1. Assess your finances and work out your budget
Before going property shopping or even selecting a home loan, it’s important to crunch some numbers on what you can afford. 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 RateCity’s Borrowing Power calculator 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.
Improving your chances of approval for a home loan
This stage of the loan process is the ideal time to boost your chances of approval for a mortgage. This is because lenders look for stability in your income and spending when assessing your application.
An ideal applicant may be someone who:
- Is employed full-time
- Has been with the same employer for 12 months or more
- Has a credit score in the ‘good’ to ‘excellent’ range.
Keep in mind that the lender will request copies of your credit history and around 3-6 months of bank statements when assessing your application. You may want to work on improving your credit score before you apply for your mortgage.
Also, the lender will categorise your spending and generally flag, say, your regular takeaway meal as a standard ongoing expense. They may then subtract this from how much you can borrow, as it is expected you would keep paying for this over the life of the loan. It is recommended that you limit your expenses in the lead up to your application, so you can boost your borrowing power and your chances of approval.
If you are waiting for a promotion, an inheritance or a gift before applying for the home loan, you may want to hold off and apply for your mortgage after that comes through.
2. Compare your home loan options
You wouldn’t buy the first home you saw without doing some research on the house and neighbourbood first, and the same is true of your home loan.
It’s crucial that you compare your home loan options before applying, as you could pay tens of thousands of dollars more in higher interest charges and fees, or settle for an option that doesn’t suit your goals just because the lender is familiar.
So, how do you actually begin to compare home loans? Use comparison tools. Comparison tables can come in handy here, as they allow you to compare apples with apples. You may filter down your loan options based on your specific criteria and goals. Then you can view loan options side-by-side and see how they compare on factors, like those listed below.
Compare interest 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.
Compare 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.
3. Speak to a broker
For some borrowers, the next step to getting a home loan will be to engage with a broker. 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.
4. Choose your ideal loan
Whichever way you approach it, your next step is to choose your ideal home loan. It’s important to remember there is no one ‘best’ home loan, as every borrower is different. This means you’ll need to make your decision based on your individual circumstances, such as:
As mentioned, you’ll either choose an owner-occupier home loan if you intend to live in the property as your principal place of residence, or an investor home loan if you plan to rent out the property.
Interest rate type
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.
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.
5. Collect your 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:
- Bank statements
- Proof of identity (e.g. driver’s license or passport)
- Employment contract
- Tax records
6. Fill out the 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.
7. Get pre-approval or full approval
Assuming you’re successful, you will then sign the formal home loan offer and contract. If your 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.
You will typically be applying for pre-approval or full home loan approval. If you get pre-approved for a home loan, you may get an idea about how much you can borrow and the conditions you need to meet - without having to fill in a detailed application.
Pre-approval allows would-be borrowers to know how much they can spend at the auction, and make offers without missing out. This can be beneficial if you cannot wait several business days or weeks for confirmation that you can afford your ideal property. Pre-approval may be valid for between three months and six months.
However, pre-approval is not full approval. You will still need to apply for full loan approval - and you may still be rejected for the mortgage if:
- The lender cannot verify your application documents,
- The property does not meet the lender’s loan-to-value ratio (LVR) requirements, or acceptable dwelling criteria; and
- Your financial circumstances change (job loss, hours reduced etc.)
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.
Congratulations! Time to move in or start looking for tenants.