Home Loan in Australia

What is a Home Loan?

A home loan is an amount that a bank or financial institution lends to an individual borrower to facilitate the purchase of a property. The lender and the borrower will agree on loan repayment terms- usually for 25 to 30 years. Both parties also agree on the repayment schedule, which is usually fortnightly or monthly but can vary according to the agreement.

The borrower must also repay the interest amount in addition to the original principal. The loan agreement between the borrower and lender determines the type of interest rate applicable to the loan. There are various applicable interest rates, including fixed and variable interest rates.

This loan is generally secured against the market value of the property. This implies that if the borrower fails to keep up with their payment schedule or is unable to repay the loan amount, the lender can exercise their right to seize and sell the property in order to settle the debt.

Eligibility for Home Loan in Australia

While there is no secret formula to decode home loan eligibility in Australia, there are a few common factors that most lenders take into consideration while processing the loan application. Given below are some of the factors that affect your home loan eligibility in Australia:

Serviceability

The banks and lenders in Australia consider many factors to determine if the borrower is capable of comfortably repaying the loan amount without any defaults. It is called ‘serviceability’ in home loan terms. Usually, lenders in Australia are required to abide by the ‘Australian Prudential Regulation Authority’ rules which state that a lender is not allowed to let people borrow more money than they can afford to pay back.

Employment

Most lenders and banks in the country prefer lenders with a steady job and source of income. The evidence to back up the same varies according to the nature of your employment.

PAYG guide:

• Payslips from the previous two pay cycles
• Banks statements
• Phone call to employer
• Group Certificate or PAYG Summary

Self-employed guide:

• Tax returns from the previous two financial years

Income and Existing Debt

Your income, expenses and existing debt plays a huge role in determining your home loan eligibility. Given below are some of the things a lender considers while determining your serviceability:

• Income Streams: Salary, investment income, government payments, etc
• Household Expenses: Bills, rent, insurance, car payments, etc
• Miscellaneous Expenses: Groceries, petrol, holiday, alcohol, shopping, etc
• Existing Debt: Pay later products, personal loans, credit cards, store finance, etc

Deposit

The more you pay as a deposit, the better your money-saving track record for the lender. This can make your application look better. You can also lower the loan amount you need to borrow by making a larger deposit. Sometimes, the lender can also acknowledge larger deposits by offering lower interest rates.

Loan-to-Value Ratio (LVR)

The Loan-to-Value Ratio is a term used at the assessment stage of the loan approval, which describes the loan amount you need to borrow in comparison with the property's market value. Usually, lenders in Australia require your deposit contribution to be over 5% to be eligible for a home loan in Australia. Although, lenders may require the LVR to be above 20% for a home loan.

What are the Benefits of a Home Loan?

Given below are some of the main reasons a home loan seeker should compare loan offers from different lenders prior to signing on the dotted line:

Save Money on Interest

Interest rates are one of the most important factors to affect the total cost of borrowing a loan. If you do not take enough time to compare loan offers from different providers, you might end up paying a higher interest rate than average and miss out on more lucrative deals. Comparing home loans to find more favourable interest rates can help you save thousands of dollars throughout the loan tenure.

Save Money on Fees

In a home loan, it is not only the interest charges that tend to add to the overall cost of the loan. Some financial institutions may even charge multiple fees, which makes even a low-interest-rate option more expensive than anticipated. Regardless of why you are purchasing the property, home loan fees can rapidly eat away at your savings. Remember to compare the fees payable before applying for your next home loan.

Useful Features

Some home loan offers in Australia can be a basic, no-incentive option, and some may be loaded with helpful home loan features that make the loan offer more competitive. Some of the features may be:

• Option to make extra repayments without incurring a penalty to pay off the loan amount faster
• Some loan offers come with an offset account to lower the interest payable while also growing a nest egg
• Some lenders offer a redraw facility which enables the borrower to access the extra repayments made on the home loan
• You can split your home loan repayments while choosing between variable and fixed interest rates

Choosing the Right Lender

While comparing different loan offers, it’s also imperative that you choose the lender very carefully. In the past, Aussies have had very few choices about the type of home loan provider they want to borrow from. Recently, many more options have emerged in addition to the traditional institutions of the past. Bigger banking institutions may provide more options with respect to being a one-stop shop for all financial products. They might also offer great customer service through their vast network of branches and have a reputation for providing safe and secure services. On the other hand, smaller loan providers usually have fewer branches. This enables them to pass on the savings to their customers through lower interest rates and loan fees.

Find a Loan That Suits Your Needs

A basic home loan may only sometimes be suited to your financial situation, making it more important to compare options if you are self-employed or a business owner. If you apply for the wrong type of loan, which leads to a rejection, it can hamper your credit score and affect your chances of obtaining a loan.

Things to Know About a Home Loan in Australia

The Australian dream of owning a home is one riddled with difficulties, yet that doesn’t deter the few dedicated to establishing their name on the property ladder. If you are an aspiring homeowner, there are a few things that you should know before applying for a home loan since rejected applications can hurt the credit score:

You Need to be Able to Afford Repayments and More

When you make a loan application, the bank not only checks if you can afford the repayment and interest rates today but also if you can afford an increase in the interest rates. It is important to take this into consideration while preparing to make a home loan application in Australia.

The HECS-HELP Debt Impacts Your Borrowing Capacity

Your mandatory HECS repayments are considered while the bank calculates your capacity to repay the loan amount. So if you have any outstanding HECS-HELP payments or debt, it might lower the loan amount approved for you.

Limit Living Expenses

Nowadays, it is common for banks to demand a detailed budget of your living expenses to see if you are capable of paying back the home loan amount without additional financial stress. If they feel that you’re providing numbers which are too low, they’ll use their estimates gathered from average Australian household expenditure data.

You’ll Have to Prove Yourself

When presenting all the necessary information and documents for your loan, the financial institution will ask you to submit proof of your income and living expenses. Banks and lenders usually ask for the latest payslips or tax returns. They can also request identity documents such as passport, driver’s license, Medicare Card, etc. and copies of loan and credit card statements.

Documents Required for a Home Loan in Australia

When you are applying for a home loan in Australia, it pays to be prepared. It is important to do your research before applying for a home loan. Once you’ve made a home loan decision, you need to gather all the documents required to submit your loan application process. The documents you need depend on your home-buying situation, and the requirements vary from lender to lender. Given below are some of the documents you need to submit to obtain a home loan in Australia:

Personal Identification Documents

Any lender you approach will require you to verify your identity while processing the loan application. Given below are some of the widely accepted primary photo identification proof documents:

• Passport
• Driver’s Licence
• Waterways/Boat Licence
• Proof of Age Card
• Australian tertiary institution ID card

In case you are not able to provide a primary identity document, lenders might require at least two forms of secondary identity documents. Some of the acceptable forms of secondary identification are:

• Citizenship certificate
• Medicare Card
• Birth certificate
• Credit Card
• Debit/ATM card
• Health Care Card

Income Details Documents

To obtain a home loan in Australia, you are required to prove that your income is adequate to repay the loan. Given below are the different ways you can verify your income depending on your employment circumstances:

Salaried Employee

• Copies of two latest payslips
• Copy of your latest Payment Summary from your employer

Self-employed

• Tax returns of the individual and business
• Latest two assessments from the Australian Taxation Office

Rental Income

• Current or latest formal signed lease
• Latest rental statement
• Tax return statement from within 18 months of loan application

Depending on your lender, you may also require proof of other ongoing income, such as:

• Bank accounts statements of rental income statements showing income from any investment property
• Dividends and interest accrued
• Statement of family tax benefits

Home Loan Situation

The documents that your lender might require for home loan processing also depend on your home loan situation, so keep the following documents handy:

First Home Buyer

• Statements of your savings and investment history
• Your latest credit card and bank account statements
• Copy of the Contract of Sale for the property you wish to buy
• Supporting documents showing are contributing to the deposit for the property, such as partial contribution by a family member, or monetary infusion via inheritance

Owner Occupier Home Buyer

• Latest credit card statements
• All home loan and personal loan statements from the previous six months
• Investment and savings history from the previous six months
• Contract of Sale copy for the property you are looking to purchase
• Supporting documents regarding any other funds contributing to the deposit for the property

Refinancer

• All home loan and personal loan account statements from the previous six months
• All relevant documents and information regarding any existing home loan
• The most recent Council Rates Notice & home building insurance policy for the property being used as collateral for the loan
• Credit card statements from the previous six months

Investor

• Rental statements
• Recent Council Rates Notice and landlord/home building insurance policy for the property being used as security
• Tenancy lease copy
• Contract of Sale copy