Home Loans

The loan amount is the total sum borrowed to purchase any property. This amount is usually determined by factors such as the property’s purchase price, your deposit, and the lender’s guidelines. Ideally a loan amount of 80% is best as you will avoid paying something called Lenders Mortgage Insurance – commonly referred to as ‘LMI.’ This is a type of insurance that protects lenders in the event that a borrower

defaults on their home loan and the sale of the property doesn’t cover the outstanding mortgage balance. LMI does not protect the borrower; rather, it protects the lender by reducing their risk of financial loss in case of default. The cost of LMI is usually paid by the borrower as a one-time premium or added to the loan amount and paid off over the life of the loan through higher interest rates or monthly payments. While LMI increases the upfront costs for borrowers with smaller deposits, it also enables them to access home loans with lower deposit requirements, making homeownership more attainable for many buyers. The amount you can borrow i.e. borrowing capacity, is mainly determined by your income. The higher your income, the more a bank will generally lend.

If you are single it is a lot harder to borrow when compared to a couple earning a similar income.

Lenders will look at things such as pay slips, income statements, bank statements, or tax returns to calculate your income which may include a regular wage, allowances, commissions, overtime, bonuses, or profit from your business if you are self-employed.

The minimum period of employed can be broken down into the following:

– Full-time OR Part-time – Minimum 3-6 months (varies from lender-to-lender). We do have a few exceptions that will consider after 1 or 2 pay slips.

– Casual – Minimum 6-12 months of consistent employment (varies from lender-to-lender)

– Self-employed – 2 x full financial years. There are some banks that will consider after 1 x financial year if your income is strong however your ABN must have been registered for a minimum period of 2 years.

Living expenses & monthly commitments such as credit cards, store cards, HELP/HECS debts, & payday lenders such as ZipPay, AfterPay etc. also greatly affect what a bank will lend.

Your living expenses are closely considered on any application. Initially as a borrower you will provide a declaration outlining roughly what you spend on items such as groceries, housing costs such as power, water, rates, vehicle costs (i.e. fuel, registration, servicing), phone & internet, clothing & personal care, health & medical costs, insurances including home & contents, motor vehicle, private health, life insurance, entertainment & recreational spending (dining out, gifts & celebrations, weekends, holidays, sport, gym). Your declaration is then reviewed by us as brokers & compared to recent spending shown in bank statement – usually within the most recent 3 x months. Be careful not to spend too much money or in the build up to applying for a loan. The more you are spending, the less a bank will lend. Ideally also having no, or very little personal debt will help.

Banks also apply a buffer on top of any carded interest rate they apply on your loan to determine affordability & borrowing power. This assessment rate is usually set at 3% on top of the actual rate being applied, & was bought in by the regulator for lending in Australia, APRA (the Australian Prudential Regulatory Authority), to prevent hardship – if & when interest rates to rise. Whilst we might think we can comfortably repay a loan at the said rate the bank will apply, in reality we must prove we can service that debt at the much higher assessment rate for that bank to lend us the money.

A deposit is the initial upfront payment made by the buyer toward the purchase price of the home. It is expressed as a percentage of the total purchase price. Deposit requirements vary depending on the type of loan and lender but typically range from 5% to 20% of the home’s purchase price.

The greater your deposit or equity position, the better deal you will get & the more money a bank will lend.

A bank may offer you massive discounts if your loan is below 60% or 70% of the overall property value.

Whilst we say 5% is the minimum bank requirement, you do in fact require a lot more than this when buying a home as there are purchase costs we have to factor in which include Stamp Duty, Government Registration & Transfer Fees, Conveyancing, Rates (these are paid pro-rata i.e. balance of what is owed for the financial year at settlement), Lender establishment fees & solicitor costs. These purchase costs do add up to around 8% of any purchase price which are quite hefty. As a rule of thumb, we normally adopt the principal that a minimum deposit of 13% is required on any home without any Government assistance (i.e. without any First Home Buyer Stamp Duty Concessions, First Home Owners Grants, New Home Guarantee Scheme, Regional Home Guarantee Scheme, Family Home Guarantee Scheme, OR MyHome Scheme). If you are a first home buyer there are ways of getting away with as little of a deposit as 5% with the aid of one of these Government Schemes OR, even less if you have access to parents or close family that can provide a guarantee & put up their home or investment property as additional security. With a parental security guarantee you can physically borrow up to 105% of a purchase price (do not really need a deposit at all), providing the home is suitable & you have the borrowing capacity to borrow the loan amount required. We have assisted many young individuals & couples with these family guarantees in the past.

The interest rate is the cost of borrowing money, expressed as a percentage.

It determines the amount of interest the borrower will pay over the life of the loan.

Interest rates can be fixed, meaning they remain the same throughout a set term – usually between 1-5 years, or variable, meaning they can change periodically based on market conditions.

Over recent times it has been very hard to borrow money, purchase your first home, OR even pay down your home loan if you already own a house.

The economy both here in Australia, & all over the world, plays a huge role in determining interest rates. Things such as inflation i.e. the increase in the general price level of goods and services in an economy over a period of time, unemployment, & global events such as war, recently COVID-19, & alike all have a massive bearing on what we are charged by a bank on our loan. The Reserve Bank of Australia sets the cash rate, also known as the official cash rate (OCR) or policy interest rate, as Australia’s monetary authority. It represents the rate at which banks borrow or lend funds to each other on an overnight basis in the interbank market. In most cases, the central bank sets the cash rate as a tool to influence monetary policy and manage economic conditions. It is very important to listen to the news when you hear an RBA decision is near. Banks will, in most cases, pass on any hike OR cut (the can be rather reluctant to do the latter sometimes!).

Varable interest rates provide total flexibility in being able to repay your loan as quickly as possible, & come with the added benefits of either an offset facility or redraw.

The downside to variable rates is that they can go up & down i.e. can change, depending on the RBA & the economy. Banks can also adjust these rates when they like. The majority of loans in Australia are currently variable.

Offset is an account/or several accounts linked to your loan that are fully transactional (just like your everyday banking account), however the money in the account is offset to the loan meaning less interest is applied daily & charged at the end of the month. For example, if you had a home loan of $500,000 & held $100,000 in your offset account, the bank will only charge interest on the net amount you owe of $400,000. Offsets will enable to you save quickly, pay your loan off sooner, & good for tax purposes if looking to purchase investment properties, & are an important tool if you hold more than one property.

Redraw is a facility of the loan itself & is not a separate account. It can only be utilised in you pay extra off your home loan via advanced repayments or lump sums (a lot of people pay their savings into their home loan so as they are not tempted to touch the money) & is a facility used to access these repayments above the

contracted minimum. They are done via internet & phone banking at no cost, in a matter of seconds. Redraw is the better option when compared to the offset if only holding one property & have no intention of purchasing another.

Usually you pay more to have an offset account linked to your loan through a wealth package (normally a monthly fee of $8-$10, or annual fee up to $395), than you do with a basic variable loan which simply has redraw.

A basic variable loan is more of a ‘no frills’ option & has slightly cheaper interest rates.

Fixed interest rates are great if you prefer certainty in repayments and would like to know what you are paying over a set period.

They do not have the flexibility that variable have with offset or redraw, & you can only pay a certain amount extra (amount differs with every lender) off your loan.

There is no option to pay it out early or as quickly as you like.

If you do break the agreed fixed term by selling the house or switching banks, your bank may charge a ‘break cost’ for doing so which could be thounsands of dollars. Banks typically calculate break costs, also known as break fees or early repayment charges, via an Interest Rate Differential (IRD): This method calculates the difference between the interest rate on the fixed-rate loan and the current market interest rate for a similar term remaining on the loan. The break cost is typically based on the remaining principal balance, the difference in interest rates, and the remaining term of the loan. These costs compensate the lender for the financial loss incurred due to the borrower breaking the terms of the loan agreement.

Fixed rate terms at most banks are 1, 2, 3, 4 or 5 years. There have been lenders in the past that would consider up to 10 year terms. Interest rates are a massive factor when determining which option might be best however, you should also factor in upfront & ongoing fees with any proposal. Comparison rates – the true rate of a loan over a term, are a good things to check when reviewing home loan options.

Everyone is different & has varying objectives – as brokers we are here to find a loan that fits your best interests & is not-unsuitable towards your needs.

The loan term is the length of time over which the borrower agrees to repay the loan. Common loan terms for home loans are 15, 20, or 30 years.

Shorter loan terms typically come with higher monthly payments but lower overall interest costs, while longer terms offer lower monthly payments but higher total interest costs over time.

Some lenders will consider up to 40 year terms for first home buyers however we should remember, the aim is to repay debt as quickly as we can.

You can greatly reduce your term with a variable rate loan should you make additional repayments, or when you refinance by keeping your original contracted term.

In most cases you can make weekly, fortnightly, or monthly payments to the lender, which include a portion of the principal (the amount borrowed) and the interest accrued on the outstanding balance.

These payments continue until the loan is fully repaid or until the property is sold or refinanced.

Interest only repayments are only available on home loans in the event of hardship OR during the construction of a new build. Should you have an investment property though, you do have the option of choosing your loan to have interest only repayments – this is only normally done if the investment is negatively geared, or you are paying off a primary residence, or you are holding the investment for capital growth purposes & are hoping to make a decent return.

Much cheaper rates are available for principal & interest (P&I) repayments when compared to interest only (IO).

Effectively, with interest only, you are not paying the loan off at all – you are simply paying the monthly interest that is applied against it.

For a home loan, the property being purchased serves as collateral or security for the loan.

If the borrower fails to make the required payments, the lender may have the right to foreclose on the property, seizing it to recoup the outstanding debt.

Most houses will be considered as security by a lender, providing no issues are apparent in valuation report & the home fits within they policy guidelines e.g. some banks may only accept homes on less than 5 Ha in residential or semi-rural areas OR units over the size of 40m2.

We may only have one or two options should you be looking to purchase remotely OR wanting to buy a house that sits on land under a certain size. Always check with us prior to making an offer on a property whether or not the home might be suitable to a bank & acceptable for lending purposes. Purchasing a home is a huge financial investment, our tips are not to rush, never get emotionally attached to a home (there will always be others), & to make sure you can live comfortably based on the repayments + added costs of owning a specific property. There is much more to life than repaying debt.