Most people who purchase property require a home loan to do so. Properties in Australia can be expensive and saving enough cash to pay for it is often a challenging hurdle. With a home loan, you could save a bit of money for the deposit and the lender provides the rest so you can make the purchase. In this article, I will break down how this works.
What is a home loan?
A home loan, or mortgage, is where a bank or lender lends you money to go toward buying property. You borrow a lump sum and then pay it back over time with interest. You can usually choose how regular you make repayments, such as fortnightly or monthly.
You usually need to provide a deposit to show the lender you have good money-saving habits and the property itself is used as security for the loan. This means the lender has the right to take possession of your property if you don’t make your repayments.
How do you get a home loan?
To get a home loan you can either go directly to a lender, or speak to a broker who can compare your options and suggest the right loan and lender for your circumstances. You apply for a home loan when you have made an offer that has been accepted for property, though it is a good idea to get pre-approval before you make any offers to ensure you understand your borrowing capacity (the amount a lender may be willing to lend to you). You can use free online borrowing capacity calculators to get an understanding of how much this might be for you.
When you have chosen a loan you would like, you complete an application form. This enables the lender to look at your financial situation to determine how much it may be comfortable lending to you and whether you could meet the repayments. You will need to provide documents such as recent payslips and identification, plus provide access to your savings account statements so the lender can see your savings habits.
If your loan is approved, you will be provided with a loan offer outlining the loan amount, interest rate, repayment schedule and any terms and conditions. If you are happy with this, you will sign the documents. On settlement day the lender will transfer the funds to the seller and the home becomes yours.
What to consider when looking for a home loan
Not all home loans are built equal. You have a number of choices, including:
- Interest rate type: You can choose between fixed rate (where it remains the same for an agreed period of time, usually 1, 2, 3 or 5 years), variable (where the rate can change up or down depending on market conditions), or split (a combination of the two).
- Principal and interest or interest only: Principal and interest involves paying both the interest and an amount toward paying down the loan. Interest only often comes at a higher interest rate and for a set time period.
- Property use: If you are planning on living in the property, you would apply for an owner-occupied loan. If you are purchasing it as an investment property, you would apply for an investor loan.
- Loan term: This is how long the repayments are stretched out for. This is usually 25 or 30 years.
How big does my deposit have to be to get a home loan?
Most commonly you will be asked for at least 20% of the total purchase price. If you have less than this, you may be required to pay lenders mortgage insurance (LMI), which is an insurance policy designed to protect the lender should you not make your repayments. There are scenarios where you could get a home loan with less than a 20% deposit without having to pay LMI; these include government schemes for eligible first-home buyers and some lenders offering more leniency for people in some professions such as healthcare workers and accountants. Speak to your broker to see if you are eligible.
There is a lot to consider when choosing the right home loan for you. It is a good idea to do your research and speak to a professional to make sure you are making an informed decision.
By Steph Thomas
About Steph Thomas
Steph is a senior finance broker for Loan Market, Australia’s most trusted and largest independent brokerage. With over 20 years’ experience working for lenders and then as a mortgage broker, Steph is passionate about helping customers achieve home ownership and build equity. She has access to a panel of over 60 lenders to help aspiring homeowners find the right solution, regardless of their situation.
The Viewfinder: What’s Your Take?
How do you feel about this article?
