Home Loan Guides

For a majority of Aussies, paying the price of a property upfront is implausible. It is precisely why millions of homeowners opt for a home loan that can be gradually repaid over time. When you play the game of loans, it is imperative that you have a deep understanding of the different trade-offs associated with each product. Educating yourself thoroughly on each loan type is a sure-shot way to ensure you have adequate information to make a well-informed decision. In this piece, we will take a look at the home loan product, its types, benefits, advantages and everything else you need to know.

What is a Home Loan?

In the simplest terms, a home loan is the amount of money an individual can obtain from a bank or loan provider in order to finance a purchase of a property. The borrower and lender come to an agreement to repay the loan amount over a loan tenure. The borrower is required to pay back the loan amount along with interest applicable throughout the tenure.

Types of Home Loans in Australia

Given below are the three main types of home loan products available in Australia:

Fixed Rate Loans

A fixed-rate home loan is a type of loan on which the interest rate is set on a pre-agreed amount and is typically fixed for a period of time between one year and five years. Since the rate is fixed, the amount you have to repay each month remains constant throughout the tenure and remains unaffected by fluctuations in interest rates.

Benefits

• Gives you the certainty that your repayment amount will not change over the loan tenure
• If the interest rate rises, you won't have to pay more till your fixed rate term expires
• If your fixed rate interest is low, you can end up saving thousands of dollars

Drawbacks

• Fewer home loan features
• You might not be able to make extra repayments
• It may be pricey or difficult to change your loan

Variable Rate Home Loans

What if the interest rates are not fixed for the particular loan tenure? That’s where variable loan rates come into effect. In these loans, the interest rates may be subject to change over a period of time depending on a number of factors, like how the lender responds to the changes in the RBA cash rate. It implies that you could end up paying more than you anticipated each month.

Benefits

• They have an introductory or teaser interest rate at the beginning of the loan tenure
• Homebuyers can opt for a more expensive home
• Provide more flexibility with the loan repayment

Drawbacks

• The repayment amount will rise if the interest rate increases
• The payments fluctuate over the loan tenure 
• Variable mortgage rates are more complex to understand

Split Home Loans

Confused between a fixed rate and variable rate loan? You can always opt for a split home loan; this is basically a mixed home loan alternative that provides the dual benefits of the flexibility of a fixed-rate loan and the security of a variable-rate loan. In this type of loan, you are required to choose a tenure of the loan you would like to keep at a fixed rate, and the remaining tenure is applicable for a variable rate of interest. 

Benefits

• The fixed portion of your home loan tenure will provide you with security against the rise in interest rates
• The variable portion allows you to save money when the interest rates fall
• Relieve the stress from constantly having to manage your household budget

Drawbacks

• You will have to pay more fees and charges on the part of the home loans that have been split
• You will potentially need to pay more variable components when the interest rate rises
• You can lose access to potential interest rate drops

What Is The Eligibility Criteria for a Home Loan?

Every lender has a set of criteria to process the home loan application. However, some basic criteria are the same with all the lenders, which allows them to determine if you will be able to repay the loan without any hardship. Given below are the eligibility criteria for a home loan in Australia:

• The minimum age of the home loan applicant should be 18 years old; there is no maximum age to make a loan application
• The applicant should be a permanent resident or citizen of India
• The house should have a clear title deed without any encumbrance 
• Most lenders in Australia prefer applicants who have a deposit of at least 20% of the property value 
• Lenders prefer an applicant with a high credit score of over 750

What Are The Documents Required to Apply for a Home Loan?

The documents you will be required to submit in Australia depend on the loan you are applying for and your home-buying circumstances. Given below are some of the common documents that you will be required to submit:

Identity Documents:

Primary Documents	Australian passport  Foreign passport Australian Driver’s License Australian learner permit
Secondary Documents	Australian birth certificate Australian citizenship certificate Medicare card ATO assessment notice (less than 12 months old)

Income Documents

Salary or Wages	Bank account statements Latest payslips Employment letter detailing salary and employment Tax returns statement not older than 18 months
Self-employed Income	Tax returns statements and Notice of Assessment not older than 18 months
Government Income	Bank accounts statements showing the credit of payment A letter from Centrelink outlining the payments

Advantages and Disadvantages of Types of Home loan

Given below is a quick look into the differences between each loan type and their advantages and disadvantages:

Type of Loan	Advantage	Disadvantages
Fixed-rate Home Loans	Repayments do not increase with a rise in interest rates Makes budgeting easier and more accurate At the end of the loan tenure, you can get another home loan at the fixed interest rate or switch to a variable interest rate for the remaining tenure	Early payment of a loan can be penalised Repayments of loans do not decrease with a fall in interest rate The scope for additional repayments is limited
Variable Rate Loans	These are ideal to pay consistently pay off an amount over the loan tenure They come with additional features and flexibility Repayment amounts are lowered when the interest rates fall	The repayment amount will increase when there is a rise in interest rates They are not ideal to pay off loans quickly Have fewer loan features as compared to standard loans
Split Rate Loans	Tackles concerns about rising interest rates Additional repayment options are available Is ideal for more accurate budgeting	Limited options for additional repayments The repayment amount will increase when the interest rates rise

Fees and Charges of a Home Purchase

Homebuyers usually incur two types of expenses; upfront costs while applying for the loan and ongoing costs when they have obtained the property. It is important to know your mortgage finances to understand both of these expenses:

Upfront Costs

Here are some costs a borrower will have to bear while obtaining a home loan in Australia:

• Lenders Mortgage Insurance
• Legal and conveyancing fees
• Building and pest inspections
• Stamp duty
• Buyer's agent
• Removalist costs
• Home loan fees

Ongoing Costs

Here are some of the expenses that a homebuyer will have to bear once they have purchased the concerned property:

• Council rates
• Strata and body corporate
• Regular maintenance and repairs
• Home and contents insurance