The thing we call a ‘deposit’ is a percentage of the purchase price (or value) of the property you are buying.
On the other hand, the loan amount itself is calculated as an LVR—loan to value (of the property) ratio.
Ideally, your deposit would be 20% of the price of the home. That means your LVR is 80%.
Some lenders, however, may accept a lower deposit and offer a higher LVR loan if you are prepared to pay a one-off Lender’s Mortgage Insurance (LMI) cost.
There are selected lenders who approve 95% LVR loans so, for you, a 5% deposit could be enough.
They also may even allow you to add the LMI cost to your loan amount—so you’re repaying that insurance cost on top of your weekly, fortnightly, or monthly loan repayments.
A word of warning though: loans with LVRs over 80%—that is, less than a 20% deposit—are attracting higher rates now. In this climate, lenders consider loans at these levels a greater risk.
Lenders Mortgage Insurance (LMI) is a one-off premium that is charged by the lender for loans that have less than a 20% deposit. The LMI premium is calculated on a sliding scale, so the more you can contribute to the deposit, the lower your premium will be.
LMI is not an insurance that covers you, as the borrower. Instead, it covers the lender against any loss they incur if you are ever unable to make your loan repayments.
Yes, it is possible. It’s called a gifted deposit home loan.
Most lenders, however, want to make sure the person gifting the funds doesn’t want you to pay them back. So, your generous donor may need to sign a Statutory Declaration confirming that the gift is ‘non-repayable’.
Even so, most lenders still want you to show them you have saved at least 3–5% of the purchase price. Although some lenders may take your good rental history into account, rather than solely relying on the record of savings in your bank account.
With most lenders, your credit score won’t affect the rate you are offered. If, however, your score is below a certain threshold, your choice of lenders will be limited. Those lenders who will consider providing you with a loan may well only offer you higher rates.
Your credit score is part of your credit report, which also gives the lender detailed information about your current borrowings (credit cards and loans) as well as any directorships you may hold, and any bankruptcies or negative listings.
You can apply to see your credit score and get a free credit report from Equifax.
A good mortgage broker will save you the time and stress of having to research and compare multiple lender options and will, ideally, bring many years of experience and knowledge to the process. They should educate, guide, and advocate for you throughout the loan application process and provide you with a range of suitable loan options to choose from.
Mortgage brokers won’t charge you a fee. All the research, calls, negotiations, and paperwork is handled by the broker.
Their commission is paid for by the lenders on their panel. As all lenders pay a similar rate of commission, there is no personal benefit for brokers to recommend one over another. Brokers are required, by law, to outline their commission and the trail money paid after your loan is in play.
Your broker should be comfortable asking any questions you have about fees and should also be happy to discuss their credentials and experience with you.
Once you have bought your home, and your loan is in place, you can make changes to your home loan. The best person to advise you about the possibilities is your broker. That’s because the broker is already aware of your lender’s processes regarding refinancing, and can guide you with options and provide comparisons from competitors.
Some loans, such as fixed-rate home loans, may have restrictions regarding changes. There may be a cost involved in refinancing. So, it’s always best to check with your broker before making any moves.
When you have your first consultation with your broker—whether that be in person, or via Zoom, Teams or any teleconferencing—your broker should give you a comprehensive list of what you need to supply.
The types of documents and statements will include:
- photo ID
- recent pay slips
- tax returns and financials (if you are self-employed)
- recent credit card statements
- current loan documents
- bank statements (to confirm your spending patterns).
Make sure your broker confirms the list of required material.
Selling before buying again is generally regarded as the safest way—financially—to get to your next home. That’s because the money from your sale is in the bank, ready for the purchase, and you don’t have a looming purchase settlement driving you to sell your existing home under pressure.
Of course, the downside is you need to find a place to live while you find your next home.
An option is to look at a bridging or relocation loan.
This is a short-term loan to cover the period between buying your new property and selling your existing one.
A good broker will help you understand the benefits and
drawbacks of a bridging loan and direct you to those with conditions and rates that are most favourable to you.
For example, lenders generally take both properties as security and give you up to 12 months to sell your existing place—which is usually great as you won’t have to accept a ‘fire sale’ price to move it on.
Some lenders will also let the old loan’s interest accrue interest in the background. But, while you only need to make repayments based on an expected “end loan”, the accrued interest must be paid to the bank when the sale finally goes through.
Your broker can lay out all the options and costs for you so you can make an informed decision.
Just as it is important to source a great deal on your initial home loan, it’s equally as vital to periodically check that your rate remains competitive in the market.
Refinancing with a new lender can provide big savings on repayments, but there are always other costs associated. That’s when your broker can help. Your broker can do that cost analysis for you—making sure there is a genuine benefit to making a move.
Right now, many lenders are offering cash-rebate incentives of between $1,000 and $6,000 to refinance your loan. So, it’s crucial to factor that in when making your decision.
Good brokers know what’s happening in the market and have the contacts and know-how to find and negotiate better rates for you.
Let’s start with the basic terminology.
- The “principal” is the amount of money you borrow.
- The “interest” is the amount you’re charged on the principal amount.
- The most popular repayment type for an investment loan is the interest-only option.
- With this type of payment, you need only meet the accrued interest at the end of each month.
- In this case, though, the loan principal stays the same and doesn’t reduce over time.
- This is often favoured by investors for tax reasons
- It is also a lower repayment than a standard P&I loan so it can be easier on cash flow as well.
Principal and interest loans
- A principal and interest (P&I) loan is one where each payment goes toward meeting interest and reducing your principal.
- Ultimately, a P&I loan will reduce to a nil balance by the end of its term.
Interest in advance loans
- The third and less-used option is the interest in advance loan.
- With this style of facility, you pay a full year’s interest upfront—usually by way of a one-year, fixed-rate, interest-only loan. This is a way for the borrower to claim a full year’s interest deduction within the current financial year.
Interest rates on investment loans are generally higher than they are for owner-occupied loans. But some lenders offer owner-occupier rates if the owner-occupied property is used as security and the majority of the funds borrowed are for the owner-occupied property.
A good broker can help determine whether you are eligible for the owner-occupied rates.
Yes! This is probably the most common way people buy investment properties.
The lender will take what’s called a “first registered mortgage” over both properties. That means your first home becomes the security for the second loan. You then can borrow the full purchase price—plus costs— for your investment property.
Home loans for self-employed borrowers are common. You will get the same product and rate offers as PAYG borrowers but, usually, you’ll need to provide extra information and be prepared for your application assessment to take a little longer.
Most lenders want you to see two years of business financials and tax returns and may also request written confirmation that the business has no outstanding ATO debts. Some specialist lenders can look at less than two years—but be prepared to pay a higher interest rate for that type of loan.
Your broker also needs to understand your business financials before packaging your application to lender. So, you’ll need to supply extensive notes about the business, its figures, and details about you and any other owners.
Australian expats living and working overseas—and getting paid in a foreign currency—can certainly qualify for a loan with an Australian lender for the purchase or refinance of Australian property.
Only a selection of lenders offers expat loans, though, and those that do have stricter assessment policies, which take into account your location, local currency and exchange rates. That’s why a broker experienced in this field can be helpful.
Lenders who offer expat loans will generally offer the same rates and products available to local borrowers.
Most lenders have a list of preferred currencies they’ll accept and will generally rely on only 80% of your AUD-converted income when testing your application for serviceability. On the plus side, most will lend between 60% and 80% of the purchase price or bank valuation.
Right now, Australian lenders are only accepting applications from PAYG-style borrowers. Self-employed Aussie expats don’t fit the current policy.