Articles - Finance

Things to Consider Before Applying for Your First Mortgage

10th July 2019
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Applying for your first home loan can be a very exciting time as it brings you one step closer to owning your own home. With the lending process becoming more in-depth and somewhat invasive, it's a good idea to know what the minimum requirements are to save yourself the disappointment.

The Basics

Before you start looking for a home or mortgage provider, it's essential you understand what the banks are looking for. There are a few questions you will need to ask yourself before you begin.

  • Are you employed?
  • Do you have enough savings?
  • Have you checked your credit score?
  • Can you repay the loan?
  • What are your living expenses?
  • Do you have a savings history?
  • Do you have a deposit?

Get Advise

When applying for a loan, it may be tempting to talk to the financial institution you already bank with. But there are a lot of different factors you should consider first. Just because you're already a customer doesn't mean your bank will give you the best deal or in some cases they may not approve your loan.

Consider using a mortgage broker as they will have access to a large number of home loan products and know the application process. Because they know the individual selection criteria of each bank is looking for, they will be able to advise you on which loan you are more likely to get approved. They will also be able to advise which home loan is right for your personal circumstance.

Are you eligible for first home buyer benefits?

There a few perks of being a first home buyer in Australia. However, these benefits vary from state to state, so make sure you check what's available in your region and if you are eligible. In most states, if you are building a new home, you will qualify for the first home buyers grant. If you are purchasing under a certain amount (varies from state to state) you may be exempt from paying stamp duty or at least pay a reduced amount.

Organise Your Documents

Getting your paperwork together may be overwhelming and leave you thinking why so much documentation? But having your documentation ready is key to speeding up your approval. If you don't provide all the required information upfront, the bank will hold up the process until they can fill in the gaps. Turning a seemingly short process into something that could feel like a lifetime.

Get Pre Approval

After some initial planning, you have a rough idea of where you would like to buy and how much you can spend now it's time to get pre-approval from a mortgage provider. Don't get confused, this isn't an offer of finance but a statement that you should be able to borrow up to a certain amount, provided you meet the criteria

Once you've been pre-approved, congratulations! You are one step closer to homeownership.

Start Looking

Whether you are buying or building you will need to start looking for the home of your dreams! Make sure you only look for homes that match or are below your pre-approved amount; otherwise, your loan may be rejected.

Remember just because you are happy to pay a certain amount for a home doesn't mean the bank will. Before getting your loan approved, the bank will do an appraisal of the house to see how much money they should lend you, and you'll know if the offer you made to the seller is reasonable. If you have offered to pay more for the house than what is deemed reasonable by your lender they will reject your home loan.

Final Tips

Before you sign any final documents, always make sure you have read the terms and conditions of your loan! Yes we know, it's a very long document, but this loan is something you may have for the next 30 years, so it is imperative you only agree to the terms are right for your personal situation.

Here a few things you should consider when agreeing to or choosing a loan that's right for you:

Interest-only or interest and principle - Regardless of which mortgage type you go for, you need to understand the difference between ins and interest, because not all home loans include repayment of the principal amount you borrow. Ensure that you know exactly what repayments are required.

Loan amount - The total amount you will be borrowing from the bank to purchase your home.

Ongoing fees - Ongoing fees may be charged monthly or annually for administering your loan. But some ongoing fees may only be payable in certain circumstances. Do be aware that ongoing costs can be as high as $750 per year, so it pays to shop around!

Lender's Mortgage Insurance - Mortgage lenders insurance (LMI) is a type of insurance that lenders get to protect themselves from borrowers not repaying the loan. If your loan is more than 80% of the price of your house (for first home buyers) or the current value of your property (for those who are refinancing or buying a new home), you have to pay LMI.

Application fee - A home loan application fee is a one time fee paid to the lender for setting up a home loan. The application fee is also known as an establishment fee, start-up fees, up-front fees, or set-up fees. If you don't have an application fee or establishment fee, be careful you might be charged higher ongoing fees

Loan term - There are a lot of decisions that have to be made when choosing a home loan. One of the most important is the loan term length. When you are paying off a loan over such a long time, five years doesn't seem like much, but it can make all the difference financially.

Redraw facility - A redraw facility is a feature of certain types of loans (namely home loans and personal loans) which allows account-holders to withdraw money they've already contributed in the form of loan payments.

Owner-occupiers - Owner-occupiers are home buyers who are buying a house that will be their primary residence, while investors are purchasing property to rent it out or otherwise use as a source of investment. In general, borrowing as an investor will attract a higher interest rate and require a bigger deposit.

Fixed or variable rate home loans - Fixed-rate mortgages don't usually allow additional repayments, and also have an early exit fee should you decide to sell or refinance the property before the term ends. Variable rates are set by the lender, not the reserve bank of Australia so that they can go up at any time, but generally, give more flexibility.

Credit Cards - Some banks may allow you to package your home loan and bank account to give you added benefits. These will depend on the lender, but some offer credit card options with low-interest rates and no annual fees.

Applying for a home loan can be a scary and overwhelming process, but take your time, do your research and only sign something if you fully agree and understand the terms of your loan. When in doubt, always seek professional advice.