One of the most daunting parts of adulthood is purchasing a home.
Rising home prices have outpaced wage growth in many markets all over the world, which makes homeownership more difficult than it was for previous generations. It’s more important than ever to put in the time, work and research it takes to get the best possible home loan rate.
It’s worth it — home ownership is still one of the best ways to increase stability and wealth. Whether you’re upgrading from your starter home, purchasing an investment property or buying your first home, we have answers to the questions you’re going to have as you navigate the home loan process.
What is a home loan?
It may seem obvious, but a home loan is a loan used to buy a house or apartment. You may have heard it called a mortgage; they’re the same thing. It’s a secured loan in which the buyer is allowed to occupy the home that’s being purchased, which also serves as collateral for the loan. Typically, a home loan requires a down payment and is repaid over time in monthly installments with interest.
What types of home loans are there?
In Australia, you have a few different options for home loans.
A standard loan consists of principal and interest. You make monthly payments to cover the principal (the amount borrowed) and the interest. As you pay down the loan, your equity increases. Standard loans can have fixed or variable interest rates (more on those below).
A split loan, or partially fixed loan, is a loan for which you pay a fixed interest rate for part of the loan, and a variable interest rate on the rest.
Standard home loans versus split loans: Which type of loan is best for you?
Each type of home loan has advantages and disadvantages, so you’ll have to weigh the options to decide for yourself which is right for you. What’s the best type of loan for one person may not be the best type for another.
Where do you get a home loan?
Banks were once the only place to go looking for a home loan. But today, financial institutions that specialize in loans or even only offer loans have created a landscape of choices for homebuyers. Going to a mortgage broker instead of a bank gives you access to a wider variety of lenders and offers, meaning you can shop around for the best possible deal.
What is a home loan rate?
A home loan rate is the interest rate paid on the loan. It’s typically expressed as a percentage of the principal, or the total amount borrowed.
What types of home loan rates are there?
Home loan rates are generally either fixed-rate, meaning the interest rate stays the same for a predetermined part of the loan (usually 1-5 years), or variable rate, meaning the interest rate changes over time. Variable rates can track a Standard Variable Rate (SVR) set by the bank, or central bank rates.
If you’re looking into home loans for first time buyers, you may see ‘honeymoon offers,’ or loans that sort of combine the two types of interest rates. These offers come with discounted variable rates in the beginning of the loan term, then move to the bank’s SVR after a predetermined amount of time.
What type of home loan rate is best?
When it comes to choosing a type of loan rate, it’s best to shop around and do the math to try to choose the least expensive option.
How is a mortgage rate calculated?
The prospective buyer’s creditworthiness is the single greatest factor affecting the rate you will be offered. If you have great credit, you’ll likely get a better rate. Poor credit home loans, on the other hand, are not known for having great terms. Besides credit, there are two common methods lenders use to make loan rate calculations
First, they determine the loan-to-value ratio, which compares the amount of the loan to the value of the collateral. You can lower this ratio by paying a higher down payment. This shows the lender you’re less likely to default since you’ve put more of your own money at risk, and may lead to a lower rate.
The other calculation lenders are likely to make is the debt-service coverage ratio of the loan, which determines the buyer’s ability to make the required payments by dividing your monthly net income by the monthly payment amount. The higher this ratio, the more likely the lender is to assume you can cover the cost of the loan and offer you a lower rate.
How much of a deposit should you pay for a home loan?
A good rule of thumb is you should make as much of a deposit as you can, since it will help you qualify for lower interest rates. Putting down 20 percent of the purchase price of the home is a good figure to aim for, but if you can put down more, even better. No down payment home loans are rare and likely to come with higher interest rates, and putting down less than 20 percent may mean you’re required to purchase lender’s mortgage insurance, which you should try to avoid (more on that below).
What is lender’s mortgage insurance (LMI)?
Lender’s mortgage insurance transfers part of the loan risk to a mortgage insurer, which helps protect the lender in case you default on the loan.
Will you need LMI for your home loan?
Most lenders will require LMI if your LTV is greater than 80 percent, meaning you own less than 20 percent of the home. You should avoid having to purchase LMI if you can, because it adds to your costs without adding any value for you, the buyer. There are a few ways to do this. Avoid home loans with no down payment or low down payments. You can pay more than 20 percent down when securing your home loan. You can also use a second mortgage to put down more than 20 percent. A common program is called an 80-10-10 mortgage, in which you finance 80 percent of the home cost in your first mortgage and 10 percent of the home cost in a second mortgage, allowing you to put 10 percent down and avoid paying for LMI. The rate on the second mortgage is likely to be higher than the rate on the first, but in the long run, this could save you more money than if you were to purchase LMI.
How much can you borrow for your mortgage?
This will be up to the lender. When you apply for a loan, the lender will look at your financial information and make you an offer of a loan amount and an interest rate. If the terms are acceptable to you, you can start shopping for a home within the price range of the loan you were offered.
How long will you be repaying your home loan?
This also depends. 15-30 years is standard, but you and your lender can discuss the loan term and agree to a different amount of time.
What are conveyancers and solicitors, and do you need their help with your mortgage?
Conveyancers and solicitors are professionals that will help you navigate the legal aspects of purchasing a home and ensure all your rights are protected throughout the buying process. In most Australian states, you can choose whether you want to use a conveyancer or a solicitor, but a few states require a solicitor, who typically will have a broader knowledge of law than a conveyancer. Their job is to protect you and you should choose one to help you before you start shopping for homes.
How do you know a home loan lender is trustworthy?
All lenders and brokers must be licensed with the Australian Securities and Investments Commission. Before working with a lender, you should search for him or her on ASIC Connect’s Professional Registers or call ASIC’s Infoline on 1300 300 630.
What should you do before applying for a home loan?
Before you apply for a loan, there are some requirements for a home loan you can start preparing ahead of time to make the process go more smoothly.
First, check your credit history. Home loans for people with bad credit tend to come with higher interest rates and less favorable terms, so if your credit is struggling, now is the time to fix it. If you have any outstanding debt, paying it off before applying for a home loan will help your credit and could help you secure a better rate.
Then, gather all of your income information. This will include salary or wage information like pay stubs or bank statements. You should also have tax information for the prior two years handy. If you have any other income sources, like investment properties, government assistance or help from family, include that information as well. You will also need evidence of all your assets, especially “genuine savings,” or savings that have been in a saving account for several months. The key is to paint as clear a picture as possible of what you can afford to repay, so your lender can give you the best possible offer.
Your lender may also want to see information about your living costs, so gather that as well.
Lastly, before applying for a loan, get an idea of what you can afford to borrow. A home loan calculator is a good way to do this.
What should you do before accepting a mortgage offer?
Once you’ve been offered a loan, your work is not done. As of 2012, all lenders in Australia are required to provide you with a key facts sheet about your loan if asked. These sheets come in a set format, making it easy to compare different loans to choose which one you want to accept.
Read all the terms of your loan carefully, and if there’s anything you don’t understand, talk to your conveyancer or solicitor. Do not ever sign for a loan if there are any terms you don’t understand.
Before applying for a loan, you should already have a good idea of what you can afford. But it’s not a bad idea to check a loan payment calculator with the terms of your offered loan, just to be sure you can comfortably make the payments.
Are there any special deals for first time home loans?
The Australian government offers a First Home Owner Grant scheme, and you may be eligible for a one-time payment if you are purchasing your first home.
Purchasing a home is a daunting process, and it should be — it’s one of the largest financial decisions most people will make in their lives. But with some preparation and research, you can ready yourself for the process and make sure you get a great deal. Good luck, and welcome home!