Do you dream of owning your own home? Purchasing property is a major financial decision and, if you are like many Australians, you may require a home loan to finance the purchase.
Home loans can be a great tool to get on the property ladder - but there are risks. The more you know about the process, the better you’ll be able to avoid those pitfalls and enjoy your new home after purchasing.
A home loan is a finance product offered by a lender, which is used to buy or build a residential property. Home loans are usually ‘secured’ - they use the property purchased as collateral - and may be offered by a variety of lenders with terms up to 40 years.
Lenders charge interest to lend you money with a home loan. The interest rate is expressed as a percentage of the total home loan amount (the principal).
In most cases, you’ll make fortnightly or monthly repayments that will cover interest charges and principal repayments. Over the loan period, which is usually 25 to 30 years, your repayments will reduce the principal amount until you pay off the loan.
There are several types of home loans, fees, interest rates and loan features that you should be aware of before applying.
There are many types of home loan available in Australia and which is right for you will depend on your circumstances and goals.
Low deposit home loans help borrowers with small deposits buy property. Home loans are generally considered low deposit if the borrower has a deposit equal to less than 20% of the property’s purchase price - or a loan to value ratio over 80%. They may come with extra fees such as lenders mortgage insurance and higher interest rates.
Low doc or low documentation home loans don’t require as much evidence of income and/or employment as regular home loans do. They’re for borrowers that may not be able to present the documents usually required for a home loan like:
While low doc loans may make it easier to secure a loan to buy property, they also come with a few drawbacks like higher interest rates and lower maximum LVR (usually 60%).
Construction home loans are designed for borrowers who want to build a home or investment property. They function a little differently than regular home loans, allowing you to withdraw funds in stages as you need them to complete construction.
During the building phase construction home loans are usually interest only, and will revert to principal and interest when the build is complete.
The vast majority of home loans include both interest payments and principal repayments. However, in some cases borrowers may be able to make interest-only payments for a set period of time - usually one to five years. This may have tax benefits for investors, or it may free up cash flow when it’s needed for other costs or lifestyle changes.
Buying your first home can be a big step toward financial security and a better lifestyle, but it can also be a huge financial challenge. Because of the high price of property in Australia, federal and state governments have created a number of grants, schemes and discounts to make it easier for first home buyers to purchase their first property.
Home loans are offered by four types of lenders, retail banks, credit unions, non-bank lenders and mortgage brokers. Each type of lender has pros and cons and which is better for you will depend on your unique goals and circumstances:
Includes Commbank, Westpac, ASB and ANZ.
Banks are financial establishments that are licensed as authorised deposit-taking institutions (ADIs). With a bank, you can open transaction and savings accounts, deposit and access your money and secure a number of financial products - including home loans. Banks are for-profit institutions owned by their shareholders.
Many borrowers choose banks because they already have accounts with them and are familiar with their brand and the vast majority of home loans are through retail banks.
Includes CUA, Heritage Bank, Newcastle Permanent and IMB Bank & more.
Customer-owned banks are sometimes called credit unions or mutual banks. They are ADIs just like banks, but the difference is they’re owned by their customers and are not-for-profit. They exist to provide services for their members.
Includes Pepper Money, La Trobe Financial, Liberty & more.
Non-bank lenders are not registered ADIs. That means they can’t offer transaction accounts, term deposits, savings accounts like banks can. They can, however, offer home loans and often cater to specialist borrowers like those with bad credit or low deposits.
Includes Aussie Home loans, Mortgage Choice and Shore Financial & more.
A mortgage broker is an intermediary between you and other lenders, including banks, non-banks and credit unions. They will act on your behalf, helping you to secure a mortgage, liaising with lenders and providing advice. Mortgage brokers are usually paid via commission by the lenders whose products they sell.
The type of loan that is suited to you will depend on your circumstances. Before you start looking for a home loan take time to learn about loan features and interest rate types or get someone to help you figure out what you need - like a mortgage broker or financial advisor.
Interest is the biggest cost of any home loan by far. That’s why it’s so important to understand how to find low interest rates, how interest works and what type of interest is best suited to your situation.
When securing a home loan you should always consider which home loan features might help make the loan cheaper, more flexible or easier to manage. These might include:
Keep in mind when considering home loan features that they often come with extra fees. Make sure you’re aware of the fees and weigh them against the benefits that the feature provides.
Once you secure a home loan and buy a property you’ll make regular repayments every month or fortnight until the loan is paid off. These repayments will generally include:
Interest and principal repayments make up most of the expense involved with a home loan, but fees charged by your lender can add up as well.
Refinancing is the process of changing to another home loan. To do this you’ll secure a new mortgage to pay off your existing one. Refinancing may cost you money, so make sure you know the cost and can weigh it against the benefits before making a decision. If you’re unsure, it’s always best to get advice from a financial advisor or mortgage broker.
Home loans are an essential tool for the vast majority of people who want to buy property in Australia. The more you know about your loan, the more equipped you’ll be to get a great deal, pay your loan off faster and save money.
Choosing the right home loan is nearly as important as choosing the right home. Take time to understand how home loans work and what type of home loan is suited to you, or seek expert advice before applying. Do it right and a few good decisions now could save you hundreds of thousands of dollars and make your life easier.
You can compare home loans by using a mortgage broker, doing your own research or visiting a home loan comparison site. Consider home loan fees, features and lender customer service while researching rates. A comparison rate expresses the true cost of the loan, including both fees and interest.
As a general rule, home loan repayments should ideally be less than 30% of your household’s take-home income. Paying more than this amount can potentially lead to financial stress - always speak to a financial advisor to assess your capacity to meet repayments.
The home loan that is best for you will depend entirely on your goals and circumstances. Take the time to learn about what you need in a home loan to achieve those goals, and talk to an expert for advice like a mortgage broker or a financial advisor.
There are many lenders offering home loans in Australia, and a wide variety of home-loan types to suit individual borrowers. Banks are often the primary lender for home loans in Australia, however they are also available from credit unions, non-bank lenders, and through mortgage brokers.
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.
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