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.

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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

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

Mortgage Calculator, Loan Purpose

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

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

What if I can't pay off my guaranteed home loan?

If you can’t pay off your guaranteed home loan, your lender might chase your guarantor for the money.

A guaranteed home loan is a legally binding agreement in which the guarantor assumes overall responsibility for the mortgage. So if the borrower falls behind on their mortgage, the lender might insist that the guarantor cover the repayments. If the guarantor fails to do so, the lender might seize the guarantor’s security (which is often the family home) so it can recoup its money.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

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.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Mortgage Calculator, Loan Term

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

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.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Does Real Time Ratings' work for people who already have a home loan?

Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.