Home Loan FAQs

Answers to Common Home Loan Questions.

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Frequently asked home loan questions

For most Australians, buying a home and entering the property market is an important goal. Taking out a home loan is most often a crucial facet of making this goal a reality.

Despite this, the home loan process can be confusing or even scary for some. For this reason, here we seek to provide answers to some of the most commonly asked questions regarding home loans to get help get you on your way.

How exactly does a home loan work?

For the vast majority of property buyers, the prospect of purchasing a property outright is not realistic. For this reason, mortgage lenders such as banks, credit unions and specialised lenders offer home loans as a product which can allow you to make your purchase with only limited funds. Your home loan is paid back to the lender over a fixed period of time, with additional interest payments made to the lender. This means that over a prolonged period of time, you will repay more than the initial value of your home, but since your repayments will be spread out over a long period of time and are consistent, they can be easily managed.

As you progress towards paying off the entirety of your mortgage, over time you will come closer to owning your property outright. At the end of this process your relationship with your lender will end, leaving the property solely in your hands.

How much money do I need to take out a home loan?

All Australian lenders require a deposit to be provided in order for a home loan to be issued, and while the minimum required deposit can vary, the generally accepted absolute minimum deposit is 5% of the total purchase cost of the property in question. While you may be approved for a home loan with only a 5% deposit, the conventional wisdom here is that you should aim for a 20% deposit in order to avoid paying lenders’ mortgage insurance.

This means that the amount you will need to have saved before you will be eligible for a home loan will vary depending on the price of the property you wish to purchase. For example, if you wish to buy a home worth $500,000 then you will need a minimum deposit of $25,000, or if the value of your home-to-be is $1,000,000 then you will need a deposit of $50,000.

How do I know if I’m eligible to receive a home loan?

Each lender has home loan eligibility requirements which are specific and sometimes unique to them, however there are a few general principles which you should be aware of when preparing to apply for a loan:

Income

Lenders will need to be able to see verification that your income is substantial enough for you to successfully repay your home loan with little trouble.

Credit history

On top of proof of substantial income, you will need to show that you have a strong credit history and that you have not defaulted on any past debts. It may still be possible for you to access finance with a less-than-ideal credit history, however you will find that you have significantly limited options.

Residential status

Depending on your Australian visa status, you may find that you are eligible for only limited finance- in the area of 80% of the value of a property as opposed to 95%. For Australian citizens living overseas and wishing to buy domestically, you might face similar limitations.

Age

Most lenders will be reluctant to extend home loan financing to people who are nearing retirement age. This means that as you approach retirement age, you may need to provide proof of alternative income streams that will persist past your retirement which you can draw from to pay down your debts in addition to your pension. Alternatively, you can show that you own assets of sufficient value to provide security for the loan.

Where do I need to go to find a home loan?

A great place to begin on your search to find the right home loan is Savvy’s online home loan comparison tool. This comparison tool allows you to gain a fast and comprehensive overview of all of the lenders which will be appropriate for you to consider given your individual circumstances and needs, and can help you quickly narrow down your search. Alternatively, mortgage brokers can offer helpful insights and industry expertise in helping to match you with the right loan from a variety of lenders.

How long will it take me to repay my home loan?

Home loan terms generally sit at around 25-30 years, and most loan agreements provide the borrower the capacity to make payments in advance should they choose to do so. This means that if you make the minimum required payments, then you should expect to pay off your home loan within the span of time agreed upon at the outset of your loan. If on the other hand, you wish to make additional repayments to your loan, then this can be a prudent decision and might result in your loan being paid off ahead of time. By making additional repayments ahead of time you provide yourself with the opportunity to save costs in the long-run by minimising interest costs, as well as yearly fees.

What is an interest only home loan?

An interest-only home loan is a loan that for an agreed upon, fixed period of time, requires only repayments that service the interest on the loan and not the principal as well.

These loans can be a useful way to maintain a certain level of financial flexibility after your property purchase, as it will allow you to save more funds which can be deployed for other investments or kept as a lump sum in the meantime.

Obviously, this type of loan means that for your interest-only period, you will not be making progress towards paying off your home, and that in some circumstances, this will mean that your total repayment horizon for your loan will be longer.

It is common, however, to utilise the flexibility afforded by this type of loan to use an interest-only period to save up for a deposit on a second investment property. It is also commonly used with construction loans and investment properties. 

Can I get a home loan for an apartment?

Getting home loans for an apartment is absolutely possible, but this can sometimes involve certain additional eligibility requirements or stipulations involved with your loan. For example, apartments smaller than certain square metreage or studio apartments might be deemed by lenders to be slightly riskier securities for loans, and can therefore require a larger initial deposit, or may incur higher interest rates. It is also important to note that in some post codes where there is a perceived oversupply of apartments of a certain type, or where lenders have already issued to many loans for apartments in a particular building, loans for additional properties might not be available whatsoever.

What else do I need to know about applying for home loans?

When you’re thinking about making a home loan application, there are some things which will be helpful for you to bear in mind.

  • Allow for plenty of time in the lead-up to purchasing your property. The process of finding the right lender, acquiring pre-approval for your loan, finding the right property for you, and ultimately finalising your purchase, can be a long and intensive one. For this reason, you should ensure that you are as prepared as possible and allow for a long runway when entering this process.
  • Make sure that your finances are in order and that you know what you can reasonably afford to borrow. By over-leveraging yourself, you might find yourself under financial strain in the event that any unfortunate life events arise. If you find that you must default on a loan or have trouble making your repayments as a result of this, then your credit score will be negatively impacted, thereby impeding your ability to access finance in the future. Consider a realistic budget for your first property, even if it means that you won’t immediately be able to purchase your dream home.
  • Don’t rush into an agreement with a lender without weighing up all of your options and ensuring that you are truly comfortable with your loan conditions. Comparing the loans available to you from a variety of lenders using Savvy’s comparison tools will allow you to gain an understanding of the options which are really available to you, so that you end up with the mortgage that best suits you.

More home loan questions?

Let us answer more of the most frequently answered mortgage queries

What information and documentation will I need for my home loan application?

Before you apply for your home loan it is a good idea to ensure that you have all of the required documentation at hand. Some home loans such as low doc home loans will require you to provide more supporting material than others, however, as a general rule, you should expect to have to provide the following:

  • Primary photo ID such as a driver’s license, passport or government ID card, or two forms of secondary ID such as a birth certificate, tax documents or Medicare card.
  • Proof of income in the form of multiple payslips or bank statements showing your income regularly entering your account. This can also include documents showing your rental income or dividend income from existing investment.
  • An overview of your current assets and liabilities. For example, currently owned properties and credit card debts.
As a prospective first home owner, am I eligible for any home loan assistance?

The federal government’s first home owner’s grant offers a one-off fixed sum payment to home buyers who are buying their first property. The amount offered in this grant varies from state to state, but ranges from $10,000 to $20,000 and is also subject to conditions such as whether you are buying in a regional or metropolitan area, or are purchasing a newly built home.

How can I improve my chances of being approved for a home loan?
  • Show that you are financially disciplined by being able to provide bank statements showing proof of regular savings, and no excessive spending.
  • Ensure that you pay all of your bills and debts on time to maintain a healthy credit score.
  • Allow yourself plenty of time to accumulate a deposit which is substantial as possible before applying for your loan.
  • Make sure that you are able to show a steady stream of sufficient income leading up to your loan application.
What is lenders mortgage insurance?

Lenders’ mortgage insurance (LMI), is an extra expense must be paid for by the borrower when providing a deposit of less than 20% of the purchase cost of a property. This cost protects the lender in the instance that future repayments cannot be made. This cost is substantial and should be avoided or minimised if at all possible. In the case of a first home buyer purchasing a house as a primary place of residence for example, providing a 10% deposit of $50,000 for a $500,000 property would result in LMI expenses of over $11,000.

Are there added fees and charges associated with a home loan that I need to be aware of?

Yes, there are multiple added expenses that can be associated with home loans that you should be aware of going into the home loan process. These expenses can include:

  • Stamp duty, which is a levy charged by the federal government on all property purchases.
  • Lenders’ mortgage insurance in the case of a deposit lower than 20% of the property purchase price.
  • Application fees, a one-time cost to cover the administrative costs incurred by the lender to process your application.
  • Settlement fees, charged at the conclusion of your agreement to once again cover administrative costs.
  • Annual home loan fees.
Can a mortgage broker help me with my home loan application?

Mortgage brokers can be a valid option for those who wish to access some added expertise when applying for their home loan. Because mortgage brokers deal with such a large volume of applications and have direct relationships with lenders, they have a great understanding of what lenders are looking for in an application and help you to get your application organised in the best possible way to deliver a successful result.

Are home loans still available if I have a poor credit score?

Even for those whose credit history is less-than-stellar, home loans can still be accessed from specialised lenders who can cater to your particular circumstances. While you should still be able to find a variety of lenders who will be willing to cater to your needs, you should be aware that loans for those with checked financial histories often require higher up-front deposits, incur higher interest rates, and might not be able include loan features such as offset accounts, drawdown facilities and other conveniences typically associated with regular mortgages.

Can I use equity in my current property to take out a home loan?

Using the equity that you already control in your current property can be a helpful way to produce the deposit for an investment property or your new primary place of residence. Equity home loans typically allow you to access up to 80% of your current equity to finance a new property purchase, provided that you can still manage the repayments for two properties.

It is common for people who wish to build a property portfolio to utilise this approach, as the interest repayments and other fees associated with your investment property are eligible to be written off as tax expenses, therefore making the overall impact of your loan repayments on your finances less burdensome.

Is it possible to change the terms of my home loan after I have begun repayments?

Renegotiating or refinancing your home loan is always an option which is available to you, if after a period of time you find that your current loan is not working for you. By approaching your current lender about adding certain loan features such as an offset account, or switching from a variable to fixed-rate loan structure, you might find that your lender is willing to accommodate your requests. If not, then you can consider approaching alternative lenders or a mortgage broker to explore the possibility of refinancing your loan to better suit your wishes.

What kind of interest rate should I expect will apply to my mortgage?

Interest rates charged by financiers are essentially dependent on the Reserve Bank of Australia’s official cash rate at the time of loan application. Remember that the interest rate applied to your loan will vary depending on the details of your application, the lender which you choose to borrow from and other factors, so ensure that you conduct a thorough search to make sure that you find the best rate to suit you.

Can I use a guarantor to improve my chances of home loan approval?

Using a guarantor is one method that you can consider if you wish to improve the chances of your application being approved or to potentially avoid paying LMI on loans with deposits with less than a 20% deposit. A guarantor works by having a third party sign on to the loan agreement as an additional security guarantee for the lender. Under ordinary circumstances the guarantor acts only as a ‘back-up’ and is not required to make any repayments towards the home loan, however, in the instance that the borrower defaults on their repayments, the guarantor will be responsible for covering the loan.