Home loans can be complicated products and here at finder.com.au we’re often flooded with questions. Take a look at our answers to the most common home loan questions.
There’s no shortage of questions about home loans. When it comes to providers, refinancing, stamp duty and taxes, consumers can be overwhelmed by complicated jargon and confusing rules. Take a look at the common home loan questions we receive here at finder.com.au and the answers to them.
What is a home loan?
A home loan is a loan provided for the purpose of purchasing a property, either as an owner-occupier or an investor. The lender provides the loan for a fixed time period, usually 25 or 30 years, and the borrower pays the loan back with interest.
What is the difference between a variable and fixed rate?
Home loan products are generally divided into either variable or fixed interest rate options. A variable rate can change from month to month, depending on the Reserve Bank of Australia’s official cash rate and other market conditions. This means your monthly repayment could change from one month to the next.
A fixed rate will not change for a set period of time, generally from one to five years. While variable rate loans often provide more options and added features, fixed rate loans provide stability and certainty.
What is a split rate?
A split rate, or split facility, gives borrowers the option to split their loan into two portions, with one portion variable and one fixed. This is good for borrowers who want the options and features provided by a variable rate loan, but also want some certainty around their repayments.
How do I figure out my repayments?
Your home loan repayments will be based on the amount of money you borrow, the loan term and the interest rate. To figure out your home loan repayments, you can use our repayment calculator.
What is a comparison rate?
Home loans often carry administrative fees. The advertised interest rate on a home loan is the base rate of interest you pay each month, but does not always give a good indication of the true cost of a home loan.
A comparison rate, however, takes into account the loan’s base interest rate and any other fees and charges and expresses this cost as a percentage. To work out a home loan’s true value, always make sure to look at the comparison rate.
How big a deposit do I need?
To qualify for a home loan, you’ll need to have a deposit. This means you will need cash on hand to cover a portion of the purchase price of the property you wish to buy. The amount you need can vary from one lender to another.
In general, most lenders and loan products require at least a 20% deposit. However, some lenders offer loans with deposits as low as 10% or 5%. The size of deposit required by a loan is indicated by the loan’s loan-to-value ratio, or LVR. For instance, a loan at 80% LVR would require you to pay a 20% deposit.
There are options for borrowers with no deposit; however, these require a family member to provide their property as a security for the loan. This is known as a guarantor loan, and you can find out more about how guarantor loans work in our guide.
Will I qualify?
When assessing home loan applications, lenders look at several criteria. They will examine your credit history to ensure you have a good track record of paying your bills on time. They will also look at your income and expenses to make sure you can afford your monthly repayments.
In looking at your income, a lender will assess all sources of income. This means if you generate income from a rental property, shares or other investments, these can be considered on your home loan application. Some Centrelink benefits are also considered eligible income.
Each lender has different criteria by which they assess applicants. However, nearly all lenders will want to see that you have good credit, a suitable income and good work history. There are options for borrowers with bad credit, but these loans often carry much higher interest rates and fees.
How much can I borrow?
How much you can borrow will depend on your income and expenses. Lenders want to ensure that you’re capable of making monthly repayments on your loan without undue financial hardship. In assessing your borrowing power, lenders also take into account the possibility that interest rates might rise in the future. They’ll want to make sure you can still afford your monthly repayments, even if rates increase.
While all lenders have different criteria, you can get a good estimate of your borrowing power by using our calculator.
What if I’m self employed?
While many lenders require you to provide PAYG summaries to prove your income and employment, there are specific loans for self employed borrowers. These are known as low doc or alt doc loans.
Low doc loans allow self employed borrowers to provide alternative forms of documentation to prove their income. These can include BAS statements, notices of assessment or accountant’s letters.
What documents do I need to apply?
In general, lenders will want you to provide proof of your identity, your income, your employment, your assets and your liabilities. You’ll need documentation for each of these.
For a full rundown of the documents you’ll need to have in order when you apply, read our comprehensive home loan documents guide.
How do I apply?
There are a number of ways to apply for a home loan. If you have a specific lender in mind, you can apply directly at a bank branch. Alternatively, you can compare lenders and loans using finder.com.au’s comparison tables. Once you’ve chosen the option that’s right for you, you can head to that lender’s provider page for detailed instructions on how to apply.
Some borrowers also choose to use mortgage brokers. Mortgage brokers receive a commission from lenders for introducing borrowers. Brokers can help guide you through the home loan process if you need extra help.
What is lenders mortgage insurance (LMI)?
Lenders mortgage insurance, or LMI, is an insurance policy that covers your lender against loan defaults. This means if you cannot pay your home loan, your lender is compensated by an insurer to protect them from financial loss.
It’s important to note that, while you pay the cost of LMI, the policy covers your lender, not you. LMI is generally only payable on loans above 80% LVR.
What is stamp duty?
Stamp duty is a tax imposed by state and territory governments on the purchase of assets such as homes and cars. The tax varies from state to state, and the amount you pay will depend upon the value of the property you’re purchasing. You can estimate the amount of stamp duty you’ll pay by using our calculator.
Some states and territories offer exemptions from stamp duty for first home buyers. These exemptions often require buyers to purchase a newly constructed property, and can vary based upon the value of the property being purchased. You can find a full rundown of exemptions in our stamp duty guide.
What is an offset account?
An offset account is a transaction account linked to a home loans. Offset accounts reduce the amount of interest payable on your home loan. They do this by offsetting the interest calculated on your loan by the amount in the account. For instance, if you have a home loan balance of $450,000, but have $25,000 in an offset account, you’ll only be charged interest on $425,000.
Offset accounts can help you pay down your home loan faster, and pay less in interest. However, home loans with offset accounts can sometimes carry additional fees.
What is a redraw facility?
A redraw facility allows you to draw out any extra money you’ve already paid on your home loan. In other words, if you make extra repayments to get ahead on your home loan, a redraw facility allows you to access those additional funds.
Redraw facilities can useful tools to help in case of emergency or to fund things like renovations or improvements, but home loans with redraw facilities often carry additional fees.
What is the difference between an investor loan and an owner-occupier loan?
The difference between a loan for investors and one for owner-occupiers is generally only the loan’s purpose, and perhaps its cost.
Your lender will want to know if you’re borrowing to purchase a property to live in, or as an investment. They may assess the applications by different sets of criteria depending upon the purpose of the loan.
While most loan products are available to either investors or owner-occupiers, loans to investors often carry higher interest rates.
What is negative gearing?
Negative gearing is a tax minimisation strategy used by property investors. This tax concession allows investors to offset any losses they make on an investment property against their personal income. In other words, if the home loan interest, maintenance and ongoing costs of maintaining an investment property cost more money than the property generates, a property investor can deduct this amount from their personal income at tax time.
What is capital gains tax?
Capital gains tax, or CGT, is tax paid on profit made from selling an asset. This profit is calculated by deducting the expenses associated with the asset from the final sale price of the asset. Capital gains tax is levied on the sale of property, but property owners can be eligible for a full or partial exemption from CGT depending on their circumstances.
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