Once you’ve decided on the location and property for your purchase, and you're serious to buy, you need to get your finances in order.
In Section 4 of the Home Buying Guide, we outline the steps you need to take to get finance ready.
Step 4 of 6 in the Home Buying Guide
Table of contents
Estimate home loan costs
You may feel a sense of relief after locking in a location and property for your upcoming purchase, but there is still some groundwork to do before you get the keys to your property. Analysing your financial situation, knowing how much you can afford to borrow, and understanding the type of home loan that will suit your homeownership goals are just some of the things that need to be ticked off your list before you apply for a home loan.
For the vast majority of Australian borrowers, a home loan is required to bridge the gap between your available deposit and the property price. A home loan involves borrowing an approved amount of money from a lending institution and repaying the principal amount (and interest) over the loan term, which is normally 25- 30 years. Interest is typically calculated on the outstanding balance of your loan at the end of each business day. This amount is then multiplied by the interest rate and divided by 365 days (however this may vary depending on the lender). In theory, it sounds simple. Take out a home loan and pay it back with interest over time. However, there are many aspects of home loan products that are worth researching and enquiring about to ensure that you get the right type of finance for you, and that you are getting the most bang for your buck. In a competitive marketplace, there are several different home loan types and product features available, which is why it pays to learn how home loans function, how they are structured, and how different home loans can suit different types of borrowers. Being savvy about home loans will save you money and enable you to free yourself from debt sooner. For instance, if you are aware of money-saving features such as an offset account or the ability to make additional repayments, and use them to your advantage, then you can leverage significant cost savings over the life of your loan. Let’s put this into practice.
Genevra makes extra repaymentsAfter doing some research and speaking to a broker, Genevra discovered that making additional repayments could help reduce her interest charges over the life of her home loan. Although she is short on cash at the moment, Genevra is expecting a promotion in the next few years with a boost to her annual paycheque. With a $600,000 home loan at 5.5% interest, Genevra works out that if she starts making additional monthly repayments of $150 in 5 years from now, she could save a total of $72,489.37 in interest over the 30-year term, and she would shrink her loan term by 3 years. Upon discovering the cost savings of this feature, Genevra decides to conduct more research into different home loan features to see if there are any other ways that she can lower her repayments.
Estimate home loan costs
As discussed in the first section of the Home Buying Guide, there are several upfront and hidden costs associated with servicing a home loan (and being a homeowner). Here’s a recap of some major upfront and ongoing costs that you’ll need to factor into your budget.
If you bought a property worth $400,000 at an interest rate of 5.0% over 30 years, here is a summary of some major costs.
- Stamp duty. The amount of stamp duty tax depends on the state of the property. In this example you would pay roughly $ 7,175.00 if you were based in Queensland.
- Legal charges. This will depend on the complexity of legal work required, but as a ballpark figure you could be looking at around $1,000 - $2,500.
- Building and pest inspection. It’s important to get a building and pest inspection completed to ensure that the property is structurally sound and that it conforms to the relevant building code. For inspections, you can expect to pay around $500 - $700.
- Mortgage application fee. Also known as an establishment fee, you will pay approximately $200 - $600 for the loan application fee, but this will vary depending on the lender.
- Valuation charges. Some lenders may charge you to get your property independently valued, so if your bank doesn’t waive this cost, it could be around $400 - $500 on average.
- Mortgage repayments. Assuming the above example, your monthly repayments for this $400,000 loan would be $ 2,147.29 with a total loan cost of $ 773,023.14.
- Account-keeping fees. Some lenders charge annual service fees, or ongoing fees, which can range anywhere from $50 - $350.
- Repairs and maintenance. Being a homeowner comes with a high level of financial responsibility and as a result you need to have a buffer of funds to help cover unexpected repairs and maintenance for the property. As a ballpark figure, you may want to have $5,000 - $10,000 in a high-interest savings account to help cover property associated expenses.
- Insurance. It is crucial that you take out home and contents insurance to protect your asset as well as your family’s financial future.
While you would have previously reviewed your financial position and considered the property price range that you can afford, you need to decide how much you need to borrow. Consult a licensed mortgage broker to help you understand your borrowing capacity from the perspective of the lender (note that the amount you think you can afford to borrow may differ from what the lender thinks you can afford to borrow). A broker will be able to review your income, assets, liabilities and credit history in order to identify the amount that a lender will realistically let you borrow. Use our calculator below to work out how much you can afford to borrow.
As a rule of thumb, you want to come up with at least a 20% deposit for a full documentation loan so that you can avoid paying lender’s mortgage insurance (LMI). Most Australian lenders require you to pay LMI if your loan-to-value (LVR) ratio is below 80%. Enter your details in our savings calculator to estimate how long it'll take you to save your required deposit. If you are unable to muster up the funds to complete a 20% deposit, there are several low deposit home loans available on the market that allow you to borrow with a minimal deposit amount. If you’re a first home buyer or you’re short on cash, you can consider using a guarantor home loan to help boost your borrowing power. This involves a close family member providing security for the loan if you’re unable to meet your mortgage commitments.Back to top
Get feature savvy
The ability to make unlimited additional repayments is a useful feature for many borrowers. An extra repayment goes towards the principal amount of the loan which can help you repay your loan sooner. For example, if you paid just $50 extra per month on a $300,000 loan, you could save over $23,000 in interest over the 30 year term and reduce the term by two years. Bear in mind that some loans, including fixed rate loans charge penalties for making additional repayments or may even restrict you from making them altogether. When comparing home loans (and lenders), this is a good feature to consider. Are you able to easily make additional repayments without penalty?
If you need to draw on any additional repayments that you’ve made, a redraw facility allows you to access this money as you see fit. If an unexpected expense arises or you need extra funds to pay for a bill, the redraw facility allows you to access and withdraw this money. Check to see whether the lender allows you to use the redraw facility free of charge and whether there are any minimum or maximum redraw amounts. Some redraw facilities may even limit the number of redraws you can make in a year, or have a minimum amount per transaction.
An offset account allows you to save on interest. Similar to an everyday transaction account, you can deposit your savings into the offset account linked to your home loan, and the amount held in the account reduces the amount of interest you pay on your loan each month. This means that the savings in your offset account are working at the same rate of interest as your home loan. For example if you have a home loan of $300,000 and you have $10,000 in your offset account, each month you will only be paying interest on $290,000 of your home loan.
The portability feature allows you to keep your home loan when you move. It’s likely that your needs will change over the 30 years of your home loan, and it is common for people to move to a different property. If your loan has a portability feature you can keep the same loan you have and transfer it to your new property. This means you can maintain a relationship with your lender and could save by not having to pay establishment or application fees for a new home loan. When you transfer a loan from your old home to your new home you may have to pay a security substitution fee, which can typically be around $500. You may also need to pay a mortgage registration fee, valuation charges and fees for transferring the new loan so these fees can sometimes add up to just as much as the cost of refinancing. If you’re thinking of using the portability feature, carefully consider the costs involved.Back to top
Once you have a grasp on the amount you can afford to borrow, and different home loan features, you need to compare home loans. Doing some comparative research and finding a competitive home loan could end up saving you thousands of dollars over the lifetime of your loan. Here is how you can compare different home loans on the market.
- Review your personal and financial situation
Think about your current financial and lifestyle objectives and decide what kind of home loan will allow you to achieve these goals. For instance, if you’re a first home buyer you may want to find a basic “no frills” home loan with a competitive interest rate, no application fees and minimal ongoing fees. On the other hand, if you’re a young family and you’re planning to move house in the near future, then you may want to apply for a fixed rate home loan (for security) with a portability feature.
- Compare home loans
After identifying the home loan type (and features) that you’re looking for, you need to do some groundwork and compare different home loan products. Use our home loan comparison tables to compare the major features of home loans, including the interest and comparison rate, the LVR, and any major fees associated with the loan such as application fee and ongoing fees.
Compare current home loan rates
Rates last updated October 26th, 2016.
- CUA Fresh Start Basic Variable Home Loan - Owner Occupier
Maximum LVR now 90%
October 7th, 2016
- Westpac Fixed Options Home Loan Premier Advantage Package - 2 Years
Comparative rate increases by 0.08%
October 10th, 2016
- ClickLoans The Online Home Loan - Owner Occupier ≤ 80% LVR
Maximum LVR now 80%.
October 11th, 2016
- Interest rate. Ideally, you want to find a home loan that offers a competitive interest rate by market standards. A lower interest rate can go a long way in helping you maximise your savings. For example, a 0.5% rate difference on a $750,000 mortgage (from 5.5% to 5.0%) could save you a total of $83,612 over 30 years. You should always compare the comparison rate of different home loans as this reflects the true cost of the loan. If there is more than 1-2 basis points between the interest rate and the comparison rate, this should raise a red flag as there could be some big fees that the lender has not disclosed.
- Fees. When comparing different home loans, you should keep an eye out for application or establishment fees, ongoing fees and discharge fees. Finding a home loan with fewer fees will help you to minimise your holding mortgage costs.
- Features. As mentioned previously, there are many competitive features available that can help you save money. Compare if the lender allows you to make additional repayments without penalty, if a free redraw is available, if a 100% offset account is available, if split loans are offered, if the lender provides packaged discounts, and if salary crediting is offered.
- Repayment frequency. Another important thing to compare is the repayment frequency offered by the lender. Do they allow you to make weekly, fortnightly or monthly repayments to suit your income? Keep in mind that making bi-monthly repayments (as opposed to monthly repayments) can help you lower your repayments and help you reduce your loan term. Check to see if the lender allows you to make principal and interest or interest-only repayments and whether they will allow you to take a repayment holiday if you’re having trouble meeting your mortgage obligations.
- Customer service. Another point to consider for your research is the quality of customer service provided by the lender. How often do they promise to send you account statements? Do they offer online banking? Do they offer BPAY or other payment options?
- Chat to the experts.
Before applying for finance, speak to a professional mortgage broker, accountant and financial adviser to ensure that you are making an informed decision regarding the type of home loan that’s right for you. While an accountant and financial planner can help you plan for a financially secure future, a licensed mortgage broker can help you with the home loan application process. A broker has expert knowledge of how the home loan industry works, as well as the local property market, and can help you complete the paperwork, assist you with the application process and answer any questions that you have. A broker has access to a wide range of home loan products from a panel of lenders. After discussing your financial objectives with the broker, they will search through their database to find a loan that is suitable for you. If you’re a non-conventional borrower- for instance, if you have bad credit, you’re receiving Centrelink benefits or you’re a low income earner--, a broker can be useful in terms of finding alternative or specialist lenders that may have more lenient eligibility criteria compared to the Big Four.Back to top
If you don’t have a good credit history, you may want to think about improving your credit file before applying for a home loan (or pre-approval). Here are some ways you can improve your credit position.
- Trim existing debt. Review your debt to see if there’s any unnecessary debt that you can minimise. For example, if you have three different credit cards with different providers, you may want to consider rolling these into one.
- Pay on time. It is essential that you pay your bills in full and on time. Whether it's a phone bill or a utility bill, ensure that you are meeting your financial obligations. If you’re struggling to cover your bills, contact your provider to see if you can organise a different payment plan.
- Regularly check your credit file. So you can understand how the lender perceives you, request a copy of your credit file. This will allow you to gain insight to your credit history so that you can take steps to improve your credit position.
- Don’t over-apply. Rejected applications are recorded on your file so having a credit application declined can adversely affect your ability to borrow in the future. Be selective about the number of home loans that you apply for.
Getting pre-approval is an important step in the home buying process. This gives you an approved amount to borrow which provides you with greater bidding power and confidence when it comes to making an offer on a property. With a pre-approved home loan under your belt, you’ll be considered a more serious homebuyer because it demonstrates that a lender has made a commitment to lend you the money. It also gives you a clear idea of how much you can spend.Back to top
Most home loan applications can be completed online or by visiting the lender at your closest branch. When you apply for a home loan, you’ll generally need to supply certain information to the lender, such as:
- Personal details. You’ll need to provide documentation that confirms your personal details including date of birth, residential address, employment situation and number of dependents. The lender may request your driver’s license, passport, birth certificate and recent payslips.
- Income. You’ll need to provide details regarding your employment and income, such as recent payslips or a letter from your employer confirming the nature of your employment contract. If you're self-employed you have to submit tax returns for the previous two years, financial statements for the last two years and contact details for your accountant.
- Assets. The lender will typically request any details of assets that you have, such as investment properties, a vehicle or shares.
- Liabilities. You may also need to supply information about any existing liabilities that you have such as credit cards or personal loans.
The Australian government offers grants to assist homeowners purchase property. In particular, if you’re a first home buyer you may be eligible for stamp duty concessions and a monetary grant which could help you get into the property market. Read our first home ownership guide to learn about the government grants that may be available to you. Indigenous Business Australia (IBA) also offers grants to Indigenous Australians looking to break into the property market while the Australian Defence Home Ownership Scheme (DHOAS) is available to members of the Australian Defence Force (ADF) that meet the eligibility requirements.Back to top
Once you’ve researched different home loan products and organised your finance, read the next phase of the home buying journey. Images: Shutterstock