If the bank says NO, DFS can get you a YES!
Taking on a home loan is an exciting step in every Australian’s life. Home ownership drastically improves our sense of accomplishment and can help create the space where memories are made. Home loans are also financially meaningful, as holding a mortgage is a big commitment that can take more consideration and preparation than borrowers realise.
We’re happy to present out ultimate guide on how to get a home loan in Australia!
For those looking at buying a house, they’ve probably already realised that the starting point to getting a home loan isn’t actually at the bank, but at home! Applying for a home loan is actually towards the end of the mortgage process, let’s take a look at what needs to happen first:
Borrowing money, especially a considerable sum of money, such as when you buy a home, understandably relies on you holding a strong credit rating. Credit scores are important as they indicate to prospective lenders, your creditworthiness to lend money to. Before you can be approved for a home loan, it is a good idea to access a free copy of your credit report to check your credit rating, and undertake any actions to improve it (if it’s not where you’d like it to be).
There are a number of credit reporting agencies in Australia, and depending on the credit reporting bureau, your credit score will sit between 0 – 1,200. As a general rule of thumb, any score under 500 is considered to be ‘poor’.
Did you know: if you’ve never had a credit account before, such as car loans or even a credit card, you could have a low score and find it difficult to access credit when you need it. If this is the case for you, it can be helpful to establish a small credit account and diligently repay it in the months leading up to your home loan application, to show your home lender that you are responsible with repaying borrowed money. It will also help kick start your credit history!
It could go without saying, but ensuring that you have a robust financial situation before applying for a mortgage can drastically improve your chances of being approved. Naturally, checking that you have a strong credit rating before applying for a home loan is one way that you can improve your financial situation, however you can also look at:
Chopping and changing jobs can make your income look unreliable to lenders. Holding down the same job for as long as possible before you get a mortgage (or, at least within the same company) can look good on your mortgage application.
If your bank statements or credit card statements are sliding backwards, or overdrawn frequently, financial institutions generally consider this to be due to poor financial management and may be less likely to offer you a home loan.
Before you can borrow money for a home loan, you’ll need to have a deposit saved up. How much you’ll need to put as a deposit will depend on the purchase price of the home and the lender that you access for finance. Generally speaking, in Australia, the minimum home deposit can be as little as 5%, up to 20% of the purchase price.
Realistically, the type of home that you buy is going to come down to your affordability. Your income should be your starting point. Then assess your monthly living expenses. From here, you can gain an understanding as to how much you can realistically afford to put towards your mortgage repayments, and implement a savings plan to make sure you have a lump sum of money, sufficient to cover your stamp duty and deposit when the time comes.
Once you’ve got your financial ducks in a row, you can approach lenders, such as your local bank, mortgage broker, or private funding specialist (such as Diverse Funding Solutions) to gain a pre-approval. Pre-approvals are typically valid for 6 months, and will detail how much money you can borrow to purchase a home. This not only narrows down your search for suitable houses, but also gives you better buying power, as it lets the seller know that you have finance at the ready.
We answer some commonly asked questions that crop up during the home loan application process.
Interest only loans are as they sound: they are loans where you only cover the interest payable. What this means is that your monthly payment does not pay down the loan principal, only the interest charges.
Investment loans work in much the same way as owner-occupier loans, however, as they’re generally used to buy an investment property with tenants, the potential rental income is considered when looking at the serviceability of the loan. The beauty of owning a rental property is that you can have tenants paying down the investment loan for you, through their rent payments.
You won’t know what your repayments will be until your home lender has all of the information available, including the interest rate. Interest rates usually aren’t determined until your home loan application has been approved. You can use a mortgage calculator to get a rough idea of what your repayments may be, and how much you might be able to borrow.
There are a myriad of different home loan products on the market, all with different home loan features, so it’s prudent financial sense to use a comparison website or mortgage broker to help compare your options before embarking on the home loan application process.
Variable rate loans are any loan where the interest rate is subject to vary over the life of the loan. The interest rate won’t necessarily always shift with the cash rate target set by the Reserve Bank of Australia (RBA) — it’s up to the lender’s discretion whether they pass on increases or decreases to the interest rate on a variable rate home loan.
By comparison, a fixed rate loan is a loan where the interest rate is fixed, either for the life of the loan (unlikely with home loans, as they typically span anywhere from 20 – 30 years) or for a set period. This is commonly referred to as ‘locking in’ an interest rate.
Personal loans are generally the only type of loan where the interest rate can be fixed for the full loan term.
Lender’s mortgage insurance (LMI) is insurance that the lender takes out to help mitigate the risk of a borrower not paying the outstanding loan balance if the home is repossessed and sold for less than the outstanding balance. LMI is charged to the borrower (usually by adding it to the home loan amount) and may or may not be charged to you, depending on the strength of your application.
Home equity loans are loans that utilise the equity sitting in an existing property. Unlocking equity in a property can provide funds for major renovations, or purchasing a second property, such as a investment property. Home equity loans are frequently used by business owners, and are one of the many commercial finance solutions offered at Diverse Funding Solutions.
Self-employed people often find it challenging to access home loans, as traditional lenders and financial institutions deem them riskier than employed borrowers. However, the beauty of being a business or company owner, is that you have more lending options that you may realise.
At Diverse Funding Solutions, we offer a range of private funding solutions for business owners, regardless of their credit rating. To learn more about how a DFS private home loan could help you climb the property ladder or break into the property market, talk to our professional team, today.