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How to apply for a home loan

How to apply for a home loan

What is a home loan?

A home loan (also known as a mortgage) is where you borrow money to buy a property. You may want to live in this property as an owner-occupier, or rent it out to tenants as an investor.

You’ll have to pay back the money you borrowed, plus interest charges, in regular instalments over time. Because home loans often involve borrowing large sums of money, they’re typically repaid over longer loan terms of 20 to 30 years.

Many home loans involve making principal and interest repayments, where you’ll make slow but steady progress towards repaying the borrowed amount (the loan “principal”) with each repayment, while also covering the cost of interest charges to the lender. You may be able to switch to interest-only repayments for a limited time, which can greatly reduce the cost of your repayments, but this means it will take longer to pay off your property in the long term, and may cost you more in total interest charges.

Many home loans have variable interest rates, where the interest charged on your home loan repayments could change from month to month, depending on various economic factors. You may be able to select a fixed interest rate for a limited time, which will lock in your repayment amount for easier budgeting, until the loan eventually reverts to a variable rate.

How do you apply for a home loan?

The exact process of applying for a home loan may depend on the mortgage lender you choose, as well as your own personal and financial situation. But you can generally expect the process to follow these steps:

Calculate your budget

Before going property shopping or even selecting a home loan, it’s important to crunch some numbers. 

Often a good place to start is by looking at your household’s income and expenses. This includes income from your job and any other sources, and expenses such as payments on personal loans, car loans and credit cards. 

Based on this information, you can use mortgage calculators to estimate:

  • How much you can borrow
  • How much your repayments could cost
  • Your risk of ending up in mortgage stress

It’s also important to consider your home loan deposit, including your savings and any grants or incentives that may be available to you, such as the First Home Owner’s Grant (FHOG). The larger your deposit, the more home loan options may become available to you.  

There may also be other expenses to consider in your home loan budget, such as stamp duty, conveyancing fees and other costs.

Compare advertised rates and comparison rates

Many homebuyers start their home loan comparison by looking for the mortgage offer with the lowest advertised interest rate, as the higher the rate, the more the repayments may cost.  

However, the home loans with the lowest interest rates may not always be the best home loan choices for you, or even the cheapest options when you consider their other fees and charges. 

A home loan’s comparison rate combines the costs of interest, fees and charges into a single percentage figure, so you can quickly get a better idea of its overall cost.

Check the fees, features and other benefits and drawbacks

While comparison rates can give you a better idea of a home loan’s overall cost, they may not tell the whole story.  

As well as interest and standard fees, there may be other costs and charges to include in your budget, such as an annual package fee for a bundled home loan deal. 

A home loan may also offer special features and benefits that could increase the offer’s value to certain borrowers, such as:

  • Extra repayments
  • Redraw facility
  • Offset account

Some mortgage lenders also offer special deals to new customers, such as interest rate discounts or even cashback. Check the eligibility criteria and the terms and conditions for these deals to get a better idea of if they may suit your needs.

Keep in mind that some mortgage lenders may have other benefits and drawbacks to think about. For example, an online-only lender may offer a low interest rate and low fees, as well as convenient online access to your mortgage, but may not be able to package other financial products and services like some traditional lenders, or offer branch access for discussing your loan in person. 

Check Real Time Ratings™

One faster way to compare the overall value of different home loans may be to compare their Real Time Ratings™. Unique to RateCity, these ratings are updated daily for improved accuracy, and combine the cost and flexibility of a home loan into a single easy-to-read star rating. 

Other options for quickly comparing home loans include looking at the top-rated home loans in different categories on the RateCity Leaderboards, or choosing from the winners of RateCity’s Gold Awards

Collect financial documents

Different mortgage lenders will require different documentation to support your home loan application and confirm that you can afford the home loan on your household’s income and expenses. 

These may include: 

  • Payslips
  • bank statements
  • bills
  • Proof of identity (e.g. driver’s license or passport)
  • Employment contract
  • Tax records

Fill out a lender’s home loan application form

Depending on the lender you choose, you may need to fill out a paper form in person to apply for a home loan, or complete an online application. 

In either case, you’ll also need to include physical or digital copies of your supporting documents. 

Remember to only apply with one lender at a time, as multiple applications means multiple credit checks, which can hurt your credit score.

Get pre-approval

This means a lender agrees in principle to provide a loan, once a valuation has been conducted on the property you’re buying. 

This will give you a maximum budget for buying a property, allowing you to bid with confidence at an auction or to make a private offer to a vendor.

Make an offer on a property

Whether you’re buying at auction or by private treaty, make sure the price is within your budget.  

If you agree to pay more than you can afford, your home loan application may not receive final approval, and you may be at risk of legal action from the vendor. 

Credit check and valuation

The lender will check your credit score (based on your history of managing money) and calculate the value of the property to make sure you haven’t over-borrowed. 

If the valuation comes back short and your loan to value ratio (LVR) ends up too high for your pre-approved mortgage offer, you may need to pay for Lender’s Mortgage Insurance (LMI) or contact the lender about applying for a different home loan. 

Application approval

Assuming you’re successful, sign the formal home loan offer and contract. 

If you application is unsuccessful, consider contacting the lender to learn why – you may be able to make some adjustments to your finances and be better prepared next time. 

Prepare for settlement

A solicitor or conveyancer can help to transfer the legal ownership of the property from one owner to another. Remember when you budgeted for conveyancing fees right back at the start? This is when you’ll need to pay them.  

That’s it!

Time to move in or start looking for tenants.

Should I contact a mortgage broker?

Whether you’re buying your first home or refinancing the mortgage on an investment property, a mortgage broker may be able to help streamline your experience.

Brokers are home loan experts, who can offer personal advice on which home loans may best suit your personal goals and financial needs. Brokers can also negotiate with lenders to help you get a better deal, provide access to exclusive home loan deals, and manage your mortgage application to help save you time and hassle.

Just keep in mind that mortgage brokers may limit their home loan recommendations to a panel of lenders they have commercial relationships with, so you may not get to compare all of the home loan offers potentially available to you.

Engaging the services of a mortgage broker is usually free, as brokers in Australia are paid commissions by lenders when they sign up new customers. That said, brokers are obliged to act in the best interest of borrowers, rather than lenders, so you should be able to trust their recommendations.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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