Frequently Ask Questions
For most Australians, buying a home and entering the property market is an important goal. Taking out a home loan is most often a crucial facet of making this goal a reality.
Despite this, the home loan process can be confusing or even scary for some. For this reason, here we seek to provide answers to some of the most commonly asked questions regarding home loans to get help get you on your way.
For the vast majority of property buyers, the prospect of purchasing a property outright is not realistic. For this reason, mortgage lenders such as banks, credit unions and specialised lenders offer home loans as a product which can allow you to make your purchase with only limited funds. Your home loan is paid back to the lender over a fixed period of time, with additional interest payments made to the lender. This means that over a prolonged period of time, you will repay more than the initial value of your home, but since your repayments will be spread out over a long period of time and are consistent, they can be easily managed.
As you progress towards paying off the entirety of your mortgage, over time you will come closer to owning your property outright. At the end of this process your relationship with your lender will end, leaving the property solely in your hands.
All Australian lenders require a deposit to be provided in order for a home loan to be issued, and while the minimum required deposit can vary, the generally accepted absolute minimum deposit is 5% of the total purchase cost of the property in question. While you may be approved for a home loan with only a 5% deposit, the conventional wisdom here is that you should aim for a 20% deposit in order to avoid paying lenders’ mortgage insurance.
This means that the amount you will need to have saved before you will be eligible for a home loan will vary depending on the price of the property you wish to purchase. For example, if you wish to buy a home worth $500,000 then you will need a minimum deposit of $25,000, or if the value of your home-to-be is $1,000,000 then you will need a deposit of $50,000.
Each lender has home loan eligibility requirements which are specific and sometimes unique to them, however there are a few general principles which you should be aware of when preparing to apply for a loan:
Income
Lenders will need to be able to see verification that your income is substantial enough for you to successfully repay your home loan with little trouble.
Credit history
On top of proof of substantial income, you will need to show that you have a strong credit history and that you have not defaulted on any past debts. It may still be possible for you to access finance with a less-than-ideal credit history, however you will find that you have significantly limited options.
Residential status
Depending on your Australian visa status, you may find that you are eligible for only limited finance- in the area of 80% of the value of a property as opposed to 95%. For Australian citizens living overseas and wishing to buy domestically, you might face similar limitations.
Age
Most lenders will be reluctant to extend home loan financing to people who are nearing retirement age. This means that as you approach retirement age, you may need to provide proof of alternative income streams that will persist past your retirement which you can draw from to pay down your debts in addition to your pension. Alternatively, you can show that you own assets of sufficient value to provide security for the loan.
Home loan terms generally sit at around 25-30 years, and most loan agreements provide the borrower the capacity to make payments in advance should they choose to do so. This means that if you make the minimum required payments, then you should expect to pay off your home loan within the span of time agreed upon at the outset of your loan. If on the other hand, you wish to make additional repayments to your loan, then this can be a prudent decision and might result in your loan being paid off ahead of time. By making additional repayments ahead of time you provide yourself with the opportunity to save costs in the long-run by minimising interest costs, as well as yearly fees.
An interest-only home loan is a loan that for an agreed upon, fixed period of time, requires only repayments that service the interest on the loan and not the principal as well.
These loans can be a useful way to maintain a certain level of financial flexibility after your property purchase, as it will allow you to save more funds which can be deployed for other investments or kept as a lump sum in the meantime.
Obviously, this type of loan means that for your interest-only period, you will not be making progress towards paying off your home, and that in some circumstances, this will mean that your total repayment horizon for your loan will be longer.
It is common, however, to utilise the flexibility afforded by this type of loan to use an interest-only period to save up for a deposit on a second investment property. It is also commonly used with construction loans and investment properties.
When you’re thinking about making a home loan application, there are some things which will be helpful for you to bear in mind.
- Allow for plenty of time in the lead-up to purchasing your property. The process of finding the right lender, acquiring pre-approval for your loan, finding the right property for you, and ultimately finalising your purchase, can be a long and intensive one. For this reason, you should ensure that you are as prepared as possible and allow for a long runway when entering this process.
- Make sure that your finances are in order and that you know what you can reasonably afford to borrow. By over-leveraging yourself, you might find yourself under financial strain in the event that any unfortunate life events arise. If you find that you must default on a loan or have trouble making your repayments as a result of this, then your credit score will be negatively impacted, thereby impeding your ability to access finance in the future. Consider a realistic budget for your first property, even if it means that you won’t immediately be able to purchase your dream home.
- Don’t rush into an agreement with a lender without weighing up all of your options and ensuring that you are truly comfortable with your loan conditions. Comparing the loans available to you from a variety of lenders using Savvy’s comparison tools will allow you to gain an understanding of the options which are really available to you, so that you end up with the mortgage that best suits you.