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How home loans & property finance actually work in Australia

(This is a reference page. It is designed to be the most complete, practical explanation of how loans actually work in Australia. You do not need to read it in order. Bookmark it and come back to the sections that matter to you.)

Welcome — and how to use this page

If you’re new here, this page is designed to explain how the system actually works, not to push you in a direction.

Most people:

• skim what feels relevant
• ignore what isn’t
• come back later
• speak to a broker when they’re ready

That’s exactly how this page is meant to be used.

This page brings everything together in one place:

• how loans really work in practice
• what lenders actually assess
• what first-time buyers and investors usually get wrong
• where to find deeper reference material when you need it

What Model Mortgages is (and isn’t)

Model Mortgages is a reference library.

It explains how lending decisions are made across:

• home loans
• first home buying
• investment property
• business and complex lending
• equipment finance

So outcomes make sense when you encounter them.

Model Mortgages does not:

• provide personal advice
• recommend lenders or products
• replace professional guidance

Execution and advice are handled separately.

How most people think loans work (and why they get stuck)

Most first-time buyers assume:

• you find a property first
• the bank tells you how much you can borrow
• you get approved once
• interest rates determine everything

This is not how lending works.

People get stuck or surprised because:

• borrowing is reassessed repeatedly
• multiple assessment rules apply at the same time
• early decisions affect future options
• structure and timing matter as much as income

Understanding this before you buy changes outcomes dramatically.

How loans actually work (real-world mechanics)

Step 1: You are assessed before the property

Before a lender looks at a property, they assess you.

They assess:

• how your income is treated (not just how much you earn)
• how stable and reliable that income is
• what debts and commitments you already have
• how repayments are tested under stressed interest rates
• what lending policy applies at the time you apply

This determines what is possible — not what you hope to do.

Key things to understand

• Income types are treated differently
• Higher income does not automatically mean higher borrowing power
• Repayments are assessed at higher rates than the rate you actually pay

Deeper reference

• Income assessment (PAYG, bonus, overtime, self-employed)
• Serviceability & buffers
• Borrowing capacity basics

Step 2: Your first loan affects every future loan

Every loan you take changes how the next loan is assessed.

Existing loans:

• reduce borrowing capacity
• increase assessed repayments
• interact with policy buffers
• affect how future purchases are treated

This is why people often feel “capped” after their first or second purchase.

Key things to understand

• Borrowing capacity is not fixed
• Adding debt can reduce future options even if income stays the same
• Loan structure choices matter long after settlement

Deeper reference

• Fixed vs variable loans
• Offset vs redraw
• Interest-only vs principal & interest
• Why borrowing capacity can dry up faster than expected

Step 3: The property itself matters

Not all properties are treated equally by lenders.

Lenders assess:

• property type and security risk
• location and market acceptance
• whether the property is standard or specialised
• how the property affects future lending flexibility

A property can be “good” and still limit future options.

Key things to understand

• Some properties build usable equity, others do not
• Some properties are harder to lend against
• The wrong first property can stall future plans

Deeper reference

• Property types lenders assess differently
• Investment vs owner-occupied lending basics
• Why a good property can still block your next purchase

Step 4: Order matters (sequencing)

The order in which you make decisions matters.

Buying the right thing at the wrong time can:

• reduce borrowing capacity
• lock you into inflexible structures
• delay future purchases for years

This is called sequencing, and it is one of the most common mistakes people make.

Key things to understand

• Strategy matters more than speed
• Early decisions shape long-term outcomes
• Undoing mistakes later is often expensive

Deeper reference

• Why sequencing matters in lending decisions

Step 5: You are reassessed every time

You are not assessed once.

You are reassessed when you:

• apply for another loan
• refinance
• change ownership or structure
• change income
• add debt

Outcomes can differ even if “nothing has changed” from your perspective.

Key things to understand

• Timing affects outcomes
• Policy changes over time
• Forecasts do not override assessment rules

Deeper reference

• Why reassessment outcomes surprise people
• Why rate forecasts don’t automatically change borrowing outcomes

Common first-time mistakes (real-world)

People usually run into trouble because they:

• rely too heavily on pre-approval
• focus on interest rates instead of structure
• buy emotionally before understanding constraints
• assume income growth solves borrowing limits
• don’t think beyond the first purchase

This site exists to help you understand these mechanics before they become a problem.

See how this applies to your situation

Different people are constrained by different parts of the lending system.

You can answer a small number of questions to see:

• which assessment areas matter most for you
• what deserves attention now
• what is less relevant at your current stage

Start structure snapshot

(This is not a loan application and does not require documents.)

Deep reference library

Assessment explainers (complete answers to common questions)

These pages explain the questions people most often get wrong, in depth.

Examples include:

• Why borrowing capacity caps out
• Why higher income doesn’t always increase borrowing power
• Why sequencing matters
• Why reassessment changes outcomes
• Why rate changes don’t equal easier approvals

Browse all assessment explainers

Fact sheets (technical reference)

These pages explain loan mechanics, features, and structures.

Examples include:

• Loan types and purposes
• Repayment types
• Offset and redraw
• Fixed vs variable loans
• Ownership and structure basics

View all fact sheets

Start with the situation closest to yours (optional reading paths)

If you prefer grouped reference material, you can explore by situation:

• Buying your first home
• Buying or investing in property
• Rentvesting or buying interstate
• Australians living or working overseas
• Buying property through super (SMSF)
• Luxury or non-standard property
• Professional or complex income

These pages group relevant reference material together.

There is no required order, and you can switch at any time.

Guided learning (optional)

Some people prefer a structured walk-through rather than reference reading.

If you want step-by-step explanations covering:

• first home buying
• investing
• portfolio building
• lending mechanics

You may prefer guided learning options such as structured reading paths or courses, where available.

How to use this site

• You do not need to read everything
• Pages stand alone
• Use search freely
• Follow links only where relevant

This site is designed to help you understand how the system works, so you can make informed decisions when you’re ready.

Prefer to talk it through?

Many people use Model Mortgages to get their bearings — and then speak to a broker to help apply this information to their situation.

Talk to a broker

Execution and personal advice are handled separately.

Important note

This site provides general information only.

No personal advice is provided.

Model Mortgages

A reference site explaining how property and lending decisions actually work in Australia — across structure, policy, risk, and timing.