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Learn more about navigating the loan maze and finding a loan to fit your needs

1. Before you purchase

   When should I shop for a home loan?

   It’s best to get advice at the earliest possible opportunity, preferably before you list your existing home for sale and before you purchase or bid at auction for your new home.

   If you start shopping for a loan before purchasing your new home, you may be able to get pre-approval or in-principal approval. This allows you to shop for your home in confidence that finance will be available.

   If you have already purchased, it is important to arrange for finance immediately, as it can take up to a few weeks between application and settlement.

   How much can I borrow?

   Work out where you can afford to live and how much you can afford to borrow. Make sure that you budget for expenses associated with your home and loan purchase. Also leave a buffer for interest rate rises and if your personal circumstances change temporarily. Go to our calculators to estimate How much you can afford to borrow and where you can afford to live.

2. Shopping for the best plan

   What costs are involved? Lending costs vary between lenders and products. Costs to consider include:

   • Upfront setup costs –application,establishment/settlement,loan documentation/legal fees,valuation fees,lenders’ mortgage insurance premium charges,Mortgage registration, transfer fees & mortgage stamp duty andproperty transfer costs
   • Ongoing –interest rates,account keeping fees,annual facility fees,transaction fees andpenalty charges
   • Discharge costs –lender’s discharge fees,deferred establishment & early repayment fees anddischarge registration fees
   • Go to our lender comparison calculator

   What products are available? The right loan for you will depend on your individual circumstances. There are dozens of lenders and hundreds of products. There is a vast array of different features offered within different loan products. By seeking professional advice, you will get assistance to guide and help you choose a loan to suit your particular needs. Click here to find more detail on types of loans, interest rates and more

   Choosing the right loan product and lender

   There are dozens of lenders and hundreds of products

   • Types of loans:
     • Full Doc – this is the standard loan type, where you provide documented proof of your income. Suitable for permanent employees and established self-employed business owners who can provide full financial records.
     • Low doc and no doc – suitable for borrowers who are unable to provide full verification of their income. Generally only available to people who are self employed, or casual employees. For these loans, you may need to provide the lender with a statement confirming your income or a statement that you are able to meet the proposed loan repayments. Compared to full doc loans, these loans generally carry a higher interest rate and are available only at lower Loan to Valuation Ratios (LVRs).
     • Reverse mortgages – these loans are most suitable for retirees who own their home, but are looking to release cash. Unlike a traditional mortgage, there are no periodic repayments required, but the outstanding loan balance grows with accumulated interest charges. Generally, a reverse mortgage loan is repayable only when the property securing the loan is sold or the owner dies.
     • Non-conforming – these are specialised loans for people who have some form of credit impairment in their credit history, such as a default, or to finance a property that has unusual characteristics. The interest rate on these loans is generally higher than standard home loans.
   • Types of interest rates:
     • Variable rate
       • The most common home loan interest rate type in Australia is the variable rate. Under this form of interest rate, the lender may change the interest rate during the loan’s life on giving notice to the borrower.
       • Due to intense competition between lenders in the variable rate home loan market, most lenders will only change variable rates on existing loans in response to movements in the official cash rates, announced by the Reserve Bank of Australia (”RBA”) from time to time to regulate the economy. So, you can generally be confident that the variable interest rate on your loan will change only in response to movements in the RBA’s official cash rate.
       • Advantage: generally, variable rate loans have no restrictions or penalties on making additional repayments; therefore you may be able to pay off your loan sooner. Additionally, a variable rate is advantageous if interest rates fall, as your monthly minimum repayments should fall at the same time.
       • Disadvantage: Variable rate loans are not advantageous if interest rates rise, as your repayments will increase at the same time.
     • Fixed rate
       • Most lenders offer fixed rate loans, generally for 1 to 5 year terms. At the end of the fixed rate term, the interest rate usually converts to a variable rate.
       • On a fixed rate loan, the interest rate remains the same during the entire fixed rate term, even if variable interest rates change. The fixed rates offered by lenders can be either higher or lower than the variable rate at any given time; so, you need to make a comparison when considering this option.
       • Advantage: With fixed rate loans, you are not affected if variable rates increase during the fixed rate term, because your fixed rate will not change for that term. This means that fixed rate loans can work out cheaper compared to variable rate loans depending on interest rate movements during the fixed rate term.
       • Disadvantage: If variable rates decrease during your fixed rate term, you will not receive any benefit, as the interest rate on your loan will remain the same for that term. If market interest rates fall over your fixed rate term, it is possible that a fixed rate loan could cost you more over the fixed rate term. Furthermore, you generally cannot make additional repayments during a fixed rate term without incurring penalties.
     • Introductory / low start / honeymoon rates
       • Advantage: Many lenders offer reduced interest rates for a limited time at the beginning of your loan term, generally for periods between the first 6 to 24 months. This can provide a useful benefit for you by reducing your initial loan repayments and freeing up some cash to help establish your new home.
       • Disadvantage: there may be a catch with introductory rates. After the end of the introductory period, your lender may charge a higher variable interest rate than the normal variable rate the lender offers. So, you need to weigh up the pros and cons of a reduced interest rate loan, to work out whether the benefit of a reduced rate at the beginning, is worth the cost of a higher rate later.
     • Split loans – Most lenders will allow you to take out a split loan, which is a combination where part of the loan balance is at a variable rate and the rest is at a fixed rate. This can offer the advantage having an “each way bet” if you’re not sure about which option is best.
     • Principal & interest (”P&I”) and Interest Only (”IO”) repayments
       • The most common loan repayment type is principal and interest where your repayments are applied to pay interest as it is charged and also to pay off the loan principal over the loan term.
       • It is also possible to obtain an interest only loan, which have lower repayment requirements because you only have to pay the interest as it is charged. At the end of the IO term, you may have to repay the loan in full or repay the loan by principal and interest repayments over the rest of the loan term.
       • Most lenders will apply special conditions to IO loans, such as a restriction on the term of up to 5 years and restricting availability only to finance investment properties.
   • Loan products & features:
     • Standard – This is the most common form of loan account, which generally includes a number of the features below, with no extra charges for usage.
     • Basic – Basic loans generally have an interest rate somewhat lower than a standard loan. However, the loans either come with less features, or there are fees to use selected features. In comparing a standard and basic loan product, you will need to consider the way you expect to use your loan account.
     • Line of credit / equity access – These accounts provide you with the ability to draw loans or credit at any time up to a limit.. Some line of credit loan accounts have more flexible repayment alternatives, providing the benefit of allowing you to manage your cash flow better. Most lenders charge higher interest rates or extra fees for line of credit accounts. In many cases, a standard loan with redraw can provide features similar to a line of credit at lower cost, so make sure you compare options carefully.
     • Redraw – A redraw facility allows you to withdraw additional payments you have made to your loan account. Most lenders impose a minimum redraw amount, limited number of free redraws, or fees per redraw.
     • Redraw methods – Some loan accounts allow you to redraw by internet, telephone, cheque payments, direct debit payments, Bpay payments, ATM and EFTPOS payments. Many lenders restrict the number of free transactions, for different redraw methods, that you can make each month.
     • Inward payments – Lenders provide many different options for making payments to your loan account including: salary crediting, direct credit, internet, telephone, cheque and Bpay. Due to the flexibility and ability to save interest, some people choose to use their loan account like a transaction account, by paying all of their salary into the account and then making payments from the account as required.
     • Interest offset – This facility allows borrowers to offset money in a savings account against their loan account balance before calculating interest on the loan account, meaning that borrowers save interest charges on their loan accounts.
     • Packages – Many lenders offer packages that provide a range of products, such as a loan account, credit card and savings account, with an interest rate discount on the home loan account. The downside is an annual fee, which typically ranges from $300 to $500 per annum. Whether these accounts will work for you is really a matter of weighing up the benefits against the costs; to be worthwhile, the interest savings and other fee savings must outweigh the annual fee.
     • Repayment holidays – this facility allows you to stop making repayments for a while, provided that you have made additional repayments on your loan.
     • Top-Ups – this facility allows you to borrow more money on your existing loan account. Most lenders will require a short form application for a top up loan.
     • Portability – This facility is designed to help if you decide to sell your existing home and buy a new one, by allowing you to retain your existing loan account. This may save you some costs of setting up a new loan, like an application fee and stamp duty. But given that there may be better deals in the market if your take out a new loan, it may pay to check out what is available before using this facility.
     • Vacant land – A loan to purchase vacant land, often combined with options for construction.
     • Construction & renovations – A loan to finance construction or renovations. Usually will include conditions that you must draw down the funds in stages (known as “progress payments”), coinciding with the completion of different stages of construction. Be sure to check if the lender charges fees for progress payments.

   Which lender should I choose? There are a number of different types of lenders in the market which creates a benefit for borrowers because the market is highly competitive, resulting in lower interest rates. Click here for more info

   • How to choose your lender:
     • There are a number of different types of lenders in the market, which creates a benefit for borrowers because the market is highly competitive, resulting in lower interest rates.
     • In shopping for your loan, it is worth considering a range of different lenders to ensure that you can compare what is on offer, allowing you to choose a product suited to your individual needs at minimal cost. You may find that some of the less well known lenders in the market can offer you a superior deal than the better known players. So it’s worth shopping around.
     • Given the very large number of different lenders available, the best way to find your new lender may be to use a mortgage broker.
   • Types of lenders:
     • Major banks – There are four very large locally owned banks in Australia that serve a large proportion of the market. Each of the large banks offer the advantage of a well known name, extensive national branch network and comprehensive product range.
     • Other banks – Apart from the “big 4″ there are a number of other banks in Australia, that can be summarised as follows:
       • Other Australian banks – these banks are locally owned and have tended to be most successful in their original State of origin, but they are increasingly expanding their branch networks into other States.
       • Overseas banks – there are a number of large overseas banks that operate either via local Australian subsidiaries, or as a branch of the overseas parent. Some of these players specialise in loans distributed via brokers, or even direct via the internet.
     • Building societies and credit unions – Building societies tend to serve a local geographic area, while credit unions serve groups of people who share a common characteristic such as an employer, occupation, or local geographic area. Given that these organisations are mutual associations owned by depositors or not-for profit, they don’t have to pass on profits to external shareholders, which means that their interest rates and fees can be quite competitive.
     • Retail lenders via wholesale non-banks
       • There is a multitude of smaller lenders who offer their own loans under their own brand, using funds that are sourced from the financial markets. It’s just like goods retailing, where a shop sells a product under its own brand, using a product that is supplied by a third-party wholesaler or manufacturer. The benefit of this arrangement is that the lender has access to wholesale rates and can pass on the savings to you.
       • Some people are concerned about getting a loan from a lender that may not be very well known. It’s important to remember that with a loan, the risk is very different to when you deposit your money into a bank. With a loan, there is relatively little risk for the consumer, because it is the lender who is paying the money to you, rather than the other way around. So provided that the retail lender can offer you the features you require, a competitive interest rate, good service and low fees, they are well worth considering.
       • It’s also worth remembering that it was these lenders who opened up the home loan market in the early 1990s, creating competition that has led to vastly cheaper home loan interest rates for everyone. This form of lending is now a very large, well established and stable part of the Australian home loan market.
     • Specialist non-banks – There are a number of lenders available that specialise in offering loans to people who don’t fit the normal credit requirements. In particular, non-conforming lenders offer loans to people who may have impairments on their credit record (like loan defaults), or who are looking to purchase a property with unusual characteristics. Another source of specialist non-bank lending is via solicitors’ funds. In general, these forms of lending are more expensive than standard loans, but they offer the benefit of offering finance to people who may otherwise be ineligible for a traditional loan.

3. Applying & getting approved

   How do I apply? Once you have decided on the right loan for your circumstances, the next step will be to lodge an application. Your broker or lender will usually assist you through the application process. This will generally involve completing an application form (or submitting an electronic application), collecting and supplying required information/documents and signing required forms

   What documents will be involved in the application?Typically you will be required to collect and submit documents, which may include the loan application,proof of identity,privacy declaration,financial documents andcontracts.

   How will the lender make the decision to lend me money?While all lenders have different policies and procedures for deciding on whether to lend money, typically they will look atcredit history,serviceability and theloan to valuation ratio.

   What other steps will the lender perform in reaching their credit decision?Lenders will often also performcredit history checks,serviceability,property valuations and requireLender Mortgage Insurancebefore they make a credit decision to approve or decline the application.

   What are the types of credit approval?Types of approval include:indicative,In-principle,conditional approval andunconditional approval.

4. Fulfilling your loan

   What is involved in fulfilling your loan?

   Once the lender has approved the loan application and you have decided to go ahead with the loan, there are a number of steps that follow. These include:

   • The lender will send you a loan offer letter
   • Along with the offer letter, the lender will provide you with a copy of the detailed loan terms and conditions
   • Accepting the loan offer – When you are happy to proceed with the loan and sure that you understand and agree to the conditions, you should arrange to sign and return the documents to your broker or lender. Remember that you will be entering into a legally binding contract, so be sure to seek advice if there is anything that you don’t understand
   • Once you have signed the loan offer, the lender will start to make arrangements to take a mortgage over your home
   • The last step prior to settlement is arranging a settlement date

5. Settling your loan

   What is settlement?

   Settlement is a fairly complicated process that involves coordination between numerous parties such as: real estate agents, solicitors, loan brokers, lenders, and the land titles office. Your solicitor and loan broker can be invaluable in managing this process for you.

   Settlement for a new purchase involves the transfer of money from the buyer to the seller and the transfer of the property title from the seller to the buyer. At the same time, various other costs are settled like stamp duty, rates adjustments and solicitor’s fees.

   Settlement for a refinance involves the old lender releasing their mortgage and receiving money to discharge the old loan, while the new lender takes out a new mortgage, creates a new loan and pays money out to old lender.

   Once settlement has been completed, you will be advised by your solicitor. Within a few days, your lender will generally send a letter confirming the transaction details. It is important to follow up anything that you think may not be correct as soon as possible.

   After settlement, your new loan account should be accessible through the available channels like the internet, telephone, or ATMs. It’s a good idea to logon to your lender’s website to make sure your loan details are OK.

   From this point on, your new loan account is up and running. Remember to keep in touch with your mortgage broker or lender if you have any questions or further requirements.

Disclaimer
The information on this page is general information only. It is designed to give you an overview of the loan process, not advice. The information does not take into account your objectives, financial situation or needs. You must speak to your mortgage broker, lender or finance advisor to work out the process that is likely to occur when you arrange your loan. Also, your mortgage broker or lender can give you details of different loan terms and assist you to find the loan that is best for you.