Home Loan Guide

So, you need to apply for a home loan but don’t know where to start. The question: “Can I even get a loan?,” starts to circulate in your head. It all feels a little overwhelming. Whether you are looking to purchase a home for the first time, or you’re planning to renovate your home, or just looking to invest, there’s a lot to learn about the home loan process.

If your circumstances are not as straightforward as having a regular payslip and excellent credit history, don’t cut yourself out of the option of a home loan just yet. There is recognition that times have changed and how Australians are earning their money has changed. The gig economy is booming! You might be a sole trader and run your own business. You might have multiple streams of income.

Things happen. Sometimes we are hit with emergencies and have to dip into the deposit. Your credit rating might be low from that time you received a redundancy and it took a long time to secure a new job due to the market. You might be a single parent. Whatever your circumstances are, there are options available to you now that don’t involve the big banks and black and white processes. A non-bank is a viable option, offering more options to people who fit outside of the box and will take your circumstances and finances into account when making a decision about your loan.

Regardless of your situation, there are a number of things to keep in mind when preparing to embark on your home loan journey. We have consolidated lots of important and useful information in this guide to make things a little easier for you.

Pre-loan application – what you need to be prepared

First things first. You need to have your finances in order before applying for a home loan. Knowing your budget is essential as it is one of the first questions you will be asked. Spend time going through your finances and having a realistic understanding of what you can afford to pay. By realistic we mean having some breathing room available in case circumstances change. Also, factor in changing interest rates. Factor in all the extra costs involved in the process such as building inspection, legal fees, stamp duty and insurance.

A repayment calculator is an excellent tool to work out how much you can borrow and what you will be looking at paying per month. 

You’ll need to aim to have a 20% house deposit. If you don’t have the 20% deposit, some non-bank lenders can help. Ok, well what about the Lender Mortgage Insurance (LMI) then? Some non-bank lenders don’t have LMI which can save you thousands and get into your home sooner. Phew!

Gather up your financial documents such as:

• Proof of income (Payslips, profit and losses, tax returns, accounting)
• Bank Statements (Statements from savings and credit cards)
• List of assets (House, car, savings and superannuation)
• Proof of liabilities (Outstanding debts such as credit cards, personal loans and car loans)
• Identification documents (A driver’s licence or passport)

The more information you can provide up front, the quicker the process will be in identifying what you can borrow and what loan is right for you.

Learning the Lingo

Like every industry, home loans come with fun jargon to master! You’ll hear terms like ‘alt-doc’ and LMI a lot so you’ll need to brush up on your language skills and add a new foreign language under your belt. Here are some common acronyms and terminology:

• Alt-doc – Alternative documentation – when your employment documents don’t fit the traditional banking mould.
• Assets – What an individual currently owns such as real estate, cars, home contents, savings.
• Full doc – Full documentation – when you have access to all income verification documents needed by the lender.
• IO – Interest only
• LMI – Lenders’ Mortgage Insurance
• LVR – Loan to variation ratio – the ratio of the home loan amount compared to the value of the security.
• Negative gearing – The ability to reduce tax liability based on losses against the income-bearing investments such as an investment property.
• No-doc – No documentation loan – where almost no information is needed except the applicant’s identification.
• NCCP – National Consumer Credit Protection Act
• Non-bank – A financial institution that provides services that are not necessarily suited to banks or compete with banks.
• SMSF – Self-managed superfund
• Split loan – A loan that includes both fixed and variable components.
• Stamp duty – A charge applied by state governments or various transactions including the acquisition of the property.
• Valuation – An assessment of the current and future value of the property.

Go on, now practice your new found vocabulary with lenders and keep a list of new ones you encounter. This can prevent confusion and time lost during conversations with lenders.

Let’s explore different types of home loans

Now that you have your finances organised and lender lingo under your belt, it’s time to look at what type of home loans are available so that you can decide which is right for you. Let’s look at the most common first:

• Fixed rate interest loans – This loan locks you into the current interest rate at the time of a settlement. This is a great option if you want to know exactly how much your repayments will be, but you may miss out on falling interest rates when markets change.
• Variable rate interest loans – This loan’s interest will go up and down in line with the markets, but it offers more flexibility and features such as allowing you to make unlimited repayments, redrawing your home loan and apply to top up your loan.
• Partially fixed interest rate loans – This loan allows you to have a combination of both fixed and variable interest rates.
• Interest-only loans – Repayments on this loan only cover the interest on the amount borrowed for a set period of time. When the term is finished, you’ll start paying on the amount borrowed as well as the interest on the amount resulting in higher repayments. This may be useful for short-term loans such as a construction loan. If you are an investor, you can claim higher tax deductions from the property.

Home loan features

Now you know what types of loans are available on the market and what options you want to consider. Let’s break the choices down a little bit more with loan features. Keep in mind that you will pay a little bit more for features, but some could help you pay the loan off a little faster. It’s important to understand how they work and which ones will be helpful for you.

• Redraw – This feature allows you to withdraw any additional repayments that were made on top of the minimum loan repayment amount. This is could be a great way to keep funds available for emergencies or holidays rather than in your savings account. Fees may be applicable.
• Extra repayments – Pay off your loan quicker and put as much extra as you want on your loan in addition to the minimum payment amount. Check with the lender to see if fees apply.
• Interest only – This is an option to only pay the interest portion of on the loan repayments each month. This may impact your interest paid over the life of your loan.
• Salary crediting – This is where you opt to have your salary paid directly into your loan account.
• Loan splitting – Split your loan into multiple accounts.
• 100% offset account – This is a special type of account linked to your home loan designed to help you pay off your loan faster. In some cases, like having an investment property, this option can have tax benefits.
• Partial offset – Only a portion of funds in your account are used to offset your loan balance.
• Line of credit – Homeowners can access funds up to a certain credit limit. You can pay interest on the amount borrowed, not the entire credit line.
• Loan variation – This feature allows you to make changes and modifications to the terms and conditions of the loan during its tenure.

Managing your home loans

Keeping on top of payments is important and you’ll need to stay organised and have a repayment plan to stick to. You’ll want to consider the features included with the loan and understand how to use them to help pay off the mortgage sooner. Make sure that payments are auto-scheduled and where you can – without penalty – pay more on the loan than the monthly payments to get the balance down quicker. This can also help if you ever encounter a rainy day.

Life inevitably happens and it’s not all roses and rainbows at times. Unexpected life events are tough and they can impact your ability to pay your loan. If you are temporarily unable to pay your loan this is called financial hardship. As soon as you realise that you cannot meet the repayments, you’ll need to contact the lender and they will assess your situation in line with their hardship assistance program. Hardship assistance is a temporary and short period of time and can include:

• Reducing or deferring repayments for a period of time
• Changing the loan to Interest Only
• Varying your loan set up in other ways

Always stay up to date with the lender and seek legal advice if needed.

Using a mortgage broker and choosing the right one

As you have discovered by now, there are plenty of home loan options available for different types of circumstances from more lenders. The market has become quite competitive. Going through the buffet of different options and features can be overwhelming. It’s like going out to eat at a restaurant with one of those 50-page menus. Where do you even start?

You can create a detailed spreadsheet to keep track of different lenders, features and options – and some people love doing that. For those who don’t love it or have the time, consider using a broker.

A mortgage broker is the go-between financial professional who specialises in helping their clients – you the borrower – find a loan. They will act on your behalf to liaise with other lenders and secure a loan that is right for you.

Do they cost extra? No! Working with a broker costs the borrower nothing. Instead, they are paid for bringing your business to the banks and lenders they have a relationship with. Because of this structure, ASIC regulates the industry to ensure that the broker must act within the best interest of the borrower in each individual situation. This removes any bias from the transaction.

You can find a broker through a google or social search, you might ask for a recommendation, you could reach out to a professional association or you might be connected with one by the lender. It’s important to choose the right broker for you. As you are working together, you want to be confident in their ability and commitment to finding you the right loan situation.

Does the broker understand your needs and goals and are they acting with your best interests in mind and have a clear understanding of what you are looking for? Have you looked into the broker’s work experience? Take time to check if they are up to date with compliance and legislation. Read reviews and recommendations and ask if they are happy to provide you with some if there aren’t any online.

Another key consideration is has the broker worked with someone like you? Will they know how to secure a successful outcome for your unique situation?

For more details about finding a broker, check out our guide.

Now you have everything you need to know about home loans, share this guide with a friend who is beginning their journey or save it as a helpful reminder for yourself.

About Bluestone Home Loans

What about us? We work with borrowers banks often overlook. We offer more solutions to fit more Aussies to help them get the loan that’s best for them.