Home Loans 101: Part 1

For most Australians, choosing to purchase a home is one of the biggest financial decisions they will make. Home loans are an essential force in the real estate market, with few individuals able to afford a home without a mortgage.

Are you thinking about taking out a new home loan but have no idea where to start? Let’s go through some of the basics you should know before signing on the dotted line.

How much do I need to save?

Before starting to think about types of home loans, you need to ensure you are financially prepared for the costs associated with one.

How much you need to save will depend on a range of factors, from how much a lender is willing to lend you, to whether you are willing to pay a little more on the loan.

Generally, putting down a larger deposit is beneficial. A big deposit shows the lender your ability to save – this could increase the likelihood of your home loan application being approved. A bigger deposit may also mean not having to borrow as much money, which may mean paying less interest over the life of your loan.

It is also important to factor in fees and other costs you may have to pay:

  • Stamp Duty
    • Many buyers are caught out when they do not include stamp duty in their budget. Each State and Territory in Australia has its own rules for calculating stamp duty. Stamp duty could be up to 7% of the purchase price – the exact amount depends on several factors, including property location, and whether you’re eligible for any concessions or exemptions.
  • Conveyancing or legal fees
    • The settlement process is a complex task. You may want to engage a conveyancer or solicitor to look after the preparation and completion of all the documents – such as mortgage and transfer of ownership and settlement.
  • Home and contents insurance
    • Insurance is meant to cover you in the event of loss or damage to your home. It could be well worth the cost – in fact, some lenders may require you to have home insurance before settlement happens.

There can also be other additional costs such as building and pest inspections, loan application fees, and moving costs that you may need to factor in.

Home loan approval criteria

There are several factors that reduce your eligibility for a loan, so before applying you should make sure you tick your lender’s borrowing criteria. The following checklist will make sure your chances of succeeding are greatly improved:

  • Show your ability to repay the loan;
  • Check and improve your credit rating by being diligent with your repayments;
  • Cut down or remove unnecessary financial commitments;
  • Have a strong savings history (if you borrow more than 80% of the purchase price many lenders require evidence of savings);
  • Show you have a safety net in place;
  • Don’t apply with too many lenders at once – submitting applications to several lenders will appear on your credit report;
  • Maintain stable employment and be prepared to provide information to prove a stable employment history;
  • Disclose all information to the lender and be upfront about any other issues.

These are some of the considerations you need to make before diving in to select a home loan. Most importantly, you should carefully assess your personal circumstances prior to signing on the dotted line.

In Part 2 of our Home Loans blog series, we will cover how to choose the right home loan, fixed rate vs. variable rate loans and interest rates. In the meantime, if you are in need of any financial advice, please contact us for a complimentary consultation on your financial wellbeing.

Posted in Informative.