Home Loans

Home Loans 101

Key home loan types and aspects explained, plus what they mean for your savings.

What is the home loan application process?

The home loan application process can be quite lengthy but isn’t too complicated. It will generally involve the following steps:

  1. Gathering your required documents
  2. Comparing home loan providers
  3. A preliminary assessment by the lender
  4. Submitting your application to the lender
  5. The lender completes a property valuation
  6. The lender approves or rejects the loan
  7. They send you an offer
  8. The loan is settled and the funds are advanced to you.

How to get a mortgage pre-approval

Documents needed for a home loan pre-approval

Home loan pre-approval approves you to borrow up to a certain amount, giving you a good idea of what you can and can’t afford. The documents needed for home loan pre-approval include:

  • Proof of income (payslips, tax returns etc.)
  • Bank statements and proof of savings
  • A list of your current assets and liabilities (e.g. credit card and personal loan debt)
  • 100 points of ID (driver’s license, passport, Medicare card etc.)

Getting pre-approved doesn’t guarantee your home loan application will be successful.

Below are some low variable rate home loans for refinancing this month.

Provider Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
Purchase or Refi, P&I 80% Smart Home Loan 2.88% 2.90% $1,660 More details
Discount Variable 80% 3.07% 3.09% $1,702 More details
Base Variable Rate Special P&I 3.20% 3.20% $1,730 More details
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
Purchase or Refi, P&I 80% Smart Home Loan
2.88% 2.90% $1,660
More details
Discount Variable 80%
3.07% 3.09% $1,702
More details
Base Variable Rate Special P&I
3.20% 3.20% $1,730
More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 1 November 2019. View disclaimer.

How long does a mortgage pre-approval last?

Mortgage pre-approval, or conditional approval, usually lasts between three and six months with most traditional lenders. They don’t like to do pre-approvals for longer than this as people’s financial position can change, as can the property market.

Getting pre-approved for a loan amount can give you a better idea of your borrowing power, speeding up the application process.

How big a mortgage can I get?

Technically there’s no limit to how much people can borrow for a home loan, but how much you can borrow will depend on:

  • Your annual pre-tax salary
  • Other regular income you receive (rental income, second jobs etc.)
  • Your monthly living expenses
  • Your regular loan and credit repayments
  • Your savings history
  • Your number of dependants (usually children)
  • Your marital status
  • The type of home loan (owner-occupier, investor etc.)
  • The length of your home loan

Different providers will allow you to borrow different amounts, so speak to someone from multiple different lenders to see which one is best for you.

Common home loan requirements

Applying for a home loan can be a lengthy process, but you can speed it up by knowing what you’ll need:

  • A house deposit (at least 5%)
  • A credit history (a good score will improve your chances)
  • A stable income (the higher the better)
  • A lack of debts
  • Photo ID (driver’s license, passport etc.)
  • Bank statements and payslips
  • Council rates for any other properties you own
  • Other documents such as the First Home Owner Grant

Criteria for first time home buyers

The First Home Owners Grant has different requirements and eligibility details in every state, but the way it generally works is:

  • You need to be a permanent Australian resident and at least 18 years old
  • You need to buy a new or current house as an individual
  • You must not have used the grant previously
  • You must not have owned a home since the year 2000
  • You must plan on living in the house for a minimum of six consecutive months

Check your state’s eligibility details for more information.

Lenders mortgage insurance (LMI)

Is lenders mortgage insurance a one-off payment?

Yes, lenders mortgage insurance is a one-off payment, paid during the settlement of the loan. It is not required to be paid regularly like your mortgage repayments, so you’ll need to factor the lump-sum LMi payment into your budget before buying a house.

Loans with a deposit of less than 20% will usually require you to pay lenders mortgage insurance.

Is lenders mortgage insurance refundable?

Lenders mortgage insurance (LMI) is not refundable, at least not for loans settled after 2012. So if you switch to another lender or exit your home loan entirely, you won’t be eligible for a lenders mortgage insurance refund. To avoid paying lenders mortgage insurance entirely, try to pay a deposit of at least 20%.

How to get a home loan with no LMI?

PMI (private mortgage insurance) – also known as LMI (lenders mortgage insurance) – can be avoided by paying a deposit of 20% or greater on your home loan. PMI is designed to protect the lender in the event of loan default which they see as more likely with a lower deposit.

This is a general rule but isn’t always true – some lenders won’t charge LMI with a deposit of less than 20%. Check their PDS (product disclosure statement) to see what their requirements are.

Saving for a home deposit

How much deposit is required for a home loan?

The amount needed for a house deposit varies, but you’ll usually need at least 5% of the property’s value, which is an LVR (loan-to-value ratio) of 95%.

To avoid paying Lenders Mortgage Insurance (LMI) however, most lenders will require you to provide a deposit of 20% of the property’s value.

Should I take out a personal loan for a home deposit?

It is possible to get a personal loan for a house deposit, but many providers will be hesitant to accept a borrower without genuine savings. You should only take out a personal loan for a house deposit if you’re confident in your ability to repay both at the same time.

Lenders who allow personal loans for deposits will usually require you to have a high income, and may charge you a higher rate due to a greater perceived risk.

How to get a 95% mortgage

A 95% mortgage is a home loan where you borrow 95% of the properties value – that means a deposit of just 5%. This type of loan makes it easier for people to save up for a home, as 5% is much less than the standard 20% required by lenders.

Not all lenders will allow 95% home loans. To get a 95% home loan, you need to be able to demonstrate a strong ability to meet repayments, since you’ll be paying a lot more in interest compared to a 20% mortgage. The house you’re buying might also need to be reasonable (not too expensive or fancy).

Different types of home loan

1. Low doc (or self-employed) home loans

Low doc home loans are low-documentation home loans: primarily used by people who have difficulty providing the wealth of documents usually needed to secure a home loan, such as payslips, tax returns, proof of employment etc. They are commonly used by self-employed people, freelancers or small business owners, who might not have these.

Low-doc home loans can have higher fees and interest rates as well as more restrictive lending conditions, but not always. It will depend on the lender and the level of verification you provide.

2. Guarantee home loans

Guarantee home loans (sometimes called family guarantee or guarantor loans) involve parents using some of the equity in their current property to help their children pay for a home deposit.

Being a guarantor is not a decision that should be made lightly, as you’re effectively using your home as security against the loan. If your children can’t meet the repayments, you risk losing your own home!

3. Equity release mortgages

Equity release mortgages are also known as reverse mortgages. With an equity release mortgage, people over 55 can use the equity in their homes to borrow money, either as a lump sum, line of credit or regular income.

You don’t have to pay any interest on an equity release mortgage, but it does compound over time and is added to your loan balance. You should generally speak to a financial advisor before taking out this type of loan.

4. Low income home loans

Home loans can be harder to get for low-income families, but not impossible. While there is no such thing as low-income home loans, you can boost your chances of being approved for a home loan by:

  • Co-signing with a partner
  • Using a guarantor
  • Living within your means by applying for a cheaper house
  • Choosing a longer loan term (you’ll pay more overall but regular repayments will be lower)
  • Showing the lender a savings plan with expenses you can cut down on

5. Foreign income home loans

Home loans for foreign income earners are mainly for Aussie expats who earn a foreign currency and want to buy a property in Australia. A wide range of banks offer foreign income home loans in Australia, and they will accept a wide range of currencies – you’ll usually find a list of these on their website or by asking them.

To allow for exchange rate fluctuations, you might only be able to use 60-90% of your foreign income, so you may still need some form of Australian income (like rental properties) to successfully qualify.

6. Home loans for students

Getting a home loan as a student is tough because lenders are quite strict on their income requirements. They will assess your ability to meet monthly interest repayments on a home loan, and as a student, you’re unlikely to be earning anywhere near enough to get a home loan without some serious savings.

If you want to buy a house as a student, you’ll need to save up for a deposit. A deposit of less than 20% of the property’s value will attract lender’s mortgage insurance.

7. Home loans for single parents

Getting a home loan as a single parent is hard but not impossible. Lenders assess household income, so only having one income instead of two will make it haarder to get approved for loan. They’ll also assume you’ll have a harder time meeting monthly loan repayments.

Lenders do see Centrelink payments and Government Childcare Benefits as income. Be realistic in what you think you can afford as a single parent when applying for a home loan.

8. Relocation home loans

Relocation home loans, also known as bridging home loans, are loans for people who have bought a new home and are in the process of moving. This loan is used to ‘bridge’ the time between settlements, providing funds for you while you sell your current house using the equity in your home.

Most bridging loans last up to 6 months for existing homes or 12 months if you’re constructing a new home.

9. Rural home loans

Rural home loans can be used for rural property designated as a ‘hobby farm’ – that’s farming for personal reasons and not commercial. Anny land that returns more than $20,000 are considered income-producing and may not qualify. Lenders will allow you to borrow up to 95% of the land’s value (100% with a guarantor), but may not offer a loan for land greater than 10-15 hectares.

Frequently asked questions

How much credit score to qualify for a mortgage?

You can theoretically get a mortgage with any credit score, but a lower score will make it harder to get approved for a loan from reputable lenders. Most lender’s don’t make their lending criteria publicly available so it’s impossible to say for certain what you need.

What happens if I default on my home loan?

A mortgage default (missing a repayment by 90 days) won’t bankrupt you but will require you to pay a late fee up to $200. This might seem relatively minor, but defaulting on your mortgage will also be recorded on your credit file, thus damaging your credit score. Plus, missing a month or two of repayments will also increase the length of your home loan, which leads to greater interest charges over time.

How to get a home loan to build a house?

A home loan to build a house is a specific type of loan called a construction loan. When building the home, you pay the bank in ‘progress payments’ which are for each step of construction. If only $200,000 of a $400,000 has been drawn down, you’ll only pay interest on that $200,000.

How to get a home loan to buy land?

You can’t get a home loan to buy land, at least not a traditional one. Instead, you get something called a vacant land loan, which are given by banks for people to buy a block of land they intend to build a house on some day. Land loans might have higher fees, interest rates and tougher restrictions due to the higher risk they pose to lenders.

What is mortgage stress?

Mortgage stress doesn’t have an ‘official’ definition, but it’s commonly accepted that if 30% or more of your pre-tax income goes towards home loan repayments, then you are experiencing mortgage stress. This can place serious stress on people’s finances. Recent studies have found as many as one-third of homeowners to be suffering from mortgage stress.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in 2018. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure. The interest rate per annum is based on a loan credit of $150,000 and a loan term of 25 years.

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