Whether you’re a first home buyer or a seasoned investor, securing the right home loan takes time and patience. There is a lot to wrap your head around; the different products that are available, the jargon, the paperwork, and the application process. It can be overwhelming. To help you navigate your way through the process, here is our guide to everything you need to know about getting a home loan.
1. Home loan deposit & Lenders Mortgage Insurance
The first step, and often the most time consuming, is saving for that all important deposit. Ideally, you want to have up at least 20 per cent of the property’s value saved, but you can have as little as 5 per cent.
If your deposit is less than 20 per cent you will have to pay Lenders Mortgage Insurance (LMI), which is a condition of home loan borrowing that helps protect lenders against you failing to make a home loan repayment. This can be a one-off payment, or you can roll it into your monthly mortgage repayments. The amount you pay in LMI is dependent on how much your deposit is. For example. If you have a 5 per cent deposit, you will pay more for LMI than someone who has a 15 per cent deposit.
2. Employment stability
Whether you’re a permanent employee or self-employed, lenders need to know that you can service a loan. Being employed at the same company for at least six months gives the lender some level of assurance. If you are a contractor or self-employed, you need a minimum of one to two years of being self-employed to show that you’re able to service the loan.
To prove your employment status and income you need to provide documentation. For employees, you need your last two payslips, contractors and the self-employed need tax statements for the past two years. If you have multiple sources of income, you will need to provide documentation for each source. Some lenders may also require a letter of employment to support your documentation.
3. Clear your debts and crunch the numbers
Lenders will be looking into your finances and lifestyle to make sure that you live within your means. Any outstanding debt that you have will work against your borrowing capacity. Lenders will assess your debt to income ratio, so if you have any personal loans, credit cards, car finance or student debt, pay it off before you speak to lenders. Also, avoid taking out any personal loans or spending on your credit card while you’re in the process of applying for a home loan.
Aside from the initial deposit, you will also need to make sure you have enough money to cover the fees that pop up during the process, including stamp duty. Crunch the numbers, look at how much you are willing to borrow (not how much you can borrow) as you don’t want to overstretch yourself, putting a strain on your day-to-day lifestyle.
4. The documents you need
Before meeting with the lender, get your documents in order. All applicants will need to provide:
- Personal identification. Birth certificate, passport, driver’s license, Medicare card etc
- Proof of income. If you are an employee; two recent payslips and your most recent Payment Summary. Contractors and self-employed; personal and business tax returns and an Australian Taxation Office assessment
- If you have rental income. A signed lease, most recent rental statement and tax return
- Bank statements showing savings and investment history
- Most recent bank statements for bank accounts and credit cards
- A copy of the Contract of Sale of the property you are buying
- Supporting evidence if other funds are contributing towards the deposit – e.g. family guarantor or a monetary gift
Depending on your situation, such as refinancing or second investment property, you will need to provide further documentation.
5. Available home loans
There are a variety of home loans to choose from, and selecting the right one for you is the most critical part of the process. It’s important to educate yourself on the different types of home loans, their overall product features and the interest rates. It’s a competitive market, so shopping around and negotiating with your lender will pay off.
To start you off, here is a basic overview.
Fixed Rate Home Loan
With a fixed rate home loan your repayments will be charged at the same interest rate for one to five years, depending on the agreed terms. The benefit of this type of loan is that you know exactly what your repayments will be, helping you stay in control of your budget.
Variable Rate Home Loan
A variable home loan starts with a low-interest rate, and after a fixed term begins to fluctuate with the market as set by the Reserve Bank, therefore repayments can vary. What makes this type of home loan so appealing is that you can package other products (credit or debit cards) with this type of home loan.
Home loans with redraw facilities
Getting a home loan with redraw facilities provides you with the flexibility to repay more than your minimum repayment amount and if needed, withdraw from it at a later date. The balance you would be able to draw from is the extra payments you have made on top of your required monthly repayments. There are a lot of financial and tax benefits to this, so talk to your lender about whether this is a good option for you.
When considering what home loan to get and which products to bundle with it, you need to consider your current situation and how your life circumstance will change over the coming years – will you get married, have children, career advancement or changes? Arming yourself with this information will help determine what loan features are best for you.
Want to know more? Australian Securities & Investment Commissions talks about the different types of home loans available in more detail
Time for pre-approval
Once you have all your paperwork and finances in order, the lender will provide you with a home loan guarantee or pre-approval certificate, which means, subject to conditions, you have been approved for a set amount to purchase a property.
The home buying process can take longer than expected, so if three to six months has lapsed, visit your lender to ensure your pre-approval still stands. If too much time has passed, you may have to reapply.
Five things to avoid before applying for a home loan
- Taking out personal loans and vehicle finance
- Credit card debt
- Missing repayments on existing loans and credit cards
- Spending your savings
- Changing jobs
Five things you should do before applying for a loan
- Save as much money as you can
- Pay off all debt and personal loans
- Get all your documentation in order
- Educate yourself on different home loans and their features
- Shop around for a lender