How do home loans work?

Before you make the major life decision to buy a property and take out a home loan, ensure you understand how to apply for one, as well as how mortgages work. Typically, a home loan works in the following way:

• Pre-Approval: Also known as conditional approval, this gives you an indication of the price range of properties you can look at buying. Note that pre-approval is not a guarantee of approval from your lender.
• Purchase property: If you purchase at an auction you may need to pay a deposit on the day, and if you buy through a private sale then you may have to still pay a small deposit, with the remaining amount subject to any conditions on the contract such as finance and inspections.
• You pay a deposit: Secure your home with a deposit. Generally speaking, the higher the deposit you’re able to put down, the less you’ll need to borrow. For this reason it may be beneficial to save as much as you can before applying.
• Apply for a home loan: There are a few methods for obtaining a mortgage, including through a mortgage broker, or at bank or lenders branch.
• Lender valuation: Once you’ve secured your property, your lender will usually perform an inspection and valuation of the property before providing final approval. This is to ensure the value of the property aligns with the property price.
• Sign the loan documents: Once the lender has performed their valuation and approve of the price paid the lender will send over the loan contract for you to sign, and then you simply need to wait for settlement.

What are the different types of home loans that are available?

It’s important that you work out exactly what you need from your loan and how much it will cost you in fees before you make a final decision. A lot of people are unlikely to have the full purchase price available upfront, which is why there are a variety of home loan options available to home buyers, which can include a combination of:

• Principal and interest: Principal and interest loans are to be repaid completely over the life of the loan. They’re taken out so that people can make regular repayments against the principal (amount borrowed on top of the added interest)
• Interest-only: In this case, you’re only covering the interest on your loan. This could prove costly as you’ll be paying interest on a principal that won’t reduce until you begin making extra payments towards it specifically
• Variable interest rate: Your interest rate may change in line with factors such as changes to the official cash rate or the cost of wholesale lending
• Fixed interest rate: Your interest rate will remain the same for a fixed period, where eventually it will change to a variable rate loan.
• Split loan: As the name suggests, this loan will be split, where part is variable, and part is fixed.

What is the interest rate on home loans?

It’s important to understand that interest rates are one of several factors worth taking into account when comparing home loans. There are different types of interest rates (expressed as a percentage) and the amount you pay can depend on your credit provider and the term of your agreement with them. Note that there may be other fees associated with the loan you choose. The types of interest rates can include:

• Variable rate: The interest rate fluctuates as cash rates change and the lender makes adjustments. This could either reduce or increase the amount of interest you ultimately have to pay
• Fixed rate: You can select a fixed rate if you want to lock in the amount you pay over a set period within the loan term
• Partially-fixed rate: You can choose a “split loan”, which means a portion of your mortgage is variable and another portion is fixed
• Introductory rate: Some credit providers may offer what’s known as a “honeymoon rate”, which is a lower rate for a short period (sometimes 1 or 2 years) when you first sign up. Ensure you know how much interest you’ll pay after this period ends, too

How much can I borrow?

Most mortgage providers will assess how much you’re able to borrow based on a few factors. You may be asked for information such as:

• Whether you’re single or buying with a partner
• The number of dependents you support
• Whether you’re looking for a home or investment property
• When you plan to buy
• What your income is
• Bills and living expenses
• Other loans you’re currently paying for

How do I calculate home loan repayments?

If you’d like to estimate how much your home loan repayments may cost you each month, a mortgage calculator could be an efficient way to help. There are a number of reliable online tools designed to help remove some of the guesswork for you. A home loan calculator can help you estimate the following:

• How much you can potentially borrow
• How much your estimated repayments could be

An interest-only mortgage calculator can also help you to estimate some of the additional costs such as:

• The potential cost of an interest-only mortgage
• The potential cost of repayments before and after an interest-only period in comparison to a principal and interest loan

How do I pay off my mortgage faster?

There are a few ways that may help you to pay off your mortgage faster:

• Shop around: Start shopping around for a lower interest rate than your current loan and try to avoid additional fees for changing
• Make regular, larger payments: Though this may be easier said than done, making regular and larger payments on your loan could cut your loan by years. Generally, most of your payments go towards paying off interest within the first 5-8 years, so paying extra at the start may reduce your interest bill and may help you pay off your loan faster. However, additional payments may not be possible or limited if you are on a fixed rate loan
• Payment consistency: If your interest rates end up going down, it may be beneficial to keep your repayment amount exactly the same. This way, you’ll potentially shorten the life of your loan without having to increase your current repayment plans

How much is mortgage insurance?

The cost of lenders mortgage insurance can be anything up to thousands of dollars, and is often added to your home loan amount. There are many factors which can affect the cost of your lenders mortgage insurance (LMI), or whether you are required to pay it at all, including the following:

• The size of your loan: The larger your loan, the larger the financial risk that’s being assumed by your lender
• The amount of your deposit: Generally, LMI will be added to the principal of the loan where there is a lower deposit. Check with your lender to see the deposit required to avoid paying LMI
• Consider additional fees: From administration fees to refinancing fees and more, you’ll need to confirm with your credit provider regarding potential additional fees and their full cost

What does becoming a guarantor involve?

Becoming a guarantor is a huge responsibility, and one that you should take into great consideration before you make your final decision. Once you sign your name as the 'guarantor' of a loan, this can make you legally responsible for the full loan. Therefore, you could be legally accountable for paying back the entire loan if the other person is unable to make their repayments. As the guarantor, you’re also likely to be responsible for any additional fees, charges, and interest that are left over if the other person defaults, meaning you’re completely responsible for the amount outstanding until it’s paid off.

What is the longest home loan term that you can get?

A standard home loan term can last anywhere from 25-30 years, with some lenders also offering loans that span across 40 years. Although 40-year loans may help you to enter the market sooner with reduced payments due to the long span of the term, it could potentially add additional interest costs to your loan.