Important numbers to check when applying for a home loan
There are a lot of different factors and numbers to think about when getting a home loan, and sometimes it can be hard to keep track.
Here are the main ‘numbers’ you should stick in your mind before and after you apply for a home loan:
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Interest rate and comparison rate
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Loan term
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Borrowing power
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Credit score
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LVR
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LMI
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Repayment frequency
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Extra repayments.
The interest rate and comparison rate
Arguably the most important number you need to know (or rather, two numbers) is the interest rate and the comparison rate. The interest rate is the rate shown alongside the home loan, expressed as a percentage per annum (p.a.), meaning how much interest you’ll be charged in a year. The comparison rate meanwhile is meant to express a truer cost of the loan, as it includes a number of fees in the overall interest rate.
A home loan with a cheaper interest rate could well cost tens of thousands of dollars less over the life of the loan term (see below), which is why it’s so important to compare home loans with low interest rates.
The loan term
The loan term is how long you’ll be paying the loan off for, commonly around 25-30 years. This is important to know, as a longer loan term generally means you’ll pay more overall, as the principal and interest on your loan is stretched out over a longer period.
Try using a home loan calculator to see how a shorter loan term can reduce the overall amount owed on your home loan.
Your borrowing power
Knowing what your borrowing power is is essential, as it can give you an idea of what can reasonably afford to borrow - and what you can’t. A good borrowing power calculator, such as loans.com.au’s, should give you a maximum amount an average lender would let you borrow, based on:
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Your income and your partner’s income
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Your number of dependents
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Your monthly expenses
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Your other income and debts
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The interest rate on your loan and the loan term.
Use our borrowing power calculator today to find out what you can borrow.
Your credit score
Your credit score is essentially a numerical representation of your trustworthiness as a borrower, and a lender will look at it when deciding whether to lend to you or not. Credit scores usually sit in the following bands:
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0- 509 (Below Average)
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510-621 (Average)
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622-725 (Good)
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726-832 (Very good)
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833-1200 (Excellent)
You should check your credit score before applying for a home loan, as having a below-average or average credit score could lead to a loan rejection, which could hurt your chances with future loan applications.
Want to find out your credit score? You can visit Credit Savvy to get your credit score for free, learn how to protect, improve and use your score to get better deals.
Your LVR and LMI
You should know both of these things, as they are often interlinked.
Your LVR is the loan-to-value ratio, which is how much of the property’s value you are borrowing instead of buying with a deposit. For example, if you have a $100,000 deposit for a $500,000 home, that’s a 20% deposit which is an LVR of 80. The smaller your LVR the less of the property value you’re borrowing, which means you’ll be paying less in interest overall.
Most lenders will want to see an LVR of 80 or below to show you’re a prudent borrower. Many will still lend to you with an LVR above 80, but having a deposit of less than 20% means you’re likely to pay LMI - Lenders Mortgage Insurance. Lenders Mortgage Insurance can easily cost over $10,000-$20,000 depending on a number of factors.
Your repayment frequency
With most home loans, you’ll have the option of making your mortgage repayments either weekly, fortnightly or monthly. Generally, the more frequent the payments you make, the more you will save in interest over the term of your mortgage. For example, paying fortnightly instead of monthly will generally save money in the long run because you end up paying an additional month per year - there are twenty-six fortnights in a year, not twenty-four.
Here’s an example from our page on weekly vs fortnightly vs monthly repayments, showing how more frequent repayments can save nearly $40,000 and up to 4 years off a mortgage:
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$400,000 loan w/ 3.64% interest rate |
Monthly |
Fortnightly |
Weekly |
|
Repayments |
$1,827.58 |
$913.79 |
$456.90 |
|
Interest payable over 30 years loan term |
$257,931 |
$219,786 |
$219,564 |
|
Total loan cost |
$657,931 |
$619,786 |
$619,564 |
|
Time saved repaying loan |
n/a |
4 years |
4 years |
|
Interest saved |
n/a |
$38,145 |
$38,367 |
Your extra repayments
Like more frequent repayments, making some additional repayments on top of your minimum mortgage repayments can also save you some big bucks in the long run. Some lenders even allow you to make unlimited additional repayments fee-free, meaning you can put as much of your spare cash into your mortgage repayments as you like.
Using our home loan calculator again, a 2.5% p.a interest rate on a $350,000 home loan over 30 years would result in minimum monthly repayments of $1,383. In total, you’d pay almost $148,000 in interest on this loan, but by adding an extra $200 per month to your repayments, you’d shave almost $30,000 off your total repayments.
Your ongoing repayments
One of the most important home loan numbers to know is your final monthly/fortnightly/weekly repayment. You don’t want these repayments to be too high. Falling behind on your repayments can stain your credit file and can even lead to your house being repossessed.
Before taking out a home loan, and even after taking out a home loan, use loans.com.au’s home loan repayment calculator to figure out what your minimum repayments should be on a certain loan, taking into account:
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The loan amount & your deposit size;
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The interest rate;
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The loan term;
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Your payment frequency;
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Your interest payment type (principal and interest, interest-only); and
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Any extra repayments you choose to make
Once you get an idea of your potential mortgage repayments, you'll know what kind of home you can realistically afford.
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About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
