What is the best home loan for you?

By Mark Rosanes

What is the best home loan for you?

Many housing experts believe that the current economic conditions have created a unique opportunity for aspiring homeowners to get on the property ladder. With the central bank lowering interest rate to a record 0.1%, and the federal and state governments launching various housing incentives, the path to homeownership has never been more accessible.

However, purchasing a property also entails heavy financing – and for home buyers who do not have a huge bankroll, taking a mortgage may be the only way to seal the deal.

But how can you tell if a certain home loan fits your needs and financial situation? The answer depends on several factors.

Are you eligible for a home loan?

Before you can borrow, you need to qualify for a loan. Banks and other financial institutions conduct background checks to see if you are in a stable financial position to make monthly repayments. These lenders use different requirements to determine an applicant’s borrowing capability.

One these criteria is gainful employment. Lenders often check an applicant’s annual income based on their pay slips and most recent tax statements. The standards may vary from lender to lender, but typically they use the following criteria to determine if a person’s employment situation makes them a decent candidate for a home loan:

  • Must have been working for the same company for at least two years
  • If a person has moved on from one job to another, the new job must be in line with the previous position
  • If a person has made a career switch, they must be in the job for at least six months to a year
  • Must not have more than three employers over the course of two years
  • Must not have significant breaks in employment (e.g. a five-month vacation in Europe)
  • Must not be on probation
  • If self-employed, applicants are required to show proof of tax returns for the past two financial years

Additionally, lenders take into account daily living expenses such as medical bills, insurance, utilities, and monthly mortgage or rental payments. The number of dependents can also affect a person’s borrowing capacity.

Most lenders want to confirm if an applicant has genuine savings, and to some extent, retirement savings. They also check if a person has resources allotted for the deposit that are separate from their genuine savings.

Having a good credit history and an above-average credit rating can help get a loan approval as well.

What are the different types of loans available for home buyers?

Most lenders offer several types of home loans, each with different features designed to suit a wide range of borrowers. The key is to pick the loan that fits your needs and circumstances. Here are some of the major types of loans available for Australian home buyers.

1. Owner-occupied home loans

Owner-occupied home loans cater to borrowers who plan on living on the property they intend to purchase. The loan amount can be used to buy an existing home, build a new property, or renovate an existing house. This type of mortgage often has a lower interest rate compared to other loan types, since lenders assume that borrowers will likely hold on to the property for several years.

Check out Your Mortgage’s comparison of the different owner-occupied home loans available

2. Investment home loans

An investment home loan is tailored for borrowers who are looking to purchase or renovate a property in the hope of making a return from it in the future. This type of mortgage usually comes with a higher interest and stricter eligibility criteria than owner-occupied home loans as lenders often consider investors as riskier borrowers. However, investment home loans come with tax benefits as interest payments can be claimed as a tax deduction.

Check out Your Mortgage’s comparison of the different investment home loans available

3. Low-doc home loans

A low-documentation home loan, also referred to as a low-doc loan, is designed for borrowers who are unable to provide the necessary paperwork to qualify for a conventional home loan. This type of mortgage often appeals to investors and self-employed individuals who may not have the right proof of income documents. It also usually comes with a higher interest rate and additional fees to make up for the lax lending restrictions.

4. Bridging loans

This type of loan is targeted at borrowers who are transitioning between selling their existing property and purchasing a new home. A bridging loan allows borrowers to secure a second property while the old home sells. This mortgage type comes with a shorter term, usually between six and 12 months, and is added to chosen loan for the new property once the old home is sold.

5. Construction loans

A construction loan is designed to assist with the funding for building a new house or doing a major renovation on an existing dwelling. It covers all the expenses incurred during construction. This type of mortgage often charges interest-only repayments for the period of the build, which initially runs at 12 months. Once construction is done, loan repayments go back to principal and interest for the duration of the mortgage term.

Another major difference of a construction loan from a standard home loan is the way repayments are calculated. Lenders often divide the loan into several stages, called progressive drawdown, and make payments on each stage. The stages may vary from lender to lender but typically consists of the following phases or drawdowns:

First stage: Slab down or base

This drawdown covers the cost of laying the foundation of the property, including levelling the ground, installing plumbing, and waterproofing the base of the home.

Second stage: Frame

This portion pays cost of framing the property, including the construction of trusses and windows, roofing, and partial brickwork.

Third stage: Lockup

The amount covers for the cost of putting up external walls and insulation, and installing windows and doors.

Fourth stage: Fitout or fixing

During this drawdown, the lender pays for the installation of internal fittings and fixtures in the property, including internal cladding, tiles, and the installation of shelves, cupboards, and cabinets, and plumbing and electrical systems.

Fifth stage: Completion

This part of the financing covers the expenses for the finishing touches, including painting, polishing of walls and floors, installation of fences, and overall cleaning.

6. Line of credit loans

A line of credit loan allows borrowers to access equity built up from their property. This type of loan can be used for virtually anything, including a financing a child’s education, home renovations, a new car, a second property, or traveling overseas for a vacation. It is also reusable, meaning the loan can be borrowed and repaid up to the credit limit as much as the mortgage holder wants.

7. Non-conforming loans

A non-conforming loan caters to borrowers with low credit scores who find it difficult to get an approval for a standard home loan. However, this type of loan requires a larger deposit and comes with a higher interest rate to offset the lender’s risks.

What factors should I considers when choosing a home loan?

There are several things that borrowers need to carefully consider when deciding on the right home loan to apply for. These include:

Interest rates

Interest rates can be variable or fixed. Many banks and lenders offer variable home loan interest rates, which fluctuates over time often in line with the central bank’s cash rate. This means if the rates increase, so will mortgage repayments. Similarly, if there are rate cuts, borrowers may end up paying a lower interest.

Check out Your Mortgage’s comparison of the different variable home loans available

Fixed interest rates, on the other hand, allow borrowers to get locked in a certain rate for a certain period, enabling them to plan their future repayments without worrying about rate fluctuations.

Check out Your Mortgage’s comparison of the different fixed-rate home loans available

Loan features

Mortgage features vary depending on the lender. Many large banks offer bundled financial services that suit different types of borrowers, including investors. Typically, borrowers should be looking for home loan features that allow them to vary repayments easily and access their balance online.

Loan terms

Borrowers should also consider how long it will take them to pay off the loan and what happens to their mortgage if they make extra repayments.

How much can you borrow?

Banks and other financial institutions usually lend no more than 80% of the value of a residential property and up to 70% for an investment property. But there are instances when lenders are willing to grant loans as much as 95% or even 100% of the property’s value. Our borrowing power calculator can give you an estimate of how much you can afford to borrow based on your income and expenditure.

However, for loans exceeding these standard values, a lender’s mortgage insurance (LMI) is often required. Our LMI estimator can help you calculate the amount you need to shell out for this one-time fee designed to protect lenders from financial loss.

Which lender offers the best home loans?

Home loans vary from bank to bank, and often the best way to determine which ones your needs and financial situation is by comparing interest rates, loan features, and mortgage repayment terms.

Fortunately, Your Mortgage gives you a comprehensive comparison of the best home loans available from Australia’s top lenders. Click here to view and compare.

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