

Periods and adjustment. APRA's figures are for the June quarter of 2026, or at 30 June 2026, and cover banks, building societies and credit unions; its shares are of the value lent or owed, not of the number of loans. The ABS's commitments are seasonally adjusted and exclude refinancing; its average loan sizes are the original series, for the period the ABS labels June 2026.

Our calculations. Where we derive a figure, the text says so. Investors' share of commitments by value is $37.1 billion of $97.6 billion, 38.0%. The weight of a $395 annual fee is $395 divided by $150,000, 0.26%, and by $800,000, 0.05%. CommBank's rate steps are 7.04% less 6.74% (0.30 points), 7.99% less 6.74% (1.25 points) and, for investors, 6.94% less 6.74% (0.20 points). The valuation example is $450,000 divided by $570,000, 78.9%, rounded to 79%. The example of a debt to income ratio of six is $600,000 divided by $100,000. That a guarantee of up to 15% of the value leaves a lender exposed on about 80% of it is 95% less 15%. "More than twice as likely" compares 8.9% with 3.7%.

The models. The home loan model charges interest monthly at a constant rate on the balance less any offset balance. Repayments clear the loan over its term; during an interest-only period they are the interest alone, and afterwards they clear the loan over the years left. The offset balance is an average held for the whole loan and does not change the repayment, so it repays the loan sooner. The test repayment is the principal and interest repayment at the rate plus 3 percentage points, over the years left after any interest-only period. The model leaves out fees, lenders mortgage insurance, stamp duty, tax and changes in the rate. The scenarios, including the rate of 6.25%, are our assumptions, not any lender's terms. Every figure quoted from the model is written into the text by the model, and results are rounded.

Labels. Each chart, table and model carries one of four labels. Reported data: figures published by the source named. Threefold Capital interpretation: our reading of the evidence. Illustrative model: hypothetical figures from our models. Forward-looking scenario: a planning case, not a forecast.

Limitations. The model is a simplification: real loans have fees, rates that change and repayments that are recalculated. Aggregate figures say little about any one loan or lender. Rules and lenders' terms change, and this article describes them at its cut-off. It does not cover tax, stamp duty in any detail, or construction and bridging loans.

Corrections. If you see an error, please tell us at threefoldcapitalau@gmail.com. We correct published articles and record what changed at the top of the page.