How to get a home loan in Australia: step by step

Buying a home is one of the most exciting and life-changing experiences for a person. Not only is it a significant financial investment, but it is also the realisation of a dream. However, this process involves a substantial financial commitment, which can seem complex for many.

To help you navigate this path, this step-by-step guide outlines the necessary steps to obtain a home loan in Australia.

1. Calculate your borrowing power and prepare financially

The first step to securing a home loan is understanding your borrowing power. This involves assessing your income, debts, and expenses to determine how much money you can effectively borrow. Each lender has different methods for calculating this amount, and some may be more risk-averse than others.

Importance of borrowing power

• Definition: Your borrowing power indicates the maximum amount a lender is willing to offer. Understanding this is crucial, as it helps determine the type of properties you can consider purchasing.
• Deposit requirement: Generally, lenders require a minimum deposit of around 20% of the property’s purchase price to avoid paying Lenders Mortgage Insurance (LMI), which acts as an upfront payment to proceed with the loan.
• Tighten your belt: This is the ideal time to save. In addition to the deposit, be prepared for additional costs such as stamp duty, registration fees, and property valuations.
• Credit report check: Request your credit report from agencies such as Equifax, Experian, and Illion. Check for errors and work on improving your score, especially if you have any previous outstanding debts.
• Loan grants: Research whether you are eligible for government grants, especially for first-home buyers, which may allow for reduced deposits (e.g., 2% instead of 20%).

Start saving for your house deposit

Once you have an idea of how much you need for a deposit, it’s time to create a savings plan. If you’re buying with someone else, make the plan together.

How long does it take to save for a house deposit?

Saving for a deposit takes time. Having a clear savings plan and sticking to it will help you reach your goal more quickly.

Tips for saving

• Use a savings goal calculator to set your strategy.
• Organise your finances with a budget, showing how much money comes in and goes out each month, how much can be saved regularly, and where to cut expenses.
• Automate your savings by setting up automatic transfers to a savings account, allowing you to save effortlessly.
• Consider investing in stocks or funds if your purchasing goal is a few years away, as long as you are comfortable with the risks.

2. Compare home loans

After understanding your borrowing power, the next step is to compare different home loan products. This is essential to ensure that you find the option that best suits your financial needs.

Factors to consider

• Interest rate: This is the amount you will pay on the borrowed sum. A lower rate can save you thousands over time.
• Comparison rate: Provides a clearer view of the total cost of the loan, including additional fees.

Rate type

• Fixed rate: The interest rate remains constant throughout the loan period, offering predictability in repayments. However, you won’t benefit if rates fall.
• Variable rate: The rate can fluctuate over time based on market conditions, which could result in lower or higher payments depending on rate movements. It offers flexibility but with varying repayments.
• Split rate: A combination of fixed and variable rates, providing a balanced approach.

Repayment type

• Principal and interest: Payments cover the total loan amount plus interest, ideal for those looking to reduce debt over time.
• Interest-only: Initial payments cover only the interest, typically for a set period. This may be useful but does not reduce the principal debt.

Loan features

Evaluate options like offset accounts or redraw facilities, but avoid paying extra for features you won’t use.

Loan term

Most loans come in terms of 20 to 30 years. Opting for a shorter term may result in higher monthly payments, but you’ll pay less interest overall.

Choosing a home loan

Choosing a home loan requires careful consideration of the interest rate, as even a small difference can have a significant long-term impact. Most people opt for principal and interest loans, where both the loan amount and interest are paid down over time, but there is also the option of interest-only loans.

3. Obtain home loan pre-approval

With your chosen lender in mind, you should apply for home loan pre-approval. This step is crucial to streamline your search for the ideal home.

What is pre-approval?

Pre-approval is an initial assessment of your finances conducted by the lender, which determines how much money you can borrow. It differs from final approval, as it does not guarantee that you will be approved but gives you an idea of your budget.

Importance of pre-approval

• It simplifies the property search, allowing you to feel more confident about what you can afford.
• Typically, pre-approval is valid for three to six months, so it’s important to apply when you are ready to buy.

Required documentation

This process may require you to provide documents such as proof of income, employment history, and details about your debts.

4. Make a home loan application

Once you find a home and your purchase offer is accepted, it’s time to formalize your loan application. This step is essential for acquiring your new property.

Application process

• Sale contract: This document will specify the amount of the deposit and loan, as well as the dates when payments should be made. It is advisable to have a lawyer or conveyancer review the contract.
• Property inspection: Arrange for building and pest inspections before finalizing the purchase, as this can help avoid future surprises.
• Documentation: Prepare your personal documentation for the official loan application, including proof of identity, income, and financial details.

Formal approval

After reviewing the documentation, the lender will send a loan contract for your signature. Once signed, the loan amount will be transferred to the seller.

Documents required to apply for a home loan

When applying for a loan, you will need to present documents confirming your identity, income, and financial situation. Typically, essential documents include:

• Identification documents: Photo ID and secondary documents.
• Proof of income: Pay slips or tax returns.
• Bank statements: At least three months’ worth to verify your income and expenses.
• Proof of assets and liabilities: Details of assets and debts.

5. Complete the home loan settlement

The final step in the process of obtaining a home loan is the settlement, where you finally become the owner of your new home.

What is settlement?

Settlement is the date when the sale is officially completed, and you become the owner of the property. The title of the property will be transferred to you, and you will start repaying your loan.

Timeline

The settlement date typically occurs a few weeks after the sale contract is signed. During this period, you will need to pay stamp duty and complete other documentation, depending on the state or territory.

Incentives for first home buyers

In some cases, first home buyers may be exempt from stamp duty, depending on their eligibility for government home buyer schemes.

Paying Off Your Mortgage Faster

Paying off your mortgage early can save you money and ease financial burdens. Here are some effective strategies:

• Switch to biweekly payments: Making biweekly payments results in 26 payments annually, which is equivalent to making one extra monthly payment each year. This can significantly reduce the principal balance and the total interest paid over the life of the loan.
• Make extra payments: Use bonuses or tax refunds to make additional payments toward your mortgage. This can lower the principal and reduce the interest accrued, shortening the loan term.
• Find a lower interest rate: Compare interest rates from different lenders and negotiate with your current lender. Even a slight reduction in the interest rate can lead to significant savings over time.
• Utilize an offset account: Linking a savings account to your mortgage can reduce the amount of interest charged. The balance in the savings account offsets the mortgage principal, lowering the interest calculation.

What to do before applying for a home loan?

Before starting the application process, it’s crucial to get your finances in order. here’s a summary of essential steps:

• Save for a deposit: Aim to save at least 20% of the property’s value. a larger deposit means a smaller loan amount, which can lead to lower interest payments.
• Pay off your debts: Reducing outstanding debts can enhance your borrowing capacity. paying off debts demonstrates financial responsibility, which lenders appreciate.
• Check your credit score: Regularly monitor your credit and make necessary corrections to ensure you qualify for competitive interest rates. you can request free credit reports periodically.
• Estimate your borrowing capacity: Use online tools to calculate how much you can borrow, helping you set a realistic budget for your home purchase.
• Know your LVR: The loan-to-value ratio (LVR) is an important indicator for lenders. an lvr below 80% can help you avoid Lenders Mortgage Insurance (LMI) and may result in better interest rates.
• Compare different lenders: Analyze options from various banks and lenders. compare interest rates, terms, and conditions, and be prepared to negotiate for better offers.

How much do you need for a house deposit?

As mentioned, buying a house is exciting and involves saving for the initial deposit. Start by calculating how much you can borrow, taking into account the additional costs of purchasing, such as taxes and transfer fees.

A common goal is to save 20% of the house price, but some lenders accept a deposit as low as 5%. This can result in a larger loan and the need to pay Lenders Mortgage Insurance (LMI).

Get help to buy a house

If you’re purchasing your first home in Australia, there are government assistance programs available. The First Home Owner Grant (FHOG) can help cover costs for your home or reduce land transfer taxes (stamp duty). Rules vary by state and territory, so it’s essential to check the specific grant website for details.

• Another option is the First Home Super Saver Scheme (FHSSS), which allows you to save a deposit through your superannuation. You can withdraw up to $15,000 per year, with a total limit of $50,000. More information is available on the Australian Taxation Office website.
• Additionally, the First Home Loan Deposit Scheme lets you buy with just a 5% deposit without needing to pay Lenders Mortgage Insurance (LMI). Eligibility details can be found on the National Housing Finance and Investment Corporation website.

Consider seeking professional advice

Seeking professional advice when applying for a home loan can be crucial in securing the best terms and avoiding mistakes. A knowledgeable professional is familiar with the various types of home loans and keeps up with changes in bank policies regarding risks.

This guidance helps prevent you from approaching the wrong lender, facing rejection, or ending up with a non-competitive interest rate. Professionals can analyze your financial situation, explain different loan options, and ensure you understand the fine print.

Practical step-by-step guide to applying for a home loan

Here’s a summary of the key steps:

1. Fill out the application form: Provide basic information about your finances, deposit, and the property you wish to acquire. The lender will use this information to estimate how much you can borrow and the applicable interest rate.
2. Submit your documents: The lender will request documents such as pay slips, bank statements, and identification to assess your borrowing capacity and validate your information.
3. Credit check: The lender will conduct a credit check to ensure you have a solid financial history. They will review existing debts and any potential defaults.
4. Obtain pre-approval: After the financial verification, you may receive a pre-approval, which means the lender generally agrees to lend you a specific amount. Pre-approval is typically valid for a few months.
5. Property valuation: After making an offer on a house, the lender will conduct a property valuation to ensure the market value aligns with the loan amount requested.
6. Obtain unconditional approval: If everything is in order after the valuation and your financial situation hasn’t changed, the lender will grant unconditional approval for the loan.
7. Receive the loan offer: The lender will issue a formal loan offer, which you should review and sign, accepting the terms and conditions.
8. Prepare for settlement: Settlement is the final stage, where payment to the seller is made, and you take ownership of the property.

Conclusion

Obtaining a home loan in Australia may seem daunting, but with the right knowledge and preparation, you can navigate this process confidently. Each step is crucial, from understanding your borrowing capacity to the final settlement of the loan. Don’t hesitate to seek financial advice and consult professionals to assist you at every stage of your journey.

Investing in financial education is one of the best decisions you can make when entering the real estate market. With careful planning and an informed approach, you’ll be well on your way to realizing the dream of homeownership in Australia.

Also read: How to buy a house? A practical guide