What to read, watch and follow to become a home loan expert

What to read, watch and follow to become a home loan expert

You wouldn’t buy a car without first giving it a test drive, so why would you make the biggest financial decision of your life without arming yourself with as much information as possible?

Almost half of next home buyers do not fully understand major components of home loans, according to Westpac’s latest Home Ownership Report.

The report, which surveyed over 1,000 Australian home owners, identified education gaps amongst next home buyers, including:

  • Over half (56 per cent) of next home buyers are too scared to purchase at an auction;
  • Almost half (49 per cent) did not know exactly what equity is;
  • Almost half (48 per cent) did not know exactly what an offset account is; and
  • 41 per cent did not know exactly what refinancing is.

However, 84 per cent of next home buyers are taking steps to better educate themselves on home financing.

If you are considering taking out your first or next property, it is crucial that you arm yourself with as much knowledge as you can. This will ensure that you get the most competitive home loan for your financial needs and budget. 

How to learn more about home loans 

  1. Home loan guides 

There are a few key aspects of a home loan that you should nail down before you sign on the dotted line.

These include what type of buyer you are, what type of rate you want, what fees and hidden costs are involved, what loan features you may or may not want and how much you should borrow.

RateCity’s home loan guide provides a comprehensive break down of these crucial questions so you can find the answer you need and choose the most competitive home loan for your financial situation.

  1. Explainer videos 

If the thought of diving deep into a home loan guide makes you go a bit cross-eyed, home loan explainer videos may be more your vibe.

There is an abundance of these types of videos on YouTube, even from our own RateCity expert team. Just make sure you’re watching an Australian video, as different countries will have different rules and structures. 

  1. Follow some financial experts

There’s a reason Scott Pape’s ‘The Barefoot Investor’ has been sold over 1.5 million copies and is a #1 best seller in Australia.

For years Aussies have been turning to financial experts who can break down even the most complicated of concepts into plain English or simple to follow steps.

If you want to deepen your knowledge of home loans and the property market, it pays to hear what the experts have to say.

Here are 10 experts you need to follow on Twitter:

Who

What

Where to find them

Scott Pape

Financial guru and author of ‘The Barefoot Investor’.

@scottpape

Noel Whittaker

Financial commentator and author of 20 bestselling books.

@NoelWhittaker

Effie Zahos

Financial commentator and literacy campaigner. Author of ‘A Real Girl’s Guide to Money’.

@effiezahos

Sophie Elsworth

National personal finance writer for NewsCorp

@sophieelsworth

Ross Greenwood

Channel Nine finance editor

@Ross_Greenwood

Gemma Acton

Finance and business editor at Channel 7.

@GemmaActon

Cameron Kusher

Head of research for CoreLogic & king of property graphs.

@cmkusher

Nicola Powell

Senior research analyst and property analyst for Domain.com.au

@DocNicolaPowell

John Collett

Personal finance writer for Sydney Morning Herald and The Age

@jcollett_money

Duncan Hughes

Senior reporter for AFR with a focus on real estate.

@duhughes

  1. Use comparison tools 

If the Banking Royal Commission has taught Aussies anything, it’s that loyalty is dead.

Just because you’ve been with the same bank since you were a child, doesn’t necessarily mean they’ll give you the most competitive home loan across the market with a low interest rate, no fees and all the features you could ever dream of.

The most effective way to find the right type of home loan for you is to utilise comparison tools such as comparison tables and calculators.

Comparison tables allow you to search, filter and compare home loan products from across the market that suit your specific needs, such as which loan may suit you if you only have a 5 per cent deposit, or which loans have an offset account.

Home loan calculators are a great resource to understand just how much you can afford to borrow without blowing your budget. You can enter in your own details (how much you’d like to borrow, the repayment frequency etc.) to get a good estimate of what your repayments may look like.

TIP

To avoid mortgage stress, financial experts recommend not paying more than 30 per cent of your pre-tax income towards your home loan.

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Learn more about home loans

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.

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.

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.

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. 

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. 

What is a debt service ratio?

A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

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.

How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.