Loans and mortgages
Buying or building a home is the most expensive purchase most people will make, and many will have to take out a loan. There are many different types of loan and lenders to choose from. The two main types of lenders are banks and non-banks - eg credit unions. HomeStart Finance offers a range of loans specifically designed for low and moderate income households.
How much can you afford?
Your eligibility for a loan will vary depending on the lender. Generally, they will calculate how much they can lend you based on these criteria:
- your household income
- your repayment capacity
- the loan to valuation ratio on the property you want to buy or build.
When working out how much you can afford you should also take into account other charges you may have to pay, including:
- the deposit
- loan establishment fees
- legal and conveyancing costs
- government charges - eg stamp duty, GST
- moving costs
- connection fees for utilities and services - eg water, electricity
- insurance costs
- any furniture or white goods you may need to buy
- any immediate repairs or renovations you may need to make to the property.
As a general rule, you should aim to spend no more than one third of your gross household income on loan repayments.
Choosing a lender
It is important that you research and understand the lending market as well as your rights and responsibilities. This will help you to make an informed decision when choosing the loan that best suits your circumstances.
You should organise your finance before you start looking for a property. Most lenders will be able to approve an in-principle loan and this will give you a price limit when looking for a property. This approval is usually valid for between 6 and 12 months and after this period you may need to be reassessed by your lender.
Before you decide on a lender or a loan you should:
- check they are licensed with the Australian Securities and Investments Commission
- consider what fees and charges will be payable
- work out what loan and repayment amounts you can afford
- plan for any future commitments or changes in your circumstances
- remember there will be other fees and charges to pay - eg stamp duty, property inspection fees
- read carefully and understand all the terms and conditions of the contract and ask lenders to explain their terms and conditions in writing.
Mortgage brokers are usually independent from the lenders and can help you find the right loan. You aren't obliged to use a mortgage broker or to use the loan they have suggested. It is recommended that you do your own research to ensure you are getting the best possible loan for you.
Before deciding on a mortgage broker you should:
- check they are licensed with the Australian Securities and Investments Commission
- ask if they are independent or if they only deal with certain lenders
- ask if they have professional indemnity insurance
- ask if they are a lender as well as a broker as this could influence which loan they recommend
- check they offer a wide range of loans and lenders
- ensure all fees and charges are disclosed to you up front before you sign a contract
- ask how commissions are paid, who pays it and who receives it
- ask to see a copy of any application and financial details they are sending to lenders
- ask them to justify their recommendations.
Common types of loans
There are many different types of loan available and many can be tailored to suit individual needs. It is important that you carefully read and understand all the information available before you sign anything. If you don't understand something you should ask your lender to clarify it. You can ask lenders to explain their terms and conditions in writing before you sign a contract.
Consider the repayment options, including if any early repayment fees will be charged, and if there will be any costs involved in changing your loan or lender in the future.
This is the most common type of home loan. The interest rate varies over the life of the loan according to the economic climate and the official interest rates set by the Reserve Bank.
Most lenders will offer several variable loan packages with various extras and rates. Usually, the lower the interest rate the less flexibility the loan will have with fewer or no added extras.
These loans have a fixed rate for a set period, usually between one and five years. This will allow you to plan your finances without having to worry about changes to interest rates, but you won't benefit if the interest rate falls.
Penalties apply for breaking the loan or paying it back before the end of the fixed period. Most lenders will have restrictions around making extra repayments and most fixed loans have limited extra features.
These loans are split into a partly fixed and partly variable rate - eg 80% fixed and 20% variable. You can usually decide how much is variable and how much is fixed. These loans allow you to gain some benefit from a fall in interest rates while still having the security of a fixed loan.
The rates are lower for the first 6 to 12 months. After this period it reverts to a standard variable rate and the repayments will increase. You should take this increase into account to make sure that you can meet the higher repayments. Ask your lender if you will be charged a fee for the switch from the honeymoon loan to the standard variable loan.
Capped rate loans
The rates can't exceed an agreed percentage for a fixed period time. This means that you won't benefit from a fall in interest rates during this period but won't be affected by interest rate increases.
These loans are usually used by people who are buying a new property before they sell their current one. The existing property must be sold within a set timeframe, usually within 6 to 12 months.
Bridging loans can be more expensive than other types of home loan but can be used to secure a new property.
These loans are supplied by the vendor rather than a lending institution. Vendors will generally charge a higher interest rate than other lenders, and you may have to pay a premium over and above the purchase price.
As you are not the legal owner of the property until all money has been repaid to the vendor, you will have limited legal rights. It is strongly recommended that you seek independent and professional legal advice if you are considering this type of loan.
This type of loan is usually used by older property owners to access their home's equity without having to make regular repayments.
The amount you can borrow will depend on your age and the value of your property. The loan doesn't have to be paid back until the property is sold or until the last co-borrower moves out or dies. The amount you will have to pay back will be considerably higher than the amount you originally borrowed as fees and interest will be added to the balance each year.
This type of loan may affect your eligibility for age pension payments from Centrelink.
If you want to repay a reverse mortgage earlier you may be charged considerable termination fees.
Before you decide on a reverse mortgage it is important that you:
- talk to different lenders and do your research before deciding
- understand all the terms, conditions, fees and charges that may apply
- get any promises or guarantees made by lenders in writing before you sign a contract
- seek independent and professional advice from a financial advisor or a solicitor before signing a contract
- consider all the possible long-term effects a reverse mortgage can have.
Your home may be periodically assessed by your lender to ensure that its condition has not deteriorated and that the amount of the loan doesn't exceed the property's value. This information will be included in the regular loan statements provided by your lender.
Information and advice about reverse mortgages are available on the National Information Centre on Retirement Investments website.
HomeStart Finance has developed a senior's equity loan specifically to help older homeowners access the equity in their property.
For information about services available to help you remain independent at home, including getting modifications, see Housing and help at home.
Making extra lump sum payments or making higher repayments can help you to pay off the loan faster and shorten its term. Depending on your loan there may be restrictions placed on how much extra or how often you can make early repayments. Many lenders will charge you a fee if you repay your loan in full before a certain date.
These are set by the Reserve Bank and will increase or decrease according to the economic climate. You should always include a margin when you are calculating the size and amount of your loan repayments to take into account a potential interest rate increase. A one percent increase in the interest rate could mean an extra $170 to a monthly repayment on a $200,000 loan.
If you have a savings account with your lender - eg bank, credit union, you may be able to offset the amount you hold in this account against a percentage of the interest rates charged on your mortgage. This can shorten the term of your loan. You will still be able to withdraw funds from the savings account when needed.
Most lenders will charge you a higher interest rate for this option and there may be extra fees and charges you will have to pay.
This is a deposit used to secure a property and is equal to a certain percentage of the property's purchase price. This percentage will vary depending on your lender and loan. Deposits are usually between 5 and 10% of the purchase price. If you have been approved 100% of the purchase price you don't need to pay a deposit.
Documentation provided by a lender
All lenders must comply with Australian consumer law. They are legally required to provide you with:
- a credit contract also called a pre-contractual statement
- a copy of the comparison rates schedule
- a statement outlining your rights and responsibilities.
The credit contract will set out:
- the amount of money you are borrowing
- the annual percentage rates
- how interest will be calculated and when it will be changed
- the total amount of interest if you repay the loan in full within seven years
- any credit fees or other charges, including commission charges
- how you will be told of any contractual changes
- the default rate of interest and how this will be calculated if this is applicable
- how often you will be provided with account statements
- whether mortgage guarantee insurance applies
- the details of any credit-related insurance financed under the contract.
Comparison rates schedule
The comparison rate allows you to compare home loans between lenders and is displayed as a single percentage figure. This will allow you to see the real cost of the loan. The comparison rate schedule will list the rates for a range of standard loan amounts and terms for a particular loan. Australian consumer law sets out these amounts.
Different loan amounts and terms will produce different comparison rates and the comparison rate for your particular loan may not be included in the schedule. You can ask your lender to calculate the comparison rate for your particular loan but they are not obliged to provide this information. It is important to make sure that you are comparing loans of the same amount and length of term.
Comparison rates are calculated using a standard formula that includes:
- the interest rate
- all fees and charges relating to the loan you are expected to pay
- the amount being borrowed
- the term of the loan
- how often repayments will be made.
It doesn't include any government fees and charges such as stamp duty, or other fees that may be incurred - eg early repayment fees, redraw fees.
If you have any questions or concerns about comparison rates see the Money Smart website for more information.
You should carefully read and understand any contract before you sign it. After it is signed, the lender must provide you with a copy.
If you are unsure about anything in the contract, ask for clarification from the lender or seek independent advice from a solicitor, accountant or conveyancer.
Mortgage insurance, also called mortgage guarantee insurance, is sometimes required by the financial institution providing your mortgage. It is usually a one-off premium you pay when you buy the property. When mortgage insurance is needed. It is most commonly requested by the financial institution if you are borrowing more than 80% of the price of the property you are buying.
How it works
Mortgage insurance protects the financial institution providing your mortgage if you default on the mortgage repayments. If you sell the property because you can't meet the payments, the lender can claim for the amount they are still owed if the selling price is less than the amount you owe them.
If you default on the mortgage and the mortgage insurance is paid out to your lender this will become a debt to the insurance company you will have to repay.
On this site
- Reserve Bank of Australia
- SmartMoney - Australian Securities and Investments Commission website
- HomeBuilder Grant - Revenue SA
- First Home Owners Grant - Revenue SA
For an alternative version of these documents contact Consumer Affairs.