How to apply for a home loan

A little planning can help you to confidently apply for your first mortgage, with the knowledge of what you can afford and how it will affect your budget and lifestyle.

A bank or mortgage lender (e.g. non-bank lenders, fintechs etc.) will ask for information about you and your finances as part of your home loan application. Collecting the necessary documents before you apply can not only help speed up the application process, but may be helpful for your own budgeting calculations as well.

Some of these documents may include: 

• 100 points of ID (e.g. drivers licence, passport, medicare cards etc.)
• Proof of income (e.g. payslips or tax returns)
• Bank statements as proof of living expenses
• Savings account statements as proof of savings 
• Statements for your current assets (e.g. cars, valuables, shares or other investments you own) 
• Statements of your current liabilities (e.g. credit cards, personal loans)

Banks and mortgage lenders will work out how much you can afford to borrow without being at too high risk of mortgage stress by considering:

• Your salary, and your partner’s salary if you have one.
• Any other regular income (e.g. money from side hustles or investments)
• Living expenses (e.g. groceries, bills, subscriptions etc.)
• Current debts (whether that’s a HELP debt, a car loan, personal loan and your credit card limit, if you have one)
• Savings history
• Your number of children or other dependents.
• Whether you’re buying a property to live in or to rent out as an investment
• How long you plan to take to repay the loan

You may be able to use a borrowing power calculator to estimate approximately how much a lender may be likely to lend you based on your current financial situation. Keep in mind that the results do vary depending on the lender.

Mortgage lenders often prefer borrowers who earn income from an employer and can provide payslips to back it up. If you’re a self-employed freelancer, contractor, sole trader or small business owner, you may not receive the PAYG payslips that most lenders prefer with mortgage applications. Similarly, borrowers whose income is commission-based may be considered riskier prospects as you may not always earn enough to service a loan.

But it's still possible for these borrowers to apply for a home loan! You can provide alternative documents to traditional payslips (such as tax returns or business statements) and apply for a low-doc or alt-doc home loan. While some lenders charge higher interest rates on these loans, there are ways to reduce or limit the lender’s risk, such as by paying a higher deposit or having an excellent credit history. A mortgage broker may also be able to help.

The total cost of home ownership may be higher than you realise. There may be extra upfront and ongoing expenses you should consider when planning your budget.

Some upfront expenses may include:

• Stamp duty (waivers or concessions may apply for some first home buyers in some states and territories)
• Conveyancer/solicitor fees (for the legal transfer of the property title)
• Upfront home loan fees, such as application fees, valuation fees, legal fees and establishment fees.
• Government fees
• Building, pest and strata reportsHome insurance

As well as home loan repayments and interest charges, some ongoing expenses may include:

• Home loan package fees
• Utility bills
• Council rates
• Strata fees (if you’re buying an apartment or townhouse)
• Home and contents insurance
• Lenders mortgage insurance (LMI) if your deposit is less than 20%.

Your own upfront and ongoing expenses may vary depending on your exact circumstances. Be sure to do your research and make the necessary calculations so you can avoid any expensive surprises. 

1. Assess your finances and work out your budget
2. Compare your options
3. Speak to a broker (if applicable)
4. Choose your ideal loan
5. Collect your documents
6. Fill out the application
7. Wait for pre-approval or full approval
8. Settlement

One of the simplest ways to get a home loan is to go to your current bank – after all, they already have your details, which could save some time and effort. However, there are many other banks and alternative mortgage lenders out there that may offer home loan deals that better suit your budget and needs.

A good place to start is to work out what type of borrower you are and what features you are looking for in your home loan. The answers to the following questions can help you narrow down your search:

1. Are you an owner-occupier or an investor?
2. Are you planning on paying principal and interest or interest-only?
3. Do you want a variable rate, a fixed rate or are you open to either?
4. How big is your deposit, compared to the price of the property you are aiming to buy?
5. Do you want an offset account or would you be happy with just a redraw facility?

Using a comparison table, you can view a variety of home loans from different lenders side by side. Using the filters, you can enter some loan preferences and narrow down your shortlist to only the lenders that offer the features and benefits you’re looking for.

Many borrowers look for a home loan with the lowest interest rate, as this means lower repayments. However, low-rate home loans often have strict terms and conditions, and may not be suited for every borrower. Plus, low-rate home loans may not have value-adding features and benefits.

Interest isn’t the only cost to consider with a home loan. Lenders may also charge upfront and ongoing fees that you’ll need to budget for. The comparison rate can indicate the cost of the home loan including both interest and fees.

Often when you apply for a home loan, the lender will offer you pre-approval, also known as approval subject to valuation. This means that they’re willing to give you a home loan, provided the value of the home you’re buying is enough to secure the loan. Home loan pre-approval can give you a set budget to work with when shopping for real estate, allowing you to make offers on properties with confidence.

However, pre-approval doesn’t guarantee final approval. If your circumstances change between your pre-approval and your property purchase, such as if you lose or change your job, your home loan application may be declined or need to be amended before it can proceed. 

Also, when you buy a property, the lender will send a valuer to assess its value. If the valuation comes back significantly lower than the purchase price, it may no longer match the lender’s Loan To Value Ratio (LVR) requirements. In cases like this, you may need to pay a bigger deposit or pay for Lenders Mortgage Insurance (LMI) to get final approval on the home loan.   

If your deposit is less than 20% of the property’s value, the lender may take out a Lenders Mortgage Insurance (LMI) policy to cover the risk that you may default on your repayments. This policy protects the lender, not you, and most lenders pass the cost on to the borrower. Generally the lower your deposit, the higher the cost of LMI.

The more of the lender’s requirements you can fulfil without hassle, the more likely you are to see your home loan application approved.

Lenders will generally want to see:

• A house deposit (preferably 20% of the property’s value, but at least 5%), made up predominantly of genuine savings (money earned from your job, or gifts or inheritances that have stayed in a savings account for 3 to 6 months or longer)
• A credit history
• A stable income (the higher the better, preferably wages or salary from an employer)
• Low debts and manageable expenses

Even a well-prepared borrower may not be able to easily apply for a home loan. If your deposit isn’t looking all that great, or it’s looking like you won’t be able to borrow enough to afford the kind of property you want, there may be options to consider.

Most states and territories around Australia offer some kind of incentive to first home buyers to encourage property ownership. This may be a contribution to your deposit of up to $10,000, or it could be waived or discounted stamp duty.

Check with your state or territory government to check what’s available and if you qualify. In most cases you’ll need to be a permanent resident purchasing in that state or territory, and you’ll need to be buying property for the very first time. You will also need to be buying a home to live in rather than an investment property.

Formerly known as the First Home Loan Deposit Scheme (FHLDS), this federal government program allows first home buyers to apply for home loan with deposits of just 5% and pay no LMI, as the government will step in to guarantee the loan. 

There are a limited number of positions available in this scheme each financial year, and there are several terms and conditions to fulfil. You can only apply for a home loan with participating lenders, so you may not have as many options to choose from.

As well as the First Home Guarantee, there is Regional Home Guarantee for buying property in a regional area, and the Family Home Guarantee, which allows single parents to apply for a no-LMI home loan with a 2% deposit.

If your parents or grandparents own their own home, or have at least paid most of their mortgage, they may be able to use the value of their equity to guarantee your home loan. This could mean you apply with a low deposit or even no deposit and pay no LMI.

However, if you’re unable to pay your mortgage, your guarantor will become responsible for the mortgage, and, if they can’t pay the mortgage, could risk losing the property that’s used to guarantee it. This can not only affect your guarantor’s financial situation, limiting their ability to apply for credit and potentially their credit score, but it can also put a lot of pressure on your personal relationships with them. Be sure that everyone involved is well aware of the risks and responsibilities involved before entering a guarantor arrangement.

If you’re not confident to compare home loans and apply for a mortgage on your own, get some help from a mortgage broker. These home loan experts can take your through the entire home buying process from start to finish, including:

• Assessing your finances and working out a plan to reach your home ownership goals
• Comparing available home loan options and recommending suitable loans, including exclusive home loans that aren’t normally advertised.
• Negotiating with lenders on your behalf to help you get a better deal
• Managing the paperwork on your behalf to help you save time and avoid hassles.

Most mortgage brokers in Australia don’t charge fees to borrowers, as they are paid commissions by lenders when they sign up a new customer. Under Australian law, brokers are obliged to act in the best interest of borrowers, rather than the lenders that pay them, so you shouldn’t have to worry about potential conflicts of interest. If you’re still concerned, you can ask a broker how they are paid, and also check their credit licence.

Brokers often work with a specific panel or book of lenders, rather than comparing loans across the entire home loan market. This means you may have a relatively limited choice of lenders to compare than if you did your own research.