A home loan is usually the single most significant financial commitment you will make. Even a small difference in the interest rate or another variable will have a big impact on how much you end up paying over the life of the home loan.
How Hard Is It To Get A Home Loan?
Your focus should not be on rates only. The following criteria are important when you choose a home loan:
- The lending policy (whether the bank will approve you for a home loan)
- Your deposit (the amount you’ve saved for a home loan)
- Speed of approval (How fast do you need a home loan? Is the settlement date near?)
First home buyers need to understand the best strategy is to identify which lenders can approve their loan first and then worry about who has the best deal.
Generally, borrowing less than 80% of the property value, paying principal and interest, and getting a loan for a home rather than an investment property will get you the best deal.
A quick snapshot:
- Borrowing up to 60% of the property value will give you the cheapest home loan.
- Borrowing up to 80% of the property value will give you a cheaper loan.
- Borrowing 90% of the property value will give you a competitive/reasonable rate, but you’ll pay Lenders Mortgage Insurance (LMI).
- Borrowing 95% of the property value will be an expensive loan, especially if your loan is over $1 million.
How To Get The Best Home Loan
Get answers to the following six questions and you’re on the right path to get the best home loan.
1. Am I Getting The Best Home Loan Rate?
No discussion on home loans is complete without talking about interest rates. Let’s go through rates you have to be careful of before choosing a home loan:
Advertised rates vs comparison rates
The advertised interest rate is the rate you pay on your home. It’s the rate that catches your eyes as it’s advertised in big and bold numbers and is usually attractive. On the other hand, the comparison rate is the rate that factors in the advertised interest rate plus the costs and fees of getting a home loan. This includes annual fees, loan set-up fees, valuation fees, etc.
The lowest advertised rate isn’t always better! The comparison rate is more useful, as it provides you with a better picture of the true cost of a home loan. Let’s take an example:
Assuming all things are equal, even though the advertised rate on Home Loan A is lower, Home Loan B comes out better in terms of savings when you consider the comparison rate.
| Home Loan | Interest rate | Comparison rate |
|---|---|---|
| Home Loan A | 2.50% p.a. | 3.10% p.a. |
| Home Loan B | 2.60% p.a. | 2.90% p.a. |
Comparison rates are calculated using a standard formula based on a $150,000 loan amount on a 25-year loan term.
Introductory or honeymoon rates
An introductory rate helps ease the burden of owning a home and repaying on your home loan for the first two years. You might need to pay expenses like paying off debts, paying furniture or renovating your home.
These usually have a very low interest rate during the first year or two of your home loan. It will revert to a higher rate once the honeymoon period ends. Lenders advertise a low introductory rate to entice you into choosing them over competitors.
You need to look beyond the low honeymoon rates and consider the ongoing interest rate. When comparing lenders, don’t get caught up in low rates. Ask lenders what discounts they offer once the introductory period ends. A few banks and non-bank lenders now offer professional package discounts.
2. Is This The Right Home Loan?
With a range of home loans available, choosing what’s best for you can get confusing. Let’s go through the types of home loans banks offer to understand which is the right one for you.
| Type of home loan | Is this the right home loan for me? |
|---|---|
| Variable-rate home loan | Your mortgage repayments will change based on the interest rate rising or falling. If interest rates fall, your repayments will decrease. You enjoy features like an offset account and extra repayment. |
| Fixed-rate home loan | You fix the interest rate on your mortgage for a specified period, usually from one to five years. Your repayments will stay the same over the fixed term. A fixed-rate loan is like a fixed contract. If you breach it, you will need to pay break costs. |
| Split loan | With a split loan, you can fix a portion of your home loan and leave the remaining on a variable rate. It gives you the stability of a fixed-rate home loan, and you can make extra repayments and take advantage of the features that come with a variable home loan. |
| Interest-only home loan | You only pay for the interest on your home loan during a set time period (usually one to five years). Once the interest-only period ends, you start paying principal and interest payments (unless you’ve extended your interest-only period). It’s a popular choice for property investors, who can use the freed-up cash for additional investments. |
| Guarantor home loans | This is an excellent option if your parents own property in Australia and you have not saved enough deposit. You can borrow more than 100% of the property value without paying Lenders Mortgage Insurance. |
| Low-doc loans | A great option for self-employed borrowers or those who cannot prove income through traditional means. You can get a home loan with alternative income verification documents like six months’ business banking statements, an accountant’s letter or Business Activity Statements (BAS). |
| Non-conforming or specialist loans | Specialist lenders offer these home loans for borrowers who are knocked back by a bank or declined by a mortgage insurer. These lenders can approve your home loan and offer solutions tailored to your situation. |
| Basic home loans | They are also called no-frills home loans, as they trade flexibility and features for low or no ongoing fees and reduced or waived application fees. |
| Packaged home loan | Unlike basic home loans, you pay an annual fee for packaged home loans in return for discounts on various products and services. A professional package is suitable for loans that are more than $250,000. |
3. What Documents Do I Need For A Home Loan In Australia?
| Document category | What documents are required? |
|---|---|
| Identification documents |
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| Income documents | For PAYG applicants
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| Bank and credit statements |
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| First home buyer | If you’re applying for the first home owners grant:
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Did you know around 80% of home loan approval delays are the result of missing documents? So if you require a faster loan approval, please get all your documents in order.
4. What Home Loan Features Do I Need?
The great thing about home loans is they are customisable. You can pick and choose features you want when you apply for a home loan. Here are the top three must-haves to consider when you get a home loan:
- Extra repayments: This means you can make extra repayments on top of the minimum requirement. Paying a little extra means you pay off your home loan much earlier, and you reduce the interest charged over the life of the loan.
- Redraw facility: Access any extra repayments you’ve made ahead of schedule. Any funds you have in your redraw are essentially earning the same interest rate as your home loan rate. As interest rates on savings accounts are generally lower than your home loan, you’re earning more.
- Offset account: These are transaction accounts linked to your home loan. You can make deposits or withdrawals from them as you would with a regular transaction account. They are a great way to minimise the interest you pay on the loan.
Offset vs redraw: Which should I choose?
While both features can help you reduce the amount of interest you pay on your home loan and pay off your loan earlier, the one you should choose depends on how you manage your finances.
An offset is more flexible than a redraw, since you may not have the option to withdraw from an ATM or use a debit card with a redraw. Some lenders also set minimum redraw amounts.
If you’re tempted to dip into your savings, redraw is a better feature to consider, while you’re probably better with offset if you don’t need to do that.
Offset is more suitable from a tax perspective, if you decide you rent out your home
5. Do I Know The Hidden Fees And Costs Of Getting A Home Loan?
There are a few unavoidable expenses when buying a home, so it makes sense to reduce fees and costs where you can. The less you pay in fees, the better. Remember, some lenders will waive fees or give discounts to first home buyers.
The hidden fees you should know about before you get a home loan include:
- Application or set-up fee: This is a one-off fee the bank charges when you first take out a loan. It can range from $0 to $800.
- Valuation fees: Once you’ve found a property, the lender will want to perform a valuation on it.
- Ongoing fees: There may be annual fees, monthly account-keeping fees and offset or redraw fees with your loan. With an annual $395 fee, you end up paying $11,850 over the course of a 30-year loan.
- Redraw fees: Some lenders charge a fee for this service; however, plenty of lenders offer a number of fee-free redraws each year.
- Offset fees: Many lenders charge a fee for offset accounts. However, there are a few lenders who offer free offset accounts.
- Discharge fees: When you’ve paid off your home loan or switched to a new bank, your lender may charge you a $300 mortgage discharge fee.
- Break fees: The fee charged when you break your fixed-rate home loan contract is a break fee. This fee can amount to tens of thousands of dollars.
6. How To Get Pre-approved For A Loan
In most cases, applications for home loan pre-approval are not fully assessed by a lender and don’t even go to the credit department or lenders mortgage insurers! Assessing a home loan application costs the bank money, as their credit staff has to perform credit checks, employment verification, fraud checks, credit scoring and data verification.
Banks and lenders are not under any obligation to formally approve your home loan when you find a property. Fortunately, at Home Loan Experts, our mortgage brokers always request that the bank fully assess your pre-approval. We know lenders who offer reliable pre-approvals and how to get lenders to evaluate your application thoroughly.
How long does it take to get pre-approved?
Generally speaking, it can take around 1 to 3 business days to get a pre-approval for simple applications. It depends on how quickly you return your mortgage documents and the lender’s turnaround time. If your situation is complex, then it might take up to 7 business days.
Why was my home loan declined?
The 10 most common reasons why first home buyers do not get approved for a home loan:
- A small deposit
- Not enough genuine savings
- A low credit score or bad credit history
- Unusual employment (new job, on probation, contract employment)
- Being self-employed for less than two years
- Wanting to buy in a remote location or a unique property
- Bad spending habits
- A high debt-to-income (DTI) ratio
- Applying with a lot of lenders (i.e., too many credit enquiries)
- Wanting to borrow 95% or more of the property value
What are genuine savings?
Lenders want to see you’ve saved up at least a 5% deposit on your own over time. This is referred to as a genuine savings requirement. So, if you’re planning to buy a property valued at $500,000 you’d usually require at least $25,000 (5%) in genuine savings. Even if you saved $24,000, most lenders would decline your home loan.
| What is accepted as genuine savings? | What is not accepted as genuine savings? |
|---|---|
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Fortunately, there are a few workarounds for the genuine savings requirement:
- Many lenders accept rental history as genuine savings. If you’ve received a gifted deposit from your parents and you’ve been paying rent for the past three to six months, you can use your rental history to meet the genuine savings requirement.
- Turn your deposit into genuine savings by putting your funds in a savings account and adding to it each month for three months.
Are you ready to get a home loan?
Whether you’re still looking for a property or you’ve already found one to your liking, you should:
- Get pre-approved for a home loan.
- Request a free upfront property valuation.
- Ensure that the property is acceptable to lenders.
Please speak with one of Home Loan Experts’ specialist mortgage brokers by giving us a call on 1300 889 743 or filling in our online enquiry form to get pre-approved and help you on your journey towards home ownership.