Whether you’re in the market for your first home loan or you’re refinancing your current one, whether you’re looking to invest or thinking about building, you will need to find the right home loan to suit your needs. But, if you think the property market is baffling, you ain’t seen nothing yet. Filled to the brim with complex jargon and small print, the world of home loans could hardly be called uncomplicated.
Luckily for you, Mate is here to help. Whether it’s LMI or LVR, offset or redraw, fixed rate, variable rate or split, we’re here to give you the lowdown on all things home loan. No jargon, no complicated terms, in this guide we’ll break down all you need to know about home loans, so you know what to look for when you apply for a home loan, and how to find the perfect home loan for your needs.
Before you even think about applying for a home loan, you need to start saving for a deposit. Building up a significant deposit can make your application seem more appealing to potential lenders. Not only that, it will help to reduce the amount you need to borrow, allowing you to save in interest overall, while decreasing your loan-to-value ratio.
Saving for a deposit is hard work, we’re not going to say otherwise. But while it may seem impossible, it’s something that simply needs to be done if you want to buy a house.
When you apply for a loan, your lender will ask for a cash deposit as security on the loan. This provides more collateral if you fail to make your repayments – so the bigger the deposit, the happier your lender will be. Having a larger deposit also proves to the lender that you’re committed to the purchase, and are financially secure enough to have saved up that amount of money.
When comparing home loans, you will likely hear the term LVR – or loan-to-value ratio – thrown around a lot. Quite simply, this is the amount of money you borrow for your home loan vs. the value of the property, expressed as a percentage. The more you put down as a deposit, the lower your LVR will be.
Your LVR is your mortgage amount, divided by the value of the property.
Say you want to buy a property worth $400,000 and have saved up a deposit of $90,000, you’ll need to borrow $310,000. You also choose to add $15,000 for additional costs (such as stamp duty) onto your loan making the total loan amount $325,000.
Your LVR will be $325,000 / $400,000 = 81%
(Property Cost + Extras – Deposit ÷ Property Value = LVR)
Why have LVRs at all? Lenders use LVRs to assess the risk on the loan. Borrowers with an LVR of 80% or under are typically described as ‘safe’, while those with higher LVRs up to 95% are seen as higher risk. With an LVR over 80% you may find it harder to get approved. If you do get approved, you may pay a higher interest rate on your loan, and you will have to pay lenders mortgage insurance (LMI).
TIP In the above example, choosing not to add on $15,000 for additional costs could be the best choice. Borrowing $310,000 on a $400,000 property would result in an LVR of 77%. This could make the loan more appealing to lenders, while also allowing for potential savings in interest and LMI.
From stamp duty to LMI, legal fees to inspections, there are plenty of extra costs to consider when buying a house. If you want to make sure you can really afford the property you are interested in, you need to take into account the various fees and charges you’ll be expected to pay.
Stamp duty is a tax you pay when you purchase a property. How much you pay in stamp duty will depend on the state or territory in which you live, but if you are a first home buyer you may pay a reduced amount, or no stamp duty at all. In addition to stamp duty, you may also pay a fee for the transfer of the title and the registration of the mortgage.
Often referred to as LMI, lenders mortgage insurance is a type of insurance designed to protect lenders should borrowers not be able to repay their loan. Applied to loans of ‘risky’ borrowers (those with an LVR above 80%), this insurance cost can be many thousands of dollars, which the borrower is expected to cover.
If you hire a professional – a solicitor or a conveyancer – to manage the legal side of purchasing a property, you will have to pay legal or conveyancing fees. While there are DIY options that allow you to avoid these costs, they may not be the best idea for the uninitiated.
Your lender may charge a variety of upfront fees to establish your home loan, such as application fees, documentation preparation fees and bank valuation fees. It’s a good idea to check what these fees are before you sign on the dotted line.
Finding out if there are any potential problems on your ‘dream’ property is best done before buying, rather than after. Which is why it’s a good idea to arrange inspections before making up your mind. These can include building inspections and pest inspections, and a strata report if you’re buying an apartment.
Unless you’re planning to haul boxes yourself – or you have a few favours to pull in from your mates – you may choose to bring in the professionals to deal with the big move. Hiring removalists can be expensive, so factor those costs into your budget.
Aside from the above upfront costs, you will also have to take into account the various set-up and ongoing costs associated with owning a property. These can include home and contents insurance (or landlord insurance if you are renting out the property); council, water and strata rates; telecommunications such as phone, internet and pay TV; and any maintenance and repairs on both the property and its contents.
If you are buying your first home, you may be eligible for the Australian government’s First Home Owner Grant. This grant could give you the boost you need to get into the property market, but what’s on offer to you will depend on the state or territory in which you live. To find out more about what you could be eligible for, check out http://www.firsthome.gov.au.
The type of home loan you choose will depend on the type of buyer you are. While there are other types of home loan out there, here are the two main options you will likely choose between.
With a standard home loan that covers both principal and interest, you will make regular payments to cover the principal amount borrowed plus the interest applied on the loan. As you pay down your loan, you build up equity in your home (this is the value of your property, less what you owe on it). You can choose fixed, variable or split rate loans on this type of loan, with features such as offset accounts and redraw facilities often available (we’ll get into those in more detail later).
Offering an alternative option, interest-only home loans allow you to only pay the interest on the amount you have borrowed, usually over a set period. After that period ends, the loan changes to a principal and interest loan, which means repayments increase significantly. So, why choose this type of loan?
Investors may opt for an interest-only loan as it allows them to minimise the amount of equity they have tied up in a property. They can then invest that money elsewhere while benefiting from any capital gains the property might offer. This type of loan may also work to increase their tax deductions, which reduces their tax payable.
However, owner-occupiers may also enjoy benefits from choosing an interest-only loan. Offering lower repayments at the start of the loan, this loan type could help borrowers maximise the amount they can borrow, or give them an opportunity to pay off other high interest debt. It’s worth bearing in mind that this type of loan can cost more overall, and it does come with some risks.
While a home loan can certainly be a handy tool, it certainly doesn’t come for free. Aside from the various fees you will be expected to pay your lender for graciously allowing you access to all that money, you will also have to pay interest. A lot of interest.
Say you were to borrow $450,000 over a period of 25 years with an interest rate of 5%, you would pay back a total of $789,197. Yes, that’s $339,197 in interest.
So, if you’re going to be shelling out that kind of money, it’s probably a good idea to learn a bit more about how interest works.
As you compare home loans, you may notice that there are two rates of interest attached to each loan. The first rate is typically the lender’s ‘advertised rate’, while the second is the ‘comparison rate’. What’s the difference? The advertised rate is the interest rate that will be applied to the loan, while the comparison rate factors in interest plus standard fees.
While both rates are useful, the comparison rate can allow for easier comparison between loan options, as it gives a better idea of the overall cost of the loan. However, while it’s useful for comparing loans, that comparison rate will not tell you the true cost of your loan. Comparison rates are created using an industry-wide formula, based on a $150,000 loan over a 25-year period.
When choosing a home loan, you will have the option of choosing a fixed rate loan, a variable rate loan or a split rate loan.
With a fixed rate loan, the interest rate applied to the loan is fixed for a specified period of time. This can make budgeting easier as repayments will always remain the same, and it can protect you should interest rates rise elsewhere in the market. However, fixed rate loans can be somewhat inflexible. Some don’t allow for extra repayments, and can charge a hefty break fee if you choose to exit the loan before the term finishes. Features such as offset accounts may not be available.
With a variable rate loan, the lender can raise and lower the interest rate over the course of the loan, usually following market fluctuations. Opting for this type of loan, you could take advantage of falling interest rates, but may also be subject to interest rate rises as well. However, this type of loan does tend to be more flexible, allowing for extra repayments and extra features such as offset accounts and redraw facilities.
For those who don’t want to go all-in with either a fixed rate or variable rate loan, a split rate loan could provide a worthy alternative. Allowing you to fix a portion of your loan while leaving the remainder on a variable rate, this option allows you to hedge your bets a bit.
Unfortunately, fees are another cost you’ll have to factor into your home loan comparison. While there are home loans that keep fees – and features – to a minimum, you will likely have to pay some fees no matter which loan you choose. Here are some of the most common home loan fees to look out for. Bear in mind some fees might be called different names by different lenders, but they should all be published in their product booklets, on their websites and in their credit contract.
Also called application fees, up front fees or set-up fees, an establishment fee is a one-off fee charged by the lender to establish the home loan. If you do not pay an establishment fee on your loan, you may pay higher ongoing fees, however, do not be afraid to negotiate on this fee, as some lenders will waive it for you.
Also called service or administration fees, these ongoing fees may be charged every month or every year for administering your loan.
You may pay a break fee if you break (exit) your fixed rate home loan. This fee is determined by the lender, and can be substantial. Typically, the more interest rates have dropped since the start of the loan, the higher the break fee will be.
Also called early termination, deferred establishment, deferred application or early discharge fees, early exit fees may be applied if you pay out your home loan within a specified period. Note, new loans established after 1 July 2011 cannot have exit fees.
Working in a similar way to early exit fees, discharge fees – also called termination or settlement fees – are charged when you pay out your home loan in full. Typically discharge fees are much smaller than early exit fees, and not all lenders charge them.
Home loans with a redraw facility may charge a redraw fee. This is a fee the lender may charge if you choose to withdraw money you have already paid into your home loan. This redraw fee may be $20-$25, but lenders often offer a certain number of free redraws each year.
Home loans can offer any number of features, providing added functionality and flexibility to borrowers. But, while these features can come in handy, be aware that you may pay more to have them included on your loan, either paying more in interest or in fees.
Just like credit cards, home loans can come with introductory offers designed to entice new customers. Introductory offers may provide a lower introductory rate – also known as a honeymoon rate – or even bonus rewards points for frequent flyer programs such as Virgin’s Velocity program. Before you get carried away though, make sure the loan suits you in the long term, and that you won’t end up paying through the nose just to enjoy the offer.
An offset account is basically a transaction account attached to your home loan, which allows you to reduce the amount of interest you pay. How does it work? If you have a $350,000 loan with $20,000 in your offset account, you will only be charged interest on $330,000. Bear in mind some loans only allow you to partially offset your home loan, so it can be a good idea to look for options that allow you to offset 100% of the interest to maximise your savings.
Some home loans allow you to make additional repayments outside of your set repayment schedule. Helping you chip away at your loan, these extra repayments can allow you to pay off your loan sooner, as you save on interest. This feature may be teamed with a redraw facility, which allows you to withdraw extra amounts paid in should you need to, often with fees attached.
So, now we’ve looked into the various ins and outs of home loans, it’s time to get into what you need to know to apply for one. Whether you’re an investor or an owner-occupier, a first home owner or a refinancer, it’s important to find the right home loan for your needs. Which of course starts with working out how much you can afford to borrow.
If there is one rule to live by in the world of home loans, it is don’t get in over your head. While you may have your heart set on a particular property, if buying it is going to lead to financial stress, then it just isn’t worth it. If you take out a loan you cannot afford, it’s going to lead to extreme stress as you try to cover your repayments each month, and may even result in you losing your home.
So, how much should you borrow on your home loan? Obviously, your deposit should give you a good starting point, providing an indication of the amount lenders will allow you to borrow. As we mentioned previously, aiming for a deposit that is at least 20% of the value of the property will put you in good stead for getting a home loan.
The next step involves working out what you can actually afford to pay back each month. Try using a budget planner to get a sense of what you currently spend your money on and where. This should tell you how much you can comfortably pay out on your home loan repayments each month.
All you need to do now is use a home loan calculator to see what those repayments equate to in terms of a total loan amount. Home loan calculators can also let you play around with options, lengthening and reducing the loan term to find out not only what you can afford, but how you can save on interest and even fees.
When calculating how much you can afford to borrow, don’t forget to take into account all the extra costs that go along with buying and maintaining a property.
At Mate, we know a thing or two about comparison. It’s what we do after all. Whether it’s home loans – or anything really – we make it easy for you to compare the various options available, so you can choose the right one for you. But for you to make the right choice, you need to know what to compare.
As we’ve already discussed how to work out whether a loan is affordable or not, we’ll not go into it again. However, it is important to keep the affordability of each loan in mind when comparing all your options side by side.
It’s all very well being able to afford a loan, but you want to make sure you get the best deal as well. Use a home loan calculator to compare the overall cost of each loan you’re interested in, taking into account fees and interest. Bear in mind, when you pay less in fees, you may pay more in interest, so weigh up your options carefully.
While the overall cost of the loan is important, you also need to think about flexibility. Cheaper loans tend to have fewer features, which means less flexibility. Features such as an offset account or the ability to make extra repayments could make the loan more expensive in theory, but by using them, you could save on interest to pay off your loan sooner.
When comparing home loans, check the flexibility of repayment frequency as a feature on each loan. Some loans allow for repayments to be made weekly and fortnightly as well as monthly, which could not only work better for your budget if you get paid weekly or fortnightly, it could also save you big in the long run. How?
Many lenders calculate fortnightly rates as half of a monthly repayment, and weekly rates as a quarter of a monthly repayment. But there aren’t exactly two fortnights or four week each month. While there may be 12 months in a year, there are 26 fortnights, or 52 weeks. By paying fortnightly or weekly, you will be tricking yourself into paying two extra fortnights or four extra weeks of repayments, helping you pay back your loan faster.
One of the best things about home loan comparison is that it allows you to choose the loan that best suits your needs. Whether that means finding a variable rate, fixed rate or split rate home loan, whether it means finding a no-frills or feature-packed option, you can compare your options to find the most suitable home loan for you.
No matter what type of loan you’re applying for, eligibility is key. Even if you find a loan that couldn’t be more perfect, if you don’t meet the lender’s eligibility requirements, then you’re not going to get approved. Eligibility can revolve around income, credit worthiness, assets and debts, and property deposits, so be sure to read the small print carefully to make sure you tick all the lender’s boxes.
Once you’ve narrowed your search, utilise the key facts sheet for each loan to dig a little deeper. Key facts sheets use a set format, so you can easily compare each option side by side, to fully understand what they will cost in fees and interest.
While you may be thinking about simply applying for a home loan with your current bank, there are lots of other lenders out there. Sure, there are certain advantages to sticking with a bank that knows you, but there can be advantages to shopping around to find out what other lenders have to offer. Doing so could get you a better deal, providing the options you need, for a much lower cost.
You can use Mate to compare lenders and their offering thoroughly, helping you to see what each could offer in terms of features and overall cost. You don’t need to go for the big banks if you don’t want – in fact, smaller providers may be able to save you money in both fees and interest. If you see a lender you are unfamiliar with, do some background research to see what other borrowers have to say.
All lenders featured on Mate are either licensed with ASIC or are an authorised representative of someone who is licensed. However, if you are comparing options elsewhere, be sure to search ASIC's Professional Registers to check that any potential lenders you are interested in are properly licensed.
You want to get approved, right? Well, you need to know what’s expected of you. Improving your chances of getting approved for a home loan start with getting an understanding of why certain applications are rejected. Here are some common reasons home loan applications are denied.
If your application is rejected, it’s usually best to avoid applying for another home loan straight away. Instead, it could make better sense to assess your financial situation first, pay off some debts and build your savings, to apply again later on down the line.
What will the lender ask for when you apply? While the specifics will depend on the lender, most lenders will look at the following:
Evidence of this is typically provided in the form of payslips, bank statements showing your salary being deposited, or a letter from your employer. If you’re self-employed, the lender may ask for your accountant’s details and your last two years of financial statements, as well as your personal tax return and company tax return, if you have one. If you have money coming in from any other sources, such as shares or a rental property, you’ll also have to provide evidence of this.
This could mean providing your superannuation balance, your bank balance, and a list of any shares, property or other assets you own. Some lenders may require evidence of your ability to acquire ‘genuine savings’, although what constitutes genuine savings can vary from lender to lender.
Your credit history shows how you have dealt with credit in the past, helping to provide potential lenders with an indication of how you might deal with it in the future. Providing a score out of 1,000 or 1,200, your credit score is based on factors such as what kind of credit you have in your name, your history of making repayments on time, and whether you have ever been declared bankrupt or have any judgments against you.
The lender will want to know what you spend your money on currently, to work out whether or not you will be able to afford your potential home loan repayments, now and in the future. This may include your living costs, such as how much you spend on groceries and entertainment, as well as ongoing costs, such as insurance premiums, utilities and childcare expenses. Creating a monthly budget can help you better provide this information.
Most lenders will ask for a copy of the front page of the signed contract for sale. Lenders may also organise a valuation of the property, especially if you don’t have a large deposit.
There’s no doubt buying a house is a big deal. Unless it’s something you’ve done many times before, it could be worthwhile getting the opinion of an expert before you jump in. Once you’re sure of what you’re doing, we’re here to help you onto the next stage of finding a home loan. We’re here to make the process of finding and comparing home loans as simple as possible, which is no bad thing when it comes to a job as important as this.