Home Loan Checklist - Finance Article

Buying a home can be a very stressful time! Especially for first home buyers who have no experience in the purchase of a home.

A few questions you need to ask when looking to buy a house are:

Do you want a townhouse, apartment or a house?
Do you wish to live in the inner city, suburbs or country?
How many rooms/bedrooms will you need?
Will the property accommodate your changing needs over time?
Do you want a garden, if so how big?
Do you prefer an old or modern house?
Are you happy to renovate or extend?
How close do you wish to be to facilities such as schools, shops, childcare, parks, beaches and hospitals?
How much you are willing to pay?

Once you have answered these questions, then it's a matter of finding the house that suits you and your budget. Find houses to buy at RealEstate.com.au.

Try and obtain pre-approval for a home loan before you start looking at houses to buy.
This may set the limit on what you can spend and avoid disappointment in finding a house that you can't afford.

Most lenders require a 20% deposit for their better home loan products as they look to only finance 80% Loan to Valuation Ratio (LVR). However, home loan products are now so diverse (and numerous!) and there are some lenders who will finance up to 106% LVR to include fees and costs.

Having a 20% deposit avoids the need for Mortgage Guarantee Insurance (MGI) (also known as Lenders Mortgage Insurance). MGI is an insurance policy that the lender takes out over the loan to ensure that should the loan be unable to repaid, it will cover any shortfall when the financial institution sells the property. Note that this insurance covers the financial institution and not the borrower.

As a first home buyer, it can also be beneficial to buy a property for investment purposes to assist in getting into the housing market. In this way, the rent received can pay most if not all of the mortgage repayments.

Types of Home Loans

Standard Variable

These are the normal type home loans, generally starting with a 12 month 'honeymoon' period of a lower rate, then reverting back to the current variable interest rate as determined by the bank. Generally with this type of loan, you can make additional payments to reduce the interest charges at any time. This type of loan is the most flexible. 

Fixed Rate Home Loans

As the title suggests, the rate of the home loan is fixed for a period of time. Generally these rates are slightly higher than the current variable rates, however it means that your repayments will not change during the term of the fixed period - great for budgeting purposes. Being a fixed rate generally also means that you cannot make additional payments (or capped at a low figure per year) and you may not have the benefit of a redraw facility.

Split Home Loans

This gives you the ability to split your home loan into variable and fixed portions. e.g. if you have a $400,000 mortgage, you may want to put $300,000 into a fixed rate and $100,000 in a variable rate. This would be so that you can make additional payments to the variable rate portion and have the majority of the loan at the fixed rate to avoid rate increases.

These 3 types of loans are the 'standard' loan types. There are numerous sub types of loans spawning from these 3 major types.

The rule of thumb for repayments on standard loans is that for every $1,000 you borrow, the repayment will be $7 per month. e.g. a $400,000 loan would result in approximately a $2,800/month repayment ($400,000 divided by $1,000 multiplied by $7 = $2,800). This should give you an approximate guide for budgeting for what you can afford to buy.

Fees

Most people are not aware of all the additional costs associated when buying their first home under finance. For instance:

Bank application fee
Search costs
House valuation Fees
Solicitor and Conveyancing fees
Pro Rata Rates/Taxes/Water/Strata Fees
Land tax
Mortgage Guarantee Insurance (if financing more than 80% LVR)
Monthly bank service fee
Stamp Duty on purchase of property
Stamp Duty on home loan contract
Mortgage registration costs

Speak to your bank/finance broker about the estimated total amount for these costs prior to applying for a loan. Different states have different taxes.

What you will need to apply

You credit file plays a large part of the approval process. A credit file contains details on every credit-active person and business during the past seven years. You can request a copy of your credit file from Veda Advantage. Read the Borrow Now article on your credit file.

Firstly, the financial institution will need to complete a '100 point check'. This is merely to confirm your identity. A drivers licence is 40 points, a credit card is 25 points and a birth certificate is 70 points (Only originals accepted).

Secondly you need to be able to demonstrate your ability to repay. To assist in this process, you should supply at least your last 2 payslips with copies of your last 2 group certificates and a letter from your employer confirming this information. If you are self employed, you should supply the last 2 years financials and your accountants details.

Thirdly, what security is available? This is the details of the property you are looking to purchase but also other assets you own. This includes unencumbered vehicles, other property or land, household effects, superannuation, life insurance details and your current savings accounts. Providing all of this information will assist in speeding up the process also.

Once this information has been provided, you should be able to be given a figure of what the financial institution is able to lend you.

Happy house hunting!

I'm ready to view some Home Loan offers!