A comprehensive mortgage guide for Australians

Find out everything that you need to know about getting approved for a home loan in Australia, using our comprehensive mortgage guide.

Who can offer you property advice?

While doing online research is certainly one of the first steps to getting to grips with buying a home, there are many people that can offer you advice and possibly help you make better decisions, choose better service providers and help you get it done quickly. Speaking to any of the people mentioned below should ideally occur during the earliest phases of the home buying process – before you’ve found your ideal home or have been approved for a home loan.

Who you could speak to about getting a home loan

• Family members & friends who have bought a home for themselves or are property investors
• Your bank may offer you an expert to speak to
• Your local building society may offer precious advice
• Your accountant
• Your solicitor
• A professional real estate agent
• Investment & wealth managers
• Mortgage brokers

Understanding the implications of buying a home

The dream of owning a home is a rip in the mind of most Australians and rightfully so since homeownership has proven time and time again to offer a range of social and economic benefits. Apart from having a stable home with relatively predictable rates over a good portion of one’s life, homeownership offers financial security in retirement and even acts as a safety net for Australian families.

One of the most obvious and significant benefits is that the interest on your home loan payments is tax-deductible and as is the property tax itself. That being said homeownership brings with it a whole new set of responsibilities including maintenance and mortgage responsibilities that are long-term and financially taxing.

What are you looking for within property finance?

One of the first steps in the home buying process is to figure out exactly what you’re looking for. One of the first considerations should be the general location. Are you looking to buy in the area you’re currently renting in or would you like to move back to your childhood neighbourhood?

Then you need to choose the type of dwelling that you want such as an apartment, a house, or a new build or perhaps you will choose to simply build your own home. Once you know the general type that you’re looking for you can then move on to going through a few specifics in your mind.

How many bedrooms is ideal for now and for the future? Swimming pool or no swimming pool? Do you need room to build onto the home or not? Lock up the carport and garage or not? Once you have a general idea you can then review property listings to see roughly the cost of such property in your desired location.

How much can you afford to borrow?

Now that the fun and imaginative part is out of the way it’s time to get down to business and start crunching numbers to find out how much you can afford to pay for a new house.

One of the easiest ways to do this is to use one of the many affordability calculators on the internet. These calculators will take into account your income and your expenses to find out how much you can put towards a mortgage.

Typically, it is recommended that an average household with minor existing debts buy a home no more than five times its annual income.

Saving for your deposit

Once you know how much you can afford and the typical costs of buying the type of home you want in the location that you’re interested in then it is time to start setting up a plan to save for your deposit. Most lenders require a deposit of 20% but few will accept less than this for first-time homebuyers.

Although saving for a deposit requires discipline and commitment it is important to remember that the more you put down in the form of a deposit the less you’re going to be paying in interest – since mortgages can run up to 30 years we’re talking about some serious savings here.

If you are able to save even more than the required deposit – let’s say 30% or even 40% with relative ease then you should certainly do that as you will not only pay off your mortgage sooner but you will save thousands of dollars in the process.

Consider your credit

Although this may easily be tackled closer to the time it is important for homebuyers to consider their credit from early on and take the necessary steps to keep it healthy.

This will ensure that when you apply for a home loan you will not be rejected based on late payments that were simply mismanaged.

Always pay any debts or creditors on time during the period preceding your purchase but, you should also obtain a copy of your credit file and check that it is updated and accurate.

Time to create a new budget

Owning a home is more expensive than renting a home simply because mortgage payments are typically higher than average rental payments.

In addition, you will need to consider homeowners and property insurance as well as have some money saved up in case you need emergency repairs to anything from electrical systems to your boiler.

This means that you have to create a new budget that includes all these extra costs to ensure that you are adequately prepared prior to purchase and/or occupation.

First-time home purchase?

If it is the first time you are buying a home you can make use of a Federal Government grant which you can apply for at the same time as your mortgage. There are specific requirements in order for you to qualify for this grant and you should check online and speak to your local building society or credit union for more information.

Get pre-approval for your property

Once you have the deposit in hand and are ready to start looking for a home it is then time to apply for pre-approval for your home loan.

Pre-approval offers the following benefits:

• Allows you to be certain of your budget
• Let’s you select which properties are within your budget
• Gives you an advantage if you find the right home since you can put down a solid offer immediately
• Gives you stronger negotiating power
• Allows you to quickly move into your home

Different types of home loan

As a general rule, the faster you pay off your mortgage the more you will save in terms of interest and fees, however, if you’re not able to realistically afford a shorter home loan term always opt for what is affordable to avoid defaulting on the loan.

Here are the main types of home loans

• Variable-rate home loan – you get basic variable and standard variable rate home loans and both of these are usually the cheapest as well as come in the simplest form with few extra features. The interest rate is not fixed and will change as the market index rate (as set by the Reserve Bank) does.
• Fixed-rate home loan – The bank or lender will offer you a fixed rate over a period of time ranging from a year to 5. This means you will know exactly what you will be paying for the set period of time and can budget better.
• Split home loan – this is essentially a mixture of a fixed and variable rate mortgage as described above and can offer you a mix of affordability and security and each provider will set their own allowable mixes
• Line of credit loan – this mortgage requires that your salary or regular income is paid into your mortgage account and you will then draw money from the account for expenses as needed. You can then easily access equity if you need money.
• Mortgage offset loan – this is where your mortgage and savings accounts are linked up. This allows you to benefit from lower interest and help you pay off your home sooner.
• Low-doc home loans – are typically for business owners and freelancers who do not have the typical supporting documents needed by most lenders. This type of loan always carries higher interest rates and borrowers must always keep an eye on the establishment and ongoing fees.

Applying for a home loan in Australia

Eligibility criteria for borrowers

When it comes to applying for a home loan in Australia, there are certain eligibility criteria that you need to fulfill. Lenders typically assess factors such as income requirements, employment stability, credit history, and credit score. These criteria help lenders gauge your ability to repay the loan and manage your financial responsibilities.

Income requirements and employment stability

A crucial aspect of securing a home loan is demonstrating a stable income. Lenders want to ensure that borrowers have enough regular income to meet their mortgage repayments.

Different lenders may have varying minimum income requirements, but generally, they look for consistency and job security. Steady employment with a reputable employer can positively impact the lender's confidence in your ability to make repayments without undue financial strain.

Credit history and credit score importance

Your credit history plays an essential role in the home loan application process in Australia. A good credit history demonstrates responsible borrowing behaviour and timely repayment of debts.

Lenders will assess your credit report and calculate your credit score, which is determined based on factors such as payment history, outstanding debts, length of credit history, and types of accounts held. A higher credit score signifies lower risk for lenders and can potentially lead to more favourable loan terms.

Documentation required for the application process

The application process requires specific documents that provide evidence of your financial situation and identity. Commonly requested documents include proof of income (such as payslips or tax returns), identification (e.g., passport or driver's license), bank statements showing savings or existing debts, proof of assets or liabilities (if any), as well as details about previous addresses or rental payments.

After you secure pre-approval, find your ideal home and place an offer you'll then need to prepare yourself for the buying process which is summarised below.

The home-buying process in a nutshell

Prior to exchange

• A Contract of Sale will be given to you – have this checked by your solicitor
• You can have all inspections done
• Property title searches must be done
• Get your loan approved

The exchange

• After your offer to purchase is accepted you will exchange contracts with the seller
• You'll have to pay a deposit to secure the purchase

Prior to settlement

• Stamp duty is payable
• Any other inspections must now be done

Settlement

• Your lender will pay the balance of the purchase price to the seller
• You'll now have to put your name and contact information on all utilities and you get your keys and move in

After settlement

• You're now required to make regular mortgage payments and keep up with all utility bill payments

Whether you're a first-time buyer or looking to refinance your existing loan - home ownership is within reach. With comprehensive research and guidance from professionals such as mortgage brokers, you can embark on a journey towards owning your dream home while making sound financial decisions along the way.