Common Home Loan Mistakes to Avoid: A Friendly Guide to Smarter Home Buying

You’ve spotted the perfect property online, booked an inspection, and started daydreaming about paint colours and backyard BBQs. But then your loan application gets rejected—and just like that, the dream is over.

Buying a home is one of life’s most exciting milestones—but it can also be one of the most stressful if you’re not prepared. For most Australians, securing a home loan is part of the journey. While mortgages are a standard part of homeownership, navigating the loan process can be a minefield if you don’t know what to watch out for.

Whether you're a first-home buyer or someone looking to refinance or upgrade, it's crucial to avoid the most common mortgage pitfalls. These mistakes can cost you thousands of dollars, delay your dream of owning a home, or even result in financial hardship down the track.

But don’t worry—we’re here to help. In this guide, we’ll break down the most common mortgage mistakes Australians make, and more importantly, how to avoid them. Let’s dive in.

1. Not Knowing Your Borrowing Power Before House Hunting

You’ve spotted the perfect property online, booked an inspection, and started daydreaming about paint colours and backyard BBQs. But then your loan application gets rejected—and just like that, the dream is over.

Why this happens: Many people start house hunting before they know how much they can actually borrow. Your borrowing power depends on a range of factors including income, expenses, credit history, current debts, and loan type.

The fix: Get pre-approval before you fall in love with a property. This gives you a realistic understanding of your budget and shows sellers you’re a serious buyer. Most lenders offer conditional pre-approval, which is typically valid for 3–6 months.

2. Overstretching Your Budget

Sure, you might be able to borrow a large sum, but that doesn’t mean you should. Just because a lender approves you for $800,000 doesn’t mean it’s wise to max it out.

Why this is risky: Overborrowing can leave you financially vulnerable if interest rates rise (as we've seen in recent years), or if your income unexpectedly drops. You’ll also have less wiggle room for emergencies or lifestyle expenses.

The fix: Stick to a comfortable repayment level not just what a bank says you can afford. Use online mortgage calculators to simulate different repayment scenarios and factor in rate increases, property maintenance, and personal goals like travel or starting a family.

3. Ignoring the Comparison Rate

When shopping around for home loans, many borrowers focus on the advertised interest rate. But that’s only part of the picture.

Why this is misleading: The advertised rate often doesn’t include fees and charges that come with the loan. That’s where the comparison rate comes in—it combines the interest rate and most upfront and ongoing fees to give you a better idea of the true cost of the loan.

The fix: Always compare comparison rates, not just headline rates. A loan with a lower advertised interest rate but high fees might end up costing you more in the long run.

4. Choosing the Wrong Loan Type

Not all mortgages are created equal. Choosing the wrong loan structure can cost you money or limit your flexibility.

Common mistakes:

• Picking a fixed-rate loan when rates are expected to fall.

• Choosing variable when you want repayment certainty.

• Ignoring offset accounts or redraw facilities.

  
  

The fix: Do your homework and think about your short- and long-term financial goals. Talk to a mortgage broker or lender about the pros and cons of:

• Fixed vs variable rates

• Principal & interest vs interest-only repayments

• Offset accounts

• Split loans (a mix of fixed and variable)

  
  

Each option comes with different benefits and risks, so what’s right for someone else might not be right for you.

5. Forgetting About Other Buying Costs

It’s easy to focus solely on the deposit and mortgage repayments—but there’s more to buying a home than the loan itself.

Common hidden costs include:

• Stamp duty (which varies by state)

• Conveyancing/legal fees

• Building and pest inspections

• Lender’s Mortgage Insurance (LMI) if your deposit is under 20%

• Loan establishment fees

• Moving costs and utility connections

  
  

The fix: Budget for the full cost of buying, not just the deposit. Some online calculators can help you estimate stamp duty and other fees specific to your state. If your deposit is small, consider saving a bit longer or checking whether you qualify for any government grants or schemes.

6. Not Shopping Around for the Best Deal

Loyalty is great—for friendships, pets, and coffee shops. But when it comes to mortgages, loyalty to your current bank might cost you.

Why this happens: Many people just go with their current bank or the first lender they talk to. But different lenders offer different rates, features, and approval policies.

The fix: Compare home loan offers from multiple lenders or use a reputable mortgage broker. Even a small difference in interest rate—say 0.25%—can save you thousands over the life of the loan. Don't be afraid to negotiate either; some lenders will waive fees or offer cashback deals to win your business.

7. Letting Your Credit Score Slip

Your credit history plays a big role in whether your mortgage application is approved and what rate you’ll get. But some borrowers don’t check their credit file until it’s too late.

Common issues:

• Unpaid bills or defaults

• Too many credit card applications

• High credit card limits, even if unused

• Inaccurate information on your file

  
  

The fix: Check your credit report (you can do this for free once a year via Equifax, Experian or illion in Australia). Pay down debts, reduce credit card limits, and avoid applying for multiple loans or cards before your mortgage application.

8. Taking on New Debts

Before and during the home loan process, make sure you consider the potential impact of applying for new lines of credit such as personal loans and credit cards. These new debts can affect your overall financial health, reducing your borrwoing capacity, and can potentially jeopardise your home loan being approved. 

9. Not Understanding Lender’s Mortgage Insurance (LMI)

Lender’s Mortgage Insurance is one of the most misunderstood parts of a home loan. Many buyers don’t realise they have to pay it—or what it covers.

The myth: That LMI protects you, the borrower.

The truth: LMI protects the lender, not you, in case you default on your loan. It’s typically required if your deposit is less than 20% of the property’s value.

The fix: Try to save a 20% deposit if possible, or explore alternatives like:

• Asking a family member to act as a guarantor

• Using the First Home Guarantee scheme (for eligible buyers)

• Negotiating a lower LMI premium if you're close to 20%

• If you're a First Home buyer, consider the First Home Guarantee Scheme

Another fix is to add LMIto the loan (capitalising it). This means your loan amount will be higher but it can be a good solution in the right circumstance.

9. Forgetting to Review Your Loan Regularly

You’ve signed the paperwork, moved in, and started making repayments. Job done, right? Not quite.

Why this matters: The home loan market is constantly changing. If you "set and forget" your mortgage, you could be missing out on a better deal—or paying too much.

The fix: Review your loan every 1–2 years, especially if interest rates have moved or your financial situation has changed. Refinancing could lower your repayments, unlock equity, or give you access to better features.

Some lenders offer incentives like cashback offers for refinancing, so it's worth keeping an eye out.

10. Going It Alone When Help Is Available

Home loans can be complicated, especially with all the jargon, policies, and paperwork. Trying to do it all yourself might lead to mistakes or missed opportunities, not to mention how time consuming it can be. It doesn't make sense to attempt such an important decision involving such large amounts of money without qulified, expert advice.

Why this happens: Some buyers worry that using a broker will cost them extra or think that it’s only for complex cases.

The fix: Consider using a mortgage broker, especially if you're unsure which loan is right for you. For a lot of loans Brokers are usually paid by the lender. For more complex ones (Like commercial or SMSF Loans), they charge a brokerage. Brokers can help you compare a range of products from from different lenders and answer questions that pertain to your circumstances. They’ll also help with paperwork and liaise with the lender to make the process smoother.

Be sure to choose a broker who’s accredited, transparent, and has access to a wide panel of lenders.

Final Thoughts: Home Loan Mistakes to Avoid

Buying a home is a big financial commitment—and the mortgage you choose can have a huge impact on your future wealth, lifestyle, and peace of mind.

The good news? With the right advice and a bit of homework, you'll know these common home loan mistakes to avoid and make confident, informed decisions. Whether you're a first-time buyer, upgrading, or refinancing, being mortgage-savvy is one of the smartest financial moves you can make.

Remember:

• Know your numbers

• Read the fine print

• Ask lots of questions

  
  

By steering clear of these traps, you’ll be well on your way to owning your home with confidence—and maybe even a little extra cash in your pocket.

Need Help Navigating the Home Loan Maze?

If you’re feeling overwhelmed or just want a second opinion, reach out Etairos Finance for the right advice and guidance. We can save you time, stress, and money.

Happy house hunting!