Experts in housing believe the current economic climate has created new opportunities for homeowners to move up the ladder of property ownership. The interest rate has been lowered to 0.1% by the central bank. In addition, both the federal government as well as the state governments have introduced various housing incentives in an effort to make homeownership more affordable.
However, purchasing a property also entails heavy financing – and for home buyers who do not have a huge bankroll, taking a mortgage may be the only way to seal the deal.
How do you determine if a home loan is right for you? Many factors can impact the answer.
Is it possible to get a loan for your home?
Before you can borrow, you need to be eligible. To verify your ability to make monthly payments, background checks are done by banks and financial institutions. These lenders use different requirements to determine an applicant’s borrowing capability.
One example is gainful employment. Lenders often check an applicant’s annual income based on their pay slips and most recent tax statements. The standards may vary from lender to lender, but typically they use the following criteria to determine if a person’s employment situation makes them a decent candidate for a home loan:
- You must have worked for the same company at least two years.
- If a person is promoted to a new job, they must maintain the same job title as their previous one.
- The person must have held the same job for six months or more following a career shift.
- In a 2-year period, no more than three employers
- You are not allowed to take significant breaks from work (e.g. a five-month vacation in Europe)
- Not allowed to be on probation
- If you are self-employed, you will need proof of tax returns that cover the two most recent financial year.
Lenders take into account everyday living expenses, such as medical bills, insurance, and utilities, as well as monthly mortgage, rental, or mortgage payments. The number of dependents can also affect a person’s borrowing capacity.
Lenders need to confirm that the applicant has sufficient savings and, where possible, retirement savings. Lenders want to confirm that the applicant has enough resources to make the deposit.
Loan approvals are dependent on your credit rating and your credit history.
What are the types of loans that are available for home-buyers?
There are many lenders that offer home loans. Each lender offers a different set, and each one is tailored to the needs of a specific borrower. It is important that you choose the loan that suits your needs and circumstances. These are the most common types of loans available to Australian home-buyers.
1. Home Loans for Owner-Owned Homes
Owner-occupied loans are for those who intend to live in the property. The loan amount can also be used to buy or renovate a property, or build a new home. Because lenders assume that borrowers will be financially able to maintain the property for many years, the interest rate for this type of mortgage can often be lower than for other loan types.
Check out Your Mortgage’s comparison of the different owner-occupied home loans available
2. Home improvements loans to investors
Home loans for investment are for those who wish to purchase or renovate a property and make a profit in the long-term. This type of mortgage is more difficult to qualify for because lenders view investors as riskier borrowers. Investment home loans offer tax benefits as interest payments are exempt from tax.
Check out Your Mortgage’s comparison of the different investment home loans available
3. Low-doc Home Loans
Low-documentation home loans can also be called low-doc loans. These loans are available to borrowers who cannot provide the required documentation to be eligible for conventional home loans. This mortgage is very popular among investors and self-employed borrowers, although they might not have the required income documentation. Due to loose lending restrictions, you will pay more interest and fees.
4. Bridging loans
This loan is available to borrowers who are selling a home and purchasing a new one. A bridging loan allows a borrower to purchase a second home while their original property is being sold. This type of mortgage has an average term of 6 to 12 months and is added after the sale of the original property.
5. Construction loans
A construction loan is available to finance the construction of a home or major renovations to an already existing house. It covers all construction expenses. For the duration of the build, this mortgage typically charges interest-only payment. The initial term of the mortgage is 12 months. The loan repayments will be reduced to principal and interest after construction is complete.
In that the repayments are calculated differently, a construction loan is different from a home loan. Lenders might divide the loan into multiple stages (called progressive drawing down) and make payments for each stage. The stages may vary from lender-to-lender, but they usually consist of the following phases.
Second stage: Slab down or base
This drawdown covers foundation costs, including levelling and installing water pipes.
Frame, Second Stage
This includes framing the property including roofing and partial brickwork as well as trusses and windows.
The third stage is lockup
This includes costs for insulation, windows, doors, and external walls.
Fourth stage: Fitout/fixing
During this drawdown, the lender will cover the cost of interior fixtures and fittings. This covers interior cladding, including tiles, shelves, cabinets, plumbing and electrical systems.
Fifth stage: Completion
This financing is used to pay for final touches such as painting, flooring, fencing, and polishing walls.
6. Line of Credit Loans
A line credit loan can be used to borrow the equity in a home. This type of loan can be used for virtually anything, including a financing a child’s education, home renovations, a new car, a second property, or traveling overseas for a vacation. You can also borrow the loan and repay it up to your credit limit.
7. Non-conforming Loans
Non-conforming loans are for borrowers with low credit scores who are unable or unwilling to get approval for standard home loans. However, this type of loan requires a larger deposit and comes with a higher interest rate to offset the lender’s risks.
What are these important considerations when I select a loan to my home?
Borrowers should be careful when selecting the right home loan. These are:
Rates of interest
Variable and fixed interest rates can be offered. Many banks and lenders offer variable home loan interest rates, which fluctuates over time often in line with the central bank’s cash rate. If rates rise, mortgage repayments will increase. The same goes for borrowers who have their rates reduced. Borrowers may end up paying less interest.
Check out Your Mortgage’s comparison of the different variable home loans available
Fixed interest rates allow borrowers to lock down a rate for a set period. They can plan their future repayments without worrying about rate fluctuations.
Check out Your Mortgage’s comparison of the different fixed-rate home loans available
A loan has certain features
Lenders may offer different features when it comes to mortgages. Many banks offer financial services that can be combined to suit investors and different types. Home loan features should be available to borrowers that give them easy access to their balance, and allow them to modify repayments.
Lending terms
Borrowers should consider how long it will take to repay the loan and what happens to their mortgage if they make additional payments.
What is the maximum amount you can borrow?
Banks and financial institutions won’t lend more than 80% of residential property value, and as little as 70% for investment properties. But there are instances when lenders are willing to grant loans as much as 95% or even 100% of the property’s value. Our borrowing power calculator can give you an estimate of how much you can borrow based on your income and expenses.
However, for loans exceeding these standard values, a lender’s mortgage insurance (LMI) is often required. LMI estimator helps you calculate the cost to pay this one-time expense that protects lenders against financial loss.
Which lender offers home loans at the lowest rates?
Many factors can impact home loan approvals. It is important that you compare interest rates, loan features, and repayment terms.
Fortunately, Your Mortgage gives you a comprehensive comparison of the best home loans available from Australia’s top lenders. Click here to compare.
