How to get a home loan in Australia

Unless you have enough saved up to buy a property outright, you’ll need to do what most Australians do and take out a mortgage. Below, we outline what you can expect and how to put your best foot forward.

One of the first things you should do is use a borrowing calculator, which will give you an indication of how much a bank might be willing to lend you based on your income and spending.

This amount will just be a ballpark estimate, and in any case it might not be wise to borrow that much anyway. That’s why you should also consider how much you can realistically afford to repay on a regular basis.

Use a budget calculator to see how much money is coming and going each month (if you’re planning on living in the property then you don’t need to include your current rent). This will let you know if you’ll have enough left over to comfortably service a mortgage.

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Next, use a home loan repayments calculator to see what your ongoing repayments will add up to under loan amounts of various sizes. This can also help you visualise how much sooner you can pay off your mortgage if you can commit to making extra repayments.

Once you have an idea of how much you want to borrow, you’ll need to save the requisite deposit. Lenders prefer borrowers with 20% of a property’s value saved up, but as many find this challenging several lenders offer home loans that let you borrow up to 95% of a property’s value.

Home loan deposit amounts on a $500,000 home loan

If you take out a home loan with a deposit of less than 20% you’ll have to pay for lenders mortgage insurance. The cost of LMI will depend on how much you’re borrowing and who your provider takes out the insurance with. It can either be paid upfront or added to your loan balance.

Other fees that you’ll need to budget for when getting a home loan include stamp duty (a tax charged by your state or territory), any mortgage application fees, and solicitor’s fees.

Do you know what your credit score is? Most of us don’t. When taking out a mortgage it’s a good idea to request a copy of your credit report to make sure it’s free of any errors that might affect your application. 

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It will also tell you if you have any lingering debt or other red marks against your name. Make sure these have been cleared up before you apply for a home loan so you’re not denied the amount you want or rejected outright.

Banks prefer applicants with stable jobs and finances, so try not to make any major changes in the lead up to applying for a mortgage. This can include leaving your job, taking out a personal loan, or making any large purchases.

If you’re a first home buyer, see if you fulfil the requirements for your state or territory’s first home owners grant, which provides a lump sum payment to go towards your home loan and exemption from stamp duty if you’re purchasing a new or off the plan property.

Do you want certainty around how much you’ll be paying each month? If so, a fixed rate home loan could be preferable. This locks in your rate for an agreed upon period (usually one to five years). 

Just keep in mind that fixed rate loans have their drawbacks. For instance, many are limited when it comes to features, and if you want to switch loans during the fixed rate term you’ll have to pay a hefty break fee.

The other option is taking out a variable rate home loan, where the interest rate fluctuates over time. While you’ll be vulnerable to rate hikes, these loans tend to offer features that can help you save on interest (such as an offset account and extra repayments facility).

RELATED: Types of home loans

You can also opt for a split rate home loan, which divides your loan into two (or more) accounts and assigns a different type of interest rate to each. That means you can benefit from the flexible features on the variable portion and rate certainty on the fixed rate portion.

You don’t have to get a home loan with the bank you’ve been with since the days of your first savings account. Instead, compare home loans online to see what the best deals on the market are. Signing up for a competitive rate could save you tens of thousands of dollars in interest over the life of the loan.

After you’ve compared the home loans on offer, select a few you’d like to inspect closer. For a more accurate picture of their cost, make sure you refer to the comparison rate, which combines the interest rate and any fees associated with the loan. 

Also consider the features you’d like your loan to have (for example, an extra repayments facility, redraw facility, offset account, and repayment holiday option) and narrow your search down to those that tick the right boxes.

After you’ve picked the loan, it’s time to organise your pre-approval. This is a statement from your bank indicating how much they will be willing to lend you. Importantly, this statement is conditional, temporary and can be withdrawn or changed if your circumstances change.

Assuming you’ve found the property you want to buy and secured your home loan pre-approval, you can now make an offer. If it's accepted you will pay a deposit to the seller and exchange contracts. 

The last stage of getting a home loan is contacting your lender to organise formal approval. They will then send you a home loan contract to sign and once you’ve returned the contract to them they will transfer the payment to the seller. When the settlement date has passed your mortgage is officially underway.

Are you a first home buyer after your first property? Head on over to our first home owners hub for helpful hints and tips or kick off your home loan search by visiting our home loans comparison page.