How to take out a home loan

How to take out a home loan

There are three ways to take out a mortgage in Australia, whether you’re an owner-occupier who wants a principal-and-interest loan or an investor who wants an interest-only loan.

You can use a mortgage broker. You can go direct-to-lender. Or you can use a comparison website like RateCity.

To help you decide which method to use, we’ll explain the key facts, outline the pros and cons, and tell you the next steps to take once you’ve made your choice.  

Use a mortgage broker

The traditional mortgage process involves approaching three home loan lenders, listening to them spruik their products and then choosing the most attractive offer.

This is time-consuming and – unless you’re a finance expert – can be very confusing as well.

That’s why more than half of Australians now use mortgage brokers, middle-men whose job is to help a borrower organise a suitable home loan with a lender.

Brokers are home loan experts, so they understand the mortgage market’s complicated rules and baffling jargon.

Mortgage brokers generally work with anywhere from 10 to 40 lenders – far more than the three you might visit on your own. That means you’re exposed to a far wider variety of home loan options.

Another advantage of brokers is that they generally won’t charge you for their services. Instead, they’ll charge the lender (in the form of a commission) if they end up organising a home loan for you.

However, there are also several downsides associated with mortgage brokers.

First, there are about 150 mortgage lenders in Australia, which means you’ll get exposed to only a minority of options if you organise a home loan through a broker.

Second, some unscrupulous brokers might steer you to a particular home loan not because it’s in your best interest but because it pays them the highest commission.

Pros
  • Wide range of options
  • Free expert advice
Cons
  • Only a minority of options
  • Some brokers are unethical

 

What to do next

If you want to find a broker, you can do an online search with the MFAA or the FBAA, which are the mortgage broking industry’s two professional associations.

Here are 10 questions to ask while you’re shopping around for brokers and then deciding which home loan to select.

Go direct-to-lender

Some people prefer to take full control over the home loan application process rather than outsource it to a mortgage broker whose motives or competence they might not trust.

But a word of warning: while going direct-to-lender might give you greater control, bank employees can’t be relied on to give independent advice. That’s because their job is to promote their own products, not to tell you about better options from a rival provider.

If you do decide to go direct-to-lender, make sure you do your research before deciding on your home loan provider of choice.

You might be tempted to automatically pick your current bank. However, there are about 150 banks, credit unions, building societies and non-bank lenders in the mortgage market – so the odds of your bank having the most suitable home loan for you are actually remote.

Pros
  • Full control over the process
Cons
  • Advice is not independent

 

 

What to do next

The easiest way to research your options would be to use a home loans comparison website like RateCity. Alternatively, you could browse lender websites, hit the phones or pop into branches.

Once you’ve settled on a lender, you’ll probably have to visit a branch to make your application – although some lenders will allow you to take out a home loan over the internet.

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Use a comparison website

The third and final way to take out a home loan is to go through a comparison website like RateCity.

A comparison site allows you to quickly and efficiently assess home loans based on criteria like:

  • Mortgage rate
  • Fees
  • Deposit size
  • Loan features

A comparison site should also allow you to crunch numbers by offering tools like a repayments calculator, borrowing calculator, stamp duty calculator and refinance calculator. That should help you figure out how much you can borrow, which in turn should help you figure out which loan would best suit your unique financial circumstances.

The downside of taking out a loan through a comparison website is that you won’t have a mortgage broker to hold your hand through the process. Instead, you’ll be guided by your lender of choice, which will be giving you self-interested rather than independent advice.

Pros
  • Easy to compare lots of options
Cons
  • You’ll have to use a lender anyway

 

What to do next

The first step is to thoroughly research your options. If you do decide to take out a loan through RateCity, the next step is to click the green button – the one that says ‘Enquire Now’ or ‘Apply Now’ or ‘View Now’.

Finally, don’t rush into anything. Make sure you weigh up your options and think of the consequences before signing any paperwork. Also, consider whether it would be in your interests to get advice from a mortgage broker or financial adviser.

How to take out a home loan

  1. Visit a mortgage broker
  2. Go direct-to-lender
  3. Use a comparison website

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Learn more about home loans

What do mortgage brokers do?

Mortgage brokers are finance professionals who help borrowers organise home loans with lenders. As such, they act as middlemen between borrowers and lenders.

While bank staff recommend home loan products only from their own employer, brokers are independent, so they can recommend products from a range of institutions.

Brokers need to be accredited with a particular lender to be able to work with that lender. A typical broker will be accredited with anywhere from 10 to 30 lenders – the big four banks, as well as a range of smaller banks, credit unions and non-bank lenders.

As a general rule, brokers don’t charge consumers for their services; instead, they receive commissions from lenders whenever they place a borrower with that institution.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Mortgage Calculator, Repayment Frequency

How often you wish to pay back your lender. 

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

How does a redraw facility work?

A redraw facility attached to your loan allows you to borrow back any additional repayments that you have already paid on your loan. This can be a beneficial feature because, by paying down the principal with additional repayments, you will be charged less interest. However you will still be able to access the extra money when needed.

What factors does Real Time Ratings consider?

Real Time RatingsTM uses a range of information to provide personalised results:

  • Your loan amount
  • Your borrowing status (whether you are an owner-occupier or an investor)
  • Your loan-to-value ratio (LVR)
  • Your personal preferences (such as whether you want an offset account or to be able to make extra repayments)
  • Product information (such as a loan’s interest rate, fees and LVR requirements)
  • Market changes (such as when new loans come on to the market)

Mortgage Calculator, Loan Amount

How much you intend to borrow. 

What is the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

How will Real Time Ratings help me find a new home loan?

The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.

That’s where Real Time RatingsTM can help. Our system automatically filters out loans that don’t fit your requirements and ranks the remaining loans based on your individual loan requirements and preferences.

Best of all, the ratings are calculated in real time so you know you’re getting the most current information.

Mortgage Calculator, Loan Term

How long you wish to take to pay off your loan. 

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.