How To Get A Home Loan (Mortgage) in Australia: Explained

Having your home is a significant milestone for many. A large number of homebuyers rely on loans to fund their dream home.

This comprehensive blog answers the most common home loan questions and discusses the proper steps to apply for a home loan.

It will teach you how to get your first home loan or mortgage in Australia, the requirements, eligibility criteria, documents required, the deposit you need, and much more.

1. Features Of Australian Mortgages

Australian mortgages are different from US and UK mortgages in the following ways:

• In Australia, the loan types are straightforward to manage and flexible. 

• You get the convenience of managing it via internet banking.

• Except for fixed-rate mortgages, you can make any number of additional repayments.

• You can access or redraw the additional repayments quickly.

• Many Australian banks provide specialised foreign customer credit teams or call centres to foreigners applying for loans. Also, they get home loans with greater flexibility and fewer restrictions.

• You may also get packages that include a credit card, cheque account, and mortgage at attractive discounts.

2. Types Of Home Loans Offered In Australia

Low Documentation Home Loans

• These loans are for freelancers, self-employed people, or small business owners who can't provide the necessary documents. These include payslips, employment proof, and tax returns to obtain a home loan. 

• It generally has high-interest rates and limited lending conditions.

Guarantee/ Family Guarantee/ Guarantor Home Loans

• With this loan, parents can use their home as security against it.

Equity Release /Reverse Mortgages

• This type of loan enables people over 55 years to use the equity in their existing property to borrow money as a lump sum, regular income, or line of credit. The interest payable compounds over time and adds to the loan balance.

Foreign Income Home Loans

• This loan is ideal for Australian ex-pats who earn foreign income and wish to invest in Australian property. Nowadays, several Australian banks accepting this loan accept a broad array of currencies. 

• The condition to use this loan is that you can only use 60 to 90% of your foreign earnings. This requires you to have Australian income to qualify for the loan.

Home Loans For Students

• Few lending institutions pay home loans to students by assessing their monthly interest repayments on the home loan. A student must have some savings to use as a deposit to buy the home. 

• The greater the savings, the higher chances of getting the loan. With a deposit of less than 20% of the property's value, you must have a lender's mortgage insurance.

Home Loans For Single Parents

• A single parent can also qualify for a home loan. However, it can be tough to get, but it is possible. Lenders will evaluate your household income to make the loan approval decision.

• They would consider Government Childcare Benefits and Centrelink payments as income and grant you a loan based on that.

Rural Home Loans

• It is to 10 to 15 hectares of rural property for personal reasons like farming and not to generate income. 

• You can borrow up to 95% of the existing land's value or 100% with a guarantor.

3. How To Improve Chances Of Getting A Home Loan?

The following ways can help you boost your chances of getting a home loan approved by a lender:

• Co-sign a loan with a partner

• Use a guarantor

• Apply for a cheaper house

• Choose a longer loan term that requires paying more regular repayments at lower interest rates)

• Provide a savings plan to the lender that shows how you can bring down your expenses

4. On What Factors Does A Loan Lender Assess Prospective Borrowers?

The following measures decide the loan-worthiness of a loan applicant:

Cashflow

The lender evaluates the borrowers' incomes, living expenses, and other expenses to calculate their disposable income. 

It will help them find how much cash remains after the expenses to repay the loan instalments.

Collateral

Another thing that they check is whether the property is easy to sell in case of non-payment of loan instalments.

Reliability

They check whether the applicant is trustworthy enough to pay off a loan.

Credit History

This is another essential factor that helps them determine whether they should sanction a loan to you. 

You should have a good credit history (bill payment history) to increase your chances of loan approval.

5. What Are The Best Sources To Get A Home Loan?

In Australia, you have a variety of lenders that can offer you home loans. Some of these are:

• Major banks

• Financial institutions

• Credit unions

• Smaller banks

• Non-bank lenders

Check their eligibility criteria to know which can offer you a loan. Based on that, apply for a loan over the phone, online, or by visiting a branch.

6. How To Get A Home Loan In Australia?

Pre-approval of a home loan gives you a good idea of your borrowing capacity and speeds up the application process.

However, you should know that pre-approval doesn't assure a successful home loan application. This type of approval generally lasts between 3 to 6 months as the financial position and the property market change with time.

These are the documents you need to receive a pre-approval for your home loan:

• House deposit

• Good credit history

• Steady Income

• Credit card statements

• Tax returns

• List of liabilities such as credit card debts, vehicle loans, personal loans, and other debts

• 100 points of ID (driver's license, passport, Medicare card)

• Income proof as Payslips 

• Savings proof as Bank statements 

• Council rates for existing properties that you own

• List assets such as a vehicle, immovable property, jewellery, etc.

• List of monthly expenses such as utility bills, grocery charges, medicine bills, monthly internet charges, loan repayment instalments of other active loans, child care expenses, school fees, media streaming subscriptions, etc., to calculate disposable income 

• First homeowner grant document

• A completed home loan application form

7. Home Loan Requirements For First-Time Home Buyers In Australia

The home loan qualifications for first-time buyers differ slightly from the general case. 

You must fulfil the following conditions to qualify for this loan:

• A permanent Australian resident 

• At least 18 years old 

• Identification Proof such as a passport or birth certificate 

• You haven't owned a home since the year 2000

• Do you want to purchase a new or existing house as an individual

• Contract of sale of the property you plan to buy

• You are using the grant facility for the first time

• You must prepare to live in the house for at least six consecutive months

• Employment Proof (payslips for employed in a company, and tax returns for self-employed) 

• Savings proof as bank statements 

• Disclosure of Debts as credit card statements, existing loans, billing statements, etc.

• List of assets you own, such as investments, vehicles, jewellery, real estate, etc.

• A completed home loan application form

As the requirement varies from state, check your state's eligibility criteria for more information.

8. How Much Loan Amount Can I Borrow?

Your borrowing capacity or borrowing power depends on your existing financial situation. Financial institutions like banks generally lend up to 3 to 5 times the yearly income of an applicant. 

However, your expenses, existing debts, and credit score can impact your borrowing power.

Your borrowing power is determined based on the following:

• Your yearly salary before tax deduction

• Other sources of regular income such as rental income, interest on deposits, secondary jobs, etc.)

• Monthly household expenses

• Regular credit and loan repayments

• Savings history

• Number of dependants 

• Marital status

• Type of home loan (for living or investment purposes)

• Duration of home loan

9. How Much Deposit Do You Need For A Home Loan?

Generally, lenders in Australia will require "20% of the house value" as a deposit to qualify for a home loan. However, you can also find a few lenders who can sanction you a home loan with as little as a 5% deposit.

To qualify for this loan, you must be able to meet repayments. You will pay a tremendous sum as interest compared to a 20% mortgage. Chances to secure this loan can increase if you are:

• Married with an Australian citizen or a permanent resident

• In a de facto relationship with an Australian citizen or a permanent resident

• Buying a reasonably priced house that is not very expensive or fancy.

You must know that borrowing with a below 20% deposit will require you to pay Lenders Mortgage Insurance. As it can be costly, it is wise to avoid it.

A personal loan can be an option if you can't pay a 20% home deposit. However, the chances of accepting your loan application are very low, as most providers accept borrowers with genuine savings.

Some lenders may allow personal loans for home deposits for high-income earners. Due to the high apparent risk, they charge you the loan at a higher rate. 

Thus, taking a personal loan to pay the deposit requires you to be financially capable of repaying both instalments simultaneously and bearing a high-interest rate.

10. How To Choose A Home Loan In Australia?

Home loans come in varying features and options. There are several things to consider to find the best loan for your needs:

Step 1: Decide The Type Of Loan

Principal and Interest Loans: You repay the borrowed amount regularly and pay a specified interest. You pay the total loan amount over an agreed loan period.

Interest-Only Loans: You pay only the interest amount for the initial years. During this time, your repayment amount is less as it doesn't cover the repayment of the principal amount.

However, you must repay the principal and interest in instalments when the initial period ends. Due to this, you now repay more than you were paying in the interest-only period.

It is good to check the affordability of the repayment amount after the interest-only period before you apply for this loan.

Step 2: Decide The Loan Term

The loan duration determines the size of your loan repayment and payable interest. Shorter terms loans require repayment of a higher amount for a shorter time but with less interest.

On the other hand, in longer-term loans, you repay a smaller amount for a longer duration and more interest. We recommend getting an affordable shorter-term loan.

Step 3: Choose A Loan With a low Low-Interest Rate

Loan lenders provide loans at varying interest rates. As home loans are long-duration debt, even the slightest difference in interest rate can save you a thousand dollars. 

Thus, in addition to the other parameters, choose the loan available at a low-interest rate.

Step 4: Decide The Type of Interest Rate

Home loan comes in three types of interest rate such as:

• Fixed Interest Rate: The interest rate remains fixed for a fixed period and later changes to the variable rate. Where it is cheaper and simplifies budgeting, you don't get the benefits of interest rate fluctuation. As of March 2022, the average fixed mortgage interest rate is 3.49%.

• Variable Interest Rate: The interest rate increase or decreases with the changes in the lending market. You get more loan features and increased flexibility but at a relatively higher price. Managing your finances is challenging due to unpredictable interest rate changes. As of March 2022, the average variable home loan rate in Australia is 3.32%

• Partial-Variable Rate: A loan with this type of interest rate combines the above two types. In other words, a certain percentage of your loan has a fixed interest rate, and the remaining has a variable interest rate. In this way, you get the benefits of both worlds and reduce the drawbacks of both schemes.

Step 5: Decide on the Features

The cost of your loan increases with the number of features you choose. These features include the line of credit, redraw, offset account, etc. Assess if you need any additional features before you finalise a loan.

Avoid fancy and costly features that do not serve you. Go for a basic loan with limited features that match your lifestyle and requirements.

Step 6: Identify Your Borrowing Capacity

Do a realistic analysis of how much you can borrow and repay. 

Choose a smaller loan amount so you can still repay the loan instalments if the interest rate rises.

Step 7: Compare the Home Loans

Once you are clear on the borrowing capacity, type of loan, loan duration, and type of interest rate, you can check the home loan offers.

Compare them based on the interest rate, loan term, monthly repayment amount, application fee, ongoing fee, and loan features.

A Mortgage Calculator helps you work out the repayments before and post the interest-only period and compare the different rates.

The calculation depends on the following information provided by the user:

• Amount borrowed

• Interest rate

• Chosen Repayment frequency (Monthly, Annually, fortnightly, Weekly, Quarterly)

• Length of Loan (in years)

• Interest-only period

• Lender's Fees

11. Steps To Apply For A Home Loan In Australia

Applying for a home loan may look like a lengthy procedure, but the below steps will help you simplify the process to a great extent.

Step 1: Arrange A House Deposit

Analyse your finances on how much you can arrange for a house deposit. To conclude, you should analyse your income statements, savings, credit score, credit report, and financial commitments.

Based on the available cash, look for only those houses where you can pay 20% of the house purchase price as a deposit, including fees and expenses associated with the house purchase.

Step 2: Get The Documents Ready

You need to provide the following documents as part of the home loan approval process:

• Credit report

• Payslips or other Employment Proof

• Bank Statements and further Savings Proof

• List of existing assets, debts, and monthly expenses

• Tax returns

• Credit card statements

• ID proof

• First Home Owner Grant document

• Completed home loan application form of the chosen lender

Step 3: Lender's Assessment Of The Borrower's Application

Once the borrower has submitted the loan application and the documents, the lender will assess it against their lending criteria. As part of the formal assessment process, they will verify the correctness of the information and documents provided.

Next, they will determine the applicant's capacity for loan repayment and the inherent risk of approving funds for the applicant. A lender may decline the loan application if they assess high risk, charge a high-interest rate or ask the applicant to provide a guarantor.

Lenders will carry out an independent valuation of the applicant's property as they will be entitled to sell it if the home loan borrower defaults on his repayments. The lender will issue a loan offer to the borrower based on the assessment.

Step 4: Decide Whether To Accept Or Refuse The Lender's Loan Offer

The borrower will assess the lender's loan offer. If he is happy with the terms and conditions of the loan offer, he can go ahead and sign the loan documents and return them to the lender.

Step 5: The Final Settlement

The lender will provide a settlement date to the seller. It is when the lender transfers the loan to the seller, and the buyer can take possession of the house.

12. What Is A Reverse Mortgage?

This type of loan is for retirees or pensioners who are cash-poor but asset-rich. This is a popular home equity release among older people in Australia.

Under this senior loan plan, people aged 60 years and above would not require income to qualify for the loan. They can convert the ownership in the form of equities in their existing property into cash for another property.

Though the bank charges interest on this loan like any other loan, the borrower doesn't need to make loan repayment in reverse mortgage loans.

13. What Is The Interest Rate On A Reverse Mortgage?

The latest HECM reverse mortgage rates for a Lending limit of $970,800 are as follows:

• Fixed-Rate: 3.68% (4.68% Adjustable-Rate Payment)  

• Adjustable-Rate: 2.77% (1.75 Margin)

• Fixed-Rate: 3.81% (4.81% APR)  

• Adjustable-Rate: 3.02% (2.00 Margin)

• Fixed-Rate: 3.93% (4.93% APR)  

• Adjustable-Rate: 3.27% (2.25 Margin)

• Fixed-Rate: 4.06% (5.06% APR)  

• Adjustable-Rate: 3.52% (2.50 Margin)

• Fixed-Rate: 4.18% (5.18% APR)  

• Adjustable-Rate: 3.77% (2.75 Margin)

14. How Does A Reverse Mortgage Work?

Reverse mortgage loans offer flexibility and increased sophistication to the older population in Australia. The amount of equity released under the loan depends on the value and age of the security property. 

During the loan approval process, the borrower retains the right over the house and can stay in it for as long as they want.

Based on the lender, they can borrow the loan in the form of:

• A lump sum

• Cash reserve

• A regular income stream

• A combination of the above

• The lenders may charge the borrowers fixed, variable, or capped interest rates. The borrower's loan account will incur the loan interest charges.

• The loan, including the fees and interest, is repaid to the lender under the following conditions:

• When the borrower sells the property 

• When the borrower moves to a nursing home

• On the death of the last-surviving borrower

15. How Much Is Mortgage Insurance?

A loan applicant is entitled to pay a lender's mortgage insurance if they borrow above 80% of the house buying price. 

This insurance only protects the banks and lending firms against the losses incurred when the borrower fails to make the loan repayment.

QBE and Genworth Financial are two popular LMI providers in Australia. 

The LMI cost depends on the following:

• The size of the loan amount

• The loan-to-house value ratio

• The location of the property

• If you are an investor/owner

• Your current employment

• If you are a first-time homebuyer

You can find LMI calculators online that can help you calculate how much LMI insurance would cost.

16. How To Get A Mortgage With Bad Credit?

Specific loan lenders in Australia provides mortgage despite the bad credit score of loan applicants under the following scenarios:

• You need to show verifiable payments that do not show on credit reports to prove your creditworthiness. These payments could be utility, rent, or any other such payment.

• Your debt-to-income ratio must not be more than 36%

• You must buy the house to use it as your primary residence.

• Ready to provide at least two months of cash reserve to the lender

Meanwhile, improve your credit score by paying down high-balance credit cards and making timely payments. Save up to 10% of the down payment to show yourself less risk to the lender.

17. How To Get A Home Loan With No Deposit?

A few home loan lenders offer no-deposit home loans in Australia. They allow approved applicants to borrow 100% of the buying price of a property without requiring any deposit. 

However, such loans come with high risks, and to qualify for them, you must meet strict lending criteria.

Some lenders even provide 105% of the house buying value, covering additional costs such as legal fees and stamp duty. Here are the eligibility criteria to obtain a no-deposit home loan:

• A perfect credit rating

• It should be a standard property and situated in a desirable location.

• Proof of adequate, stable employment income to meet regular repayments

The Following Can Improve Your Chances of Securing a No-Deposit Home Loan:

• Having A Guarantor

• Use the equity of the existing property as collateral security for another property. It reduces the risk of the lender approving the loan funds. 

• Apply for a First Home Owners Grant (if eligible).

18. Conclusion

There are several steps involved in the home loan application process.

Borrowers should begin preparing for the process before applying for a loan from a lender. This way, they will get the best opportunity to get the loan approved before moving into the new home. 

We hope the above information has solved most of your doubts and given you much-needed clarity on the loan application process.

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