Whether you’re a first home buyer or a seasoned investor, buying a property generally involves securing a mortgage or home loan.
Choosing the right home loan is an important financial decision that can be challenging.
With the proper guidance from a mortgage broker like Loan Station, you can save both money and time, making the process smoother and more cost-effective.
We help you understand your borrowing capacity, find the loan to suit your financial circumstances, negotiate with lenders and streamline the application process.
What is a home loan?
A home loan is the money you borrow from a lender to purchase a home or investment property.
You then repay the amount according to a loan repayment schedule and the lender charges interest. Repayments would be weekly, fortnightly or monthly across a loan term which generally ranges between 25 and 30 years.
The money borrowed to purchase a home and has to be repaid to the lender is called the loan principal. The principal amount decreases over time as the loan is paid off. The interest the lender charges a buyer is determined by the home loan’s interest rate.
A home loan provides the financial means to buy a property without needing the full amount upfront.
Key factors to consider when taking out a home loan
Saving for a deposit
The bigger the deposit, the more likely you are to be approved for a loan. This means the less you have to borrow and this helps reduce your mortgage repayments.
A buyer would generally borrow between 80% and 90% of a property’s value, which means a deposit worth 10% to 20% of the property value is required.
If you have less than a 20% deposit and no guarantor, lenders would generally require the borrower to pay lender’s mortgage insurance (LMI).
LMI is protection for the lender in case the borrower can’t repay the loan and the property is sold for less than what the borrower owes.
Your credit score is a number used by lenders to gauge how well you manage credit.
If you’ve been making all your repayments on time or keeping your credit products to a minimum, you’re likely to have a high credit score. On the other hand, if you’ve missed or delayed payments, they can stay on your file for a long time, bringing your credit score down.
Lenders equate a low credit score with being a high-risk borrower. Checking your credit score online before applying for a home loan is a good idea.
Regularly checking your credit report will give you time to correct any errors or enhance your credit score before you apply.
Pre-approval
Contact a mortgage broker like Loan Station for pre-approval before home hunting. It helps you know what you can afford.
Pre-approval will give you a good sense of what you can and cannot afford. We can help gain pre-approval by comparing hundreds of loan options from a variety of lenders.
Interest rates
We help clients navigate interest rate options, comparing rates from different lenders. The interest rate would either be a fixed rate or variable rate.
Loan term
The length of your loan term affects your monthly repayments and the total amount of interest you pay.
Shorter terms typically have higher monthly payments, but lower overall interest costs. Longer terms offer lower monthly payments, but higher interest costs.
Fees and charges
Loan fees and charges can add up over the life of a mortgage and substantially affect its overall cost. These fees may include, among others, application fees, ongoing account fees, valuation fees and legal fees.
Comparing loans based on their fees and charges, in addition to interest rates, helps borrowers select a mortgage that fits their financial needs and minimises the total cost of borrowing.
Eligibility criteria
- Personal details: age (18+), residency status, relationship status
- Property details: value, location, type, age, size
- Financial situation: income, employment stability, assets, liabilities, credit score
A mortgage broker like Loan Station has access to an array of options from various lenders.
We work with you to:
- Understand your needs and goals
- Work out what you can afford to borrow
- Find options to suit your situation
- Explain how each loan works and what it costs
- Apply for a loan and manage the process through to settlement
Types of home loans
Fixed-rate home loan
A fixed-rate home loan is when the interest rate of the home loan is fixed for a specific period of time.
This means that no matter how the market interest rate changes during that period, the borrower will be paying the same interest rate.
The benefit of a fixed-rate home loan is that it provides a borrower with certainty and predictability on repayments, making it easier to budget.
A drawback is that the loan isn’t flexible. If the market interest rate decreases, the borrower still pays the same amount of interest for the fixed period.
Extra payments generally can’t be made. You can sell your home early and therefore end the fixed loan early, but you generally have to pay a break cost.
Variable-rate home loan
With a variable-rate loan, the interest rate can rise or fall throughout the term of the home loan.
The interest rate a lender offers can be affected by a number of factors, including the Reserve Bank of Australia’s cash rate as well as higher or lower funding costs for the lender.
A variable-rate loan offers more flexibility than a fixed-rate home loan.
Extra repayments can be made, but the interest rate may change over the life of the loan, making it difficult to plan and budget how much interest will be paid over time.
Government-backed loans
There are a number of government schemes aimed at helping first home buyers own property sooner.
Some of these schemes include:
- First Home Guarantee
- Regional First Home Buyer Guarantee
- Family Home Guarantee
- Help to Buy
Types of loan repayment
Principal-and-interest loan
This means making regular repayments on the amount borrowed (the principal), plus paying interest on that amount.
Interest-only loan
Initial repayments cover only interest for a set period (for example, five years), making the overall loan more expensive because it takes longer for the borrower to pay down their principal, which means they get charged interest on higher outstanding loan amounts. The principal isn’t being paid off, so the borrower’s debt isn’t reduced.
Split-loan
This involves splitting your home loan balance into two separate accounts – one with a fixed rate and one with a variable rate – and you typically make separate repayments on each.
Common myths about home loans
- You need a 20% deposit: Many lenders allow up to 95% borrowing with a 5% deposit.
- LMI protects you if you default: LMI protects the lender, not the borrower, if you default.
- It’s a hassle to change lenders: Refinancing is now simpler than ever.
- Interest rates are set by the RBA: The RBA sets the official cash rate, influencing but not dictating home loan rates.
- Pre-approval is as good as being approved: Pre-approval is preliminary; full approval requires complete financial verification.
- It’s impossible to get a home loan if you’re single: Single applicants can qualify by proving their repayment ability and having a savings history.
- It’s impossible to get a home loan at all: Loan Station can help find suitable options.
In summary
Understanding these basics can make the home loan process simpler and more cost-effective with the guidance of a mortgage broker. At Loan Station, we’re committed to helping you find a home loan that suits your needs and guiding you through every step of the process.
Ready to explore your home loan options? Contact Sydney mortgage broker Loan Station to speak with one of our experienced mortgage brokers. Call us on 1300 46 46 11 or email us at info@loanstation.com.au to book a consultation.
