For many individuals, taking out a mortgage is one of the most significant financial commitments they will make. As an accountant, I frequently help clients understand the ins and outs of mortgages. A clear grasp of how a mortgage works is crucial for making informed financial decisions, especially when it comes to buying a home. Here’s an overview to help demystify mortgages.

1. What is a Mortgage?

  • Basic Definition: A mortgage is a type of loan used to purchase property or land. The loan is secured against the value of your home until it’s paid off.
  • Security for the Loan: If you can’t keep up with your mortgage repayments, the lender may take possession of your property.

2. Components of a Mortgage


  • Principal Amount: This is the amount you borrow to buy your property.


  • Interest Charges: Lenders charge interest on the loan, which is the cost of borrowing money. The interest rate can be fixed, variable, or a combination of both.

3. Types of Mortgages

  • Fixed-Rate Mortgage: Offers a fixed interest rate for a certain period, providing consistency in repayments.
  • Variable-Rate Mortgage: Has an interest rate that can change, meaning repayments can go up or down.

4. Mortgage Repayments

  • Regular Payments: You repay the mortgage over an agreed period, known as the loan term, which often spans 25 to 30 years.
  • Repayment Components: Each repayment includes a portion of the principal and the interest.

5. Features of Mortgages

  • Offset Accounts: Some mortgages offer offset accounts which can reduce the interest paid.
  • Redraw Facilities: Allows you to withdraw extra payments you’ve made on your mortgage.

6. Costs Associated with Mortgages

  • Upfront Costs: Include application fees, legal fees, and stamp duty.
  • Ongoing Costs: Include your regular repayments and any account-keeping fees.

7. Applying for a Mortgage

  • Eligibility and Application: Lenders assess your income, debts, credit history, and savings to determine your eligibility and how much they will lend.
  • Documentation: You’ll need to provide various documents, including proof of income, employment, and identification.

8. Tax Considerations

  • Tax Deductibility: Generally, the interest on your home mortgage is not tax-deductible in Australia. However, if you’re buying a property as an investment, the interest may be deductible.

9. Seeking Professional Advice

  • Financial Planning: It’s advisable to consult with a financial advisor or accountant to understand how a mortgage fits into your overall financial plan.
  • Mortgage Brokers: Mortgage brokers can help you navigate different loan options and find the best deal for your circumstances.

Understanding how a mortgage works is essential for anyone looking to purchase property. It involves not only the commitment to repay the borrowed amount with interest but also a comprehensive understanding of the loan’s features, associated costs, and the implications on your personal finances. With the right knowledge and professional advice, you can confidently navigate the process of securing a mortgage that aligns with your financial goals.