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Top 10 tips when searching for your home loan

With property prices in capital cities across the country predicted to rise an average 17 per cent in 2021, many homebuyers are realising there is no better time than now to make the leap onto the Australian property ladder.

According to Domain, ANZ economists have warned that the soar in price rises across Australia could leave many first-homebuyers priced out of the market. ANZ research revealed house prices in Melbourne and Brisbane are set to jump 16 per cent, while Perth and Sydney prices will increase 19 per cent.

Furthermore, CoreLogic’s national home value index recorded a 2.8 per rise last month, which was the fastest rate of appreciation in almost 33 years. The data showed that the “exceptionally strong growth conditions remain broad-based, with values rising by at least 1.4 per cent across each of the capital cities and ‘rest-of-state’ areas over the month.” 

And with Domain research finding that buying in many suburbs across Australia is cheaper than renting, in addition to record low interest rates, many people are deciding to turn their weekly rental payments into paying down a mortgage to make home ownership a reality. 

So just where do you start in your quest for securing a home loan? We’ve put together a guide of top 10 tips to get you on the right track to getting a home loan.

Find a lender

Taking out a home loan is a big commitment – it’s a long term debt. So doing your research and comparing lenders is important, as a home loan is so much more than what interest rate you get and the fees you pay.

You can go direct to a bank to start the process of securing a home loan or engage the expertise of a mortgage broker who can help you navigate the path to home ownership.

If sourcing a home loan on your own seems all too hard, a mortgage broker can do all the ground work for you.

They act on your behalf to negotiate a loan and take care of all the paperwork. They will meet with you and learn about your financial circumstances and from there they can work out what loan package would suit you best. Once you have picked a home loan deal, the broker will act on your behalf to complete the application process, lodge the forms and deal with the bank.

Loan features

When seeking a lender and the right loan, here are some things to consider:

  • What are the features of the loan? Can you set up an offset account? Can you redraw from your loan?
  • How many years will the loan be set up for?
  • What are the rates and fees? What interest rate are they offering? Will it be variable or fixed? Is the rate competitive compared to other rates offered by other lending institutions?
  • What sort of fees do they charge? Is there monthly or yearly account fees? What are the break fee costs?

Borrowing capacity

One of the first things to determine when searching for your home loan is just how much money you can borrow.  

There are various online calculators that can help provide you with a rough guide such as this one: https://moneysmart.gov.au/home-loans/mortgage-calculator.

A lender will determine how much you can afford when it comes to mortgage repayments by taking into account your income and other debts you have, such as credit cards or personal loans.

Your credit limit will also be investigated. The lender needs to see evidence that you would be a reliable customer who can meet mortgage repayments. Overdue bills, credit card repayments and defaulting on personal loan payments are red flags on your credit score.

Moneysmart have a list of places that can provide a free credit report: https://moneysmart.gov.au/managing-debt/credit-scores-and-credit-reports

Set a budget

The bigger the deposit, the less money you have to borrow, hence less the debt you will be in.

Take control of your finances by setting yourself a budget. Do the sums and work out where you can cut back and save. Assess where your money goes. What are your regular expenses and where can you curb your spending? Bring your lunch to work, cancel that gym membership you never use, cut back on takeaway coffees and dinners out – you’d be amazed at how quickly these expenses can add up.

Once you have a clearer picture on how your money is being spent, creating a realistic budget will be easier and you will reach your home ownership goals quicker.

Savings, savings, savings!

Many lenders want to see proof of savings and your ability to save money. This is to help them assess whether you have the capability to meet the commitment of regular mortgage payments.

‘Genuine savings’ is classed as money that has been set aside - usually a minimum of three months’ worth.

There are some lenders who will view paying weekly rent as evidence of regular savings.

Using a guarantor

If genuine savings is not something that you have, there are some lenders who still offer home loans of up to 95 per cent of the property’s value.

Another option is having someone, like a parent, be your guarantor. If you don’t have a 20 per cent deposit when taking out a home loan, lenders will require you to take out Lenders Mortgage Insurance to protect themselves if you default on your loan.

It is quite a pricey outlay but it can be avoided by securing a guarantor. It works by the guarantor using the equity in their property as security for your home loan. The lender sees this as an additional guarantee that they could recoup their funds if there was a default and will lend you the 80 per cent of the home’s value.

Hold off any career changes

Lenders like to see that you have been in a secure job for at least three months. The longer you have been employed, the better.

Lenders want evidence of financial stability in your career as proof you can meet mortgage payment obligations. Most banks will want to see payslips over consecutive weeks.

Clear any debts

Once you establish your budget and set your savings goals, clearing any credit card or personal loan debt should be top priority.

Pay more than the minimum amount due each month on your credit card to clear the debt faster, and so that you are paying off more than just the interest. And once your credit card is paid off close the card as you could be paying unnecessary fees. Or if it is something you need for emergencies, reduce the card’s credit limit.

State by State government grants

If you are a first homebuyer it is likely you’ll be eligible for a First Home Owners Grant.

Queensland:

The Queensland First Home Owners’ Grant is a $15,000 payment towards the purchase or build of a new home.

It is available for the purchase of new townhouses, units, houses, buying off-the-plan or building a home.

More information is available here: https://www.qld.gov.au/housing/buying-owning-home/financial-help-concessions/qld-first-home-grant/apply-first-home-grant

The Queensland Housing Finance Loan is offered to people who can’t obtain finance from a bank or building society but are able to afford to build or buy an established home.

People who meet certain eligibility criteria, which includes having a household income under $141,000, no significant debts, having a savings history and being able to afford the repayments, are eligible.

The loan is variable or fixed, requires a two per cent deposit and no mortgage insurance is required.

https://www.qld.gov.au/housing/buying-owning-home/financial-help-concessions/qld-housing-finance-loan

Victoria

 A $10,000 First Home Owner Grant is offered to homebuyers buying or building their first home. More information can be found here https://www.sro.vic.gov.au/first-home-owner

WA

Eligible WA first homebuyers can access the $10,000 First Home Owner Grant if they are building or buying off-the-plan, or purchasing newly built homes.

It is available for purchases of homes up to the value of $750,000. Details can be found here: https://www.wa.gov.au/organisation/department-of-finance/fhog

Keystart, an initiative of the WA State Government, aims to provide an affordable pathway to owning a home.

 It offers lower entry costs, low deposit requirements and no lenders mortgage insurance. For more information visit https://www.keystart.com.au/

Stamp duty concessions

Stamp duty on the purchase of a residential property is payable on all transactions and is a big outlay and should be something you factor in your buying budget.

However, there are concessions for first homebuyers.

Queensland first homebuyers are eligible for a first home concession for transfer duty provided they meet certain criteria, such as the home is valued under $550,000. More information can be found here:

In Victoria, if you are a first homebuyer you could qualify for a stamp duty reduction of 50 per cent if the contract price is $750,000 or less and the dutiable value is $600,000 or less. Visit https://www.sro.vic.gov.au/fhbduty#duty-reduction for more details.

In WA, if a buyer is eligible for the first homebuyer grant, a first home owner rate of stamp duty is applied. Details can be found here https://www.wa.gov.au/government/publications/first-home-owner-duty-fs

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