Your Home Loan, Made Simple

Research home loans

The first step is to research the different types of home loans available. Understanding your options helps you make an informed decision.

When talking to your loans specialist, ask:

• What loan options are available?
• What will my repayments be?
• How long do I have to repay the loan (usually 25 to 30 years)?
• How much deposit is required?
• What are the fees and charges?
• What are the loan conditions, and are there any penalties or exit fees?

Budget and pre-approval

Set a budget, or talk to your loans specialist about one, so you know how much you need to borrow. Getting pre-approved for that amount can be a wise idea while you are still looking for the right property. Pre-approvals tend to last up to three months and can help you move quickly once you find the right home.

Documentation you may need

You will be asked for several documents during the application. This includes showing that you have enough savings to cover the deposit and any other applicable fees. If you are self-employed, you may be asked for tax returns and other financial information from the past two years. Employees will need to show payslips.

Group certificates and 100 points of ID may also be requested.

Getting approval

Lenders consider four main criteria when assessing a home loan application: your capacity to repay the loan based on your income and expenses; your credit rating, which shows whether you have a history of repaying debts; collateral, meaning the property you are buying must be adequate security for the money you borrow; and your capital, meaning any assets you already own.

It is common practice to obtain a pre-approval certificate before buying a property. It helps your property search, keeps your budget in check, and confirms that a financial institution will lend you a set amount once you find a home. Be careful, though: one standard condition is 'subject to valuation'. If you pay too much for a property, your lender may see it as a risk and withhold funds. That is a difficult position to be in once contracts have been exchanged.

Since the Global Financial Crisis, lending criteria have been stricter. You may need to show a genuine history of saving. For some borrowers, particularly first-home buyers, a guarantor may be required, or a larger deposit of at least 20 per cent of the purchase price.

Making your purchase

The process differs slightly depending on whether you buy at auction or make an offer.

At auction, you will usually need to pay a 10 per cent deposit when the hammer falls, and there is no cooling-off period. The deposit is held in trust by the agent or your solicitor, and any interest it earns is split between you and the vendor during settlement.

When buying from an offer, a non-refundable holding deposit of 0.25 per cent is usually paid if the offer is accepted. You will then usually have a five-day cooling-off period to organise inspections and valuations and to discuss your finances with your lender.

During this period, the property is not held exclusively for you until a deposit of between 5 and 10 per cent has been paid and contracts are signed.

Processing your home loan

Once you have found and bought your home, the final stage is processing the loan. Keep your lender informed throughout, as they can process the loan more quickly when they know all the details. Provide the contact details of your solicitor or conveyancer, real estate agent and vendor, and a copy of the contract of sale. First-home buyers should complete their First Home Owners Grant forms at this point. Your solicitor or conveyancer can supply them.

Once a valuation has been carried out and all documents have been received and processed, your lender will grant formal approval and send you the loan documents. Sign and return them. Your solicitor or conveyancer will then liaise with your lender until the loan settles, usually 30 to 42 days after the contract is signed, depending on its terms.

Different types of home loans

As a first-home buyer you may be asking, 'Which home loan is best for me?' Talk with your lender to understand your options and the advantages and disadvantages of each. The right choice depends largely on your financial situation and the offers available at the time, so research carefully before you decide.

Fixed

Fixed-rate loans set the interest rate at one level for a set term, usually one to five years, so you know exactly what your payments will be during that period. You may end up paying more or less than the standard variable rate, but you have locked in a rate you are comfortable with and removed the uncertainty.

• Pro: good for consistent repayments that suit a household budget.
• Pro: protects you from rises in interest rates.
• Con: if interest rates fall, you are locked in to the higher rate.
• Con: generally, you can make only a small number of additional repayments.
• Con: some loan features can be quite limited.

Variable

Standard variable loans have a floating interest rate, so the amount you pay each month can change. They give you flexibility to make changes over the life of the loan as your finances or economic conditions change, which is why many borrowers choose them.

Owner-occupiers may suit principal and interest repayments, which reduce the balance from the start. Investors may find interest-only repayments ideal, as they can claim the maximum tax deductions on the purchase.

• Pro: rates can fall to a low level, so you may pay less than on a fixed rate.
• Pro: greater flexibility and features, such as additional repayments and redraw facilities.
• Pro: lets you pay the loan off faster with additional repayments.
• Con: your repayments increase if interest rates rise.
• Con: less certainty and control over your finances, as repayments can change.
• Con: standard variable rates can be higher than fixed rates.

Split

A split loan combines features of both fixed and variable rate loans.

• Pro: the best of both worlds, with features from fixed and variable loans.
• Pro: you can fall back on a fixed rate if your variable rate rises.
• Pro: you can pay down the variable portion quickly with additional repayments.
• Con: the number of additional repayments can be limited.
• Con: you need the split ratio right to fully benefit from both rates.
• Con: repayments can still rise slightly if variable rates rise.

Construction loan

A construction home loan is for borrowers building a new home. It is paid in stages to the builder, and some lenders also require valuations along the way. Once construction is complete, the loan reverts to the standard variable rate for the type you chose.

Line of credit

You don't have to make repayments until the line of credit is fully drawn. Interest is calculated on the daily loan balance and, provided it and the monthly fees don't exceed the line of credit, can be added to the loan. Most accounts also offer access via debit card or cheque book.

Offset account

An offset account is a savings account attached to your mortgage. The balance is used to offset the interest charged on your loan. Some lenders also offer free redraw and additional repayment facilities on variable rate loans, which have the same benefits as an offset account.

Low-doc loan

A low-doc home loan is for self-employed people only, and applicants must sign a declaration. Financial documents are generally also required. Low-doc loans usually carry a higher interest rate, but you may be able to switch to a full-doc loan later.