If you’re ready to enter the property market, there are a few issues you need to get in order first.
The vast majority of Australians who buy a home will do so by borrowing money through a home loan. With the excitement and stress that comes along with your first property purchase, it can be easy to overlook the particulars of actually securing a home loan. Before you fill out a home loan application, there are a few key pieces of data you’ll need.
The first requirement you’ll need to have in order to secure a home loan is a deposit. This means you’ll need to have cash on hand to cover a percentage of the purchase price of your property.
The exact percentage you’ll need will vary from one lender to another. Lenders express this percentage as a loan to value ratio, or LVR. A lender offering 80% LVR, for example, will require you to have enough cash on hand to cover 20% of the home’s purchase price.
While it’s fairly standard for lenders to require at least 80% LVR, many lenders offer loans of up to 90, 95 or even 97% LVR. However, these loans also mean you’ll have to pay for lenders mortgage insurance (LMI), an insurance policy that covers your lender in case you default on your loan.This will expand the total cost of your loan.
Prior to the global financial crisis (GFC), some lenders did offer loans at 100% or more of LVR, meaning borrowers did not need a deposit. These high LVR loans no longer exist, but there are options for borrowers who have trouble saving a deposit. Guarantor loans are loans where a parent or other close family member offers their home as security in lieu of a deposit. These loans come with their own particular pitfalls, however. For a full discussion, read our guarantor loans guide.
Lenders want to know that you can show financial responsibility and discipline. These traits give them assurance that you’ll be a good home loan customer, and will be able to make your repayments on time. As such, they want to see that you’re organised enough to save money.
Genuine savings is money that has been in your account for at least three months, though some lenders may require you to have held the money in your account for up to six months.
Most lenders will require a portion of your deposit to be in the form of genuine savings. The proportion required will vary from lender to lender, but most ask that at least 5% of your deposit be in the form of genuine savings.
Having trouble saving? Consider a term deposit.
You’ll also need to have your documents in order when you apply for a home loan. This means you’ll need to have proof of your identity, income, assets and liabilities.
The specific documents deemed acceptable may vary from lender to lender, but you’re better off being over-prepared rather than under-prepared. Having all your documentation in order can head off a lot of needless back and forth communication, and can shave days or even weeks off of the process of getting a home loan.
Find the right lender
Most importantly, you’ll need to decide on a lender. Lenders in Australia are anything but homogeneous, with a variety of lenders providing for a variety of needs.
Major "Big Four" bank lenders Commonwealth Bank, Westpac, ANZ and NAB are the highest profile, and many Australians may already have accounts with one of these banks. If you already have an account, it may make the home loan process easier and cut out some of the documentation requirements.
It can be worthwhile to look outside the major lenders, however. A wide range of smaller banks, credit unions and building societies may offer sharper rates or products better suited to your needs. In addition to smaller banks, Australia also has a thriving market of non-bank lenders. Many of these lenders have less stringent credit requirements than traditional banks, and may be better suited to your personal financial situation.
To learn how best to compare lenders to find the right one for you, read our home loan comparison guide.