Your home loan questions answered

Buying your first home can be confusing. We’ve answered some frequently asked questions to help you get started.

1. How much can I borrow?

Before you even begin looking at properties, it can be helpful to find out how much you are able to borrow. This will help you narrow down your search and choose a property that’s within your budget limitations. There are many factors that are taken into consideration when calculating the amount you could borrow, including your existing debts, your income, your savings and expenditures. A home loan calculator will give you an indication of how much you could borrow and what your repayments may look like, but pre-approval will provide you with a more accurate figure.

2. How long does pre-approval last?

Home loan pre-approval is a formal assessment from a financial institution of how much you can borrow based on your circumstances. It is usually required before you make an offer so the seller knows you have your finances in order and are serious about buying the property. Depending on the lender, pre-approval usually lasts for three to six months. If you don’t make an offer during this time, you’ll have to go through the process again. To gain pre-approval, you will usually have to provide a range of documents to validate your information, including ID, income, assets and savings.

3. How much deposit do I need?

Generally, you will need a deposit of 5-10% of the property value in genuine savings, which means money that you have saved over time. This figure is then subtracted from the purchase price of the property to give you your loan amount. If your deposit is less than 20%, you may also incur the cost of Lenders Mortgage Insurance (LMI). A Family Guarantee can help reduce the amount of money you need to save and avoid costly LMI by using the equity in a family member’s house to guarantee your loan, but there are some risks involved that you will need to weigh up with your family member.

4. What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance is a protection for the financial institution when taking security over a mortgage. It is insurance to offset any loss that may be incurred if the loan is not repaid. It may apply for a higher risk loan or when lending more than 80% of the property value and could cost you thousands of dollars extra depending on your loan amount. The cost will be included in the total amount of your loan.

5. What documents/proof do I need to apply for a loan?

While applying for a home loan might seem daunting, it’s mostly just compiling a range of documentation required by the lender. This could include proof of identification, details about your wage and income, a record of your savings and any debts you may have. Take a look at this handy checklist for a more comprehensive guide. All lenders are different, but it won’t cost you to apply for a loan if it doesn’t get approved.

6. How long does it take to get a loan approved?

Approvals range depending on institution and your financial circumstances, but it generally takes between one to two weeks.

7. What is the difference between a variable and fixed home loan rate?

It’s important to choose a home loan that suits your needs, budget and lifestyle. A fixed rate home loan will provide you with stability by fixing your interest rate for a certain period of time – typically between one to 10 years. A variable rate often provides flexibility and additional features but means your repayments can go up or down depending on any changes to the interest rate. There’s also the option of splitting your home loan to fix a portion of the loan and keep the rest variable. There’s no one size fits all solution, so make sure you look at your options before making a choice.

8. What happens if I find a property?

After spending weeks or months searching online and going to open houses, you’ve finally found a property you love! Now what? If you’ve got your pre-approval in place, you should get in touch with a conveyancer to begin the process of negotiating with the vendor and to look over the contract. If you don’t have finances sorted, get in touch with a lending specialist to get the process underway.

9. What's the difference between a solicitor and a conveyancer?

A conveyancer is a specialist who is qualified in buying and selling property, and are most equipped to handle your contract. A solicitor will have a knowledge of property law but also broader knowledge of law in general.

10. How do you get the First Home Owners Grant and how is it paid?

First home buyers can apply for a government grant if they are building or buying a new house. The scheme varies from state-to-state and the lump sum payment ranges from $7,000 - $20,000.The form to apply for the Grant should be provided by your lender and completed when your home loan application has been finalised. If you are lodging the form yourself, you have up to 12 months after settlement to submit the application. Sometimes a lender will lodge it on your behalf, which may require additional documentation and tighter time frames.

11. How does an offset account work?

Offset accounts link a transaction account to your home loan and any money held in the account will reduce the amount of interest charged on the loan. For example, if you owe $400,000 on your home and you have $25,000 in a linked offset account, you will only be charged interest on $375,000 of your home loan. Offset accounts can vary, so be sure to check with your lender what your loan options are.