Home loans: What do I need to know?
If after years of hard work you have finally reached your savings goal for a property deposit, then congratulations! Entering the property market for the first time is certainly something that should be celebrated, not taken for granted - after all it’s one of the biggest financial investments many of us will likely make in our lifetime.
To help you receive the keys to your new property purchase, you’ll generally look to take advantage of a home loan, unless you have enough cash to pay for your property in its entirety! In simple terms, a home loan is a sum of money borrowed from a lender to finance the purchase of a home or investment property. As the borrower, you are required to repay this debt with interest in regular weekly, fortnightly or monthly instalments over an agreed period of time, which is generally 30 years. To provide the lender with security, the property is held by the lender as collateral until the loan is paid off - an arrangement known as a mortgage.
Types of home loans
There are different home loan options available on the market, so initially narrowing down your choices can be an overwhelming task if you are unsure what best suits your property purchase, financial position and personal circumstances. Typically in Australia there are two main home loan options, a ‘variable’ rate or ‘fixed’ rate mortgage. Variable rate mortgages are the more common of the two options, given Australians prefer the flexibility and features associated with the loans.
Variable rate
As the name suggests, variable rate home loans can ‘vary’, meaning the interest rate charged on your home loan can fluctuate up or down in line with market conditions and policy decisions. In an environment where the cash rate set out by the Reserve Bank is increasing, it is likely that your variable rate home loan will follow suit.
Generally with a variable rate home loan, you may have additional features available such as an offset sub-account, redraw facility, or ability to make unlimited extra repayments. This makes variable rate home loans the preferred option amongst Australians when looking to take out a home loan.
Fixed rate
Where variable rate home loans vary, a fixed rate home loan means your interest rate will remain unchanged or ‘fixed’ throughout term of the loan. When you take out a fixed rate mortgage, your lender is guaranteeing that your interest rate will remain unchanged for the agreed time period, irrespective of whether interest rates go up or down.
Typically, the longer a fixed rate home loan term, the higher the interest rate will be as you’re paying for the security of a fixed interest rate for longer. In contrast to variable rate home loans, those on a fixed rate generally do not offer features like a redraw facility or offset sub-accounts.
Specialised home loans
Aside from the typical variable and fixed rate home loans, there are a number of specialised home loan options tailored to the needs of specific customers. Some of these specialised loans include:
- Construction loans: Unlike a typical home loan, a construction loan covers the expenses you incur as they happen, throughout specific construction stages. Construction loans typically charge interest-only repayments throughout the building process.
- Line of credit: A line of credit loan is a flexible loan that is very similar to a credit card (except with much lower rates) in that it offers you a certain amount of pre-determined funds that you can use when and how you wish. It can be repaid immediately or over a certain period of time that is negotiated with the lender.
- Reverse mortgage: Reverse mortgages allow you, being the home owner, to access equity that has (hopefully!) accumulated in your home as security for the loan, while continuing to live in it.
Home loan interest rates
No matter the home loan option you choose, the interest rate charged is influenced by factors such as the lender's cost of funding, market conditions, loan-to-value ratio and the Reserve Bank's cash rate. Alongside these factors, with a significant number of banks and lenders competing for your business, the interest rate charged on your home loan is influenced by competition. When there is strong competition among lenders, interest rates may be lower as banks try to attract borrowers.
Check out loans.com.au range of competitive home loan interest rates to help you on your journey to unlocking your new home.
Read more: How is interest on a home loan calculated?
Home loan deposit
As a rule of thumb, when purchasing a property in Australia, banks or lenders will require a deposit between 80% to 90% of a property’s value. This is equivalent to a 10% to 20% deposit. The difference between the loan amount and the property's value represents the deposit amount. This deposit amount is expressed as a percentage of the property's value and is referred to as the loan to value ratio (LVR).
For example, if you plan to buy a $700,000 property in suburban Brisbane, you must save $70,000 for a 10% deposit or $140,000 for a 20% deposit, allowing you to obtain a home loan with a LVR of 80%.
Generally, if you have a LVR that is above 80%, a bank or lender may require you to pay lenders' mortgage insurance (LMI) to reduce the risk of lending you the necessary funds for a home loan.
What is needed to obtain a home loan?
So you have enough savings for a deposit without having to pay thousands in LMI, but what’s next? In order to obtain a home loan, check out loans.com.au’s home loan application guide to help get you started.
The specific requirements needed to obtain a home loan will vary depending on the bank or lender, however generally you will need to provide:
- Identification documents: Primary identification may include a passport, driver's license, or state-issued photo identification such as a proof-of-age card. Secondary identification can include a birth certificate, Medicare card, utility bills, tax statement, or debit/credit cards.
- Proof of income: This includes pay slips, employment contracts, letters from their employer, or bank statements. Self-employed individuals need to present tax returns and ATO assessments from the last two years. Rental income requires a letter from the real estate agent, a copy of the Residential Tenancy Agreement, and bank statements showing rent payments.
- Assets and liabilities: Lenders will require a detailed list of your assets and liabilities, including cars, share investments, term deposits, credit card debt, and ongoing loan repayments.
Tips to gain home loan approval
To give you the best chance of home loan success and a foot on the property ladder, below you will find some tips to gaining home loan approval.
Improve your credit score
Banks and lenders use your credit score - provided by Experian, illion or Equifax - to assess your creditworthiness. Having a good credit score can improve your chances of being approved for a home loan offering a competitive interest rate. Some ways to improve your credit score include paying bills on time, paying off outstanding debts, and avoiding applying for new credit.
Save for a larger deposit
Having a larger deposit can demonstrate to lenders that you are financially stable and can afford to make mortgage repayments. It can also result in a lower interest rate, which can save you money over the life of the loan.
Pay off outstanding debts
Paying off outstanding debts can improve your debt-to-income ratio, which is a key factor in loan approval. Lenders prefer borrowers who have a lower debt-to-income ratio as it shows that they have a better chance of making the monthly mortgage payments.
Look to get pre-approval
Getting pre-approved for a home loan before you start house hunting can help you determine how much you can afford and make the buying process smoother. It can also demonstrate to sellers that you are a serious buyer and can give you an advantage in a competitive market.
To help get you started on your home loan journey, check out our range of competitive home loan options available to suit your borrowing needs. Chat to one of our lending specialists today to get started.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
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.
