Applying for a home loan involves asking a bank for a mortgage, or funds to help you to buy a property. There are a number of ways that a hopeful home buyer can approach this financial transaction.
In this article:
- What is a home loan?
- When do you apply for a home loan?
- How do you apply for a home loan?
- How hard is it to get approved for a home loan?
- What documents are needed when applying for a home loan?
- What happens after you apply for a home loan?
What does “applying for a home loan” mean?
What is a home loan?
When someone is looking to buy property, they usually need extra finance from a bank. This makes up the difference between the deposit the buyer has saved up, and the purchase price of the property. A home loan, also called a mortgage, is the financial agreement a bank or other lender may enter into with you that enables you to obtain those extra funds.
A home loan is typically for a set amount of money, which the borrower has to pay back to the bank over a certain amount of time (for example, 25 or 30 years). The bank charges the borrower interest, which is a percentage of the funds the borrower has to pay back in addition to the principal (the borrowed amount). It also typically costs money to apply for a loan (in the form of upfront fees and sometimes insurance).
It’s important to note that applying for a home loan is different to making an enquiry about a loan. The formal mortgage approval process involves supplying your chosen lender with documents and receiving an official notification of either conditional or final approval (discussed in more detail, below).
When do you apply for a home loan?
There are a number of points during the home buying process where people typically apply for a home loan:
Before finding a home:
Some people may choose to apply for a home loan before they have found a property to buy. This is called “conditional approval” or “pre-approval”, and can help a potential buyer to understand how much they may be able to borrow from a particular lender.
While pre-approval is not the same thing as formal approval, it can still be a useful first step for borrowers, as it can help them work out the price range of properties they could look at. This could, in turn, determine the type of house or apartment they choose to consider, as well as the location. It is also something that people often do if they are considering buying a home at an auction, where it can be crucial to have finance sorted before bidding, due to bids at auction usually being unconditional and legally binding.
Typically, a bank will issue the pre-approved applicant with an official letter or statement which sets out how much they can borrow, and the conditions of the pre-approval, such as how long they have before it expires.
During the COVID-19 crisis, many lenders are also requiring borrowers to give a declaration about their employment conditions. If these conditions change during the pre-approval period, a borrower is typically required to notify the lender, as there could be an impact on the agreement.
After finding a home to buy:
Some people may choose to wait until they have found a property to buy before approaching a bank to ask for a loan, or may have found their dream home first by happenstance. If that is the case, then it is possible to apply for a home loan after finding a property to purchase.
A real estate contract will typically include a “finance clause” (except for most properties bought via auctions). This clause allows the seller and buyer to negotiate an agreement about how long the buyer has to obtain a home loan, and for the bank to “settle” it (give an assurance that the funds are available for the purchase).
If the buyer is unable to find a bank that is willing to finance the purchase, the contract conditions would typically not be satisfied and so the contract would be cancelled. The risks involved in doing so include that the buyer would typically lose any deposit they had paid to the seller upon entering into the contract.
When considering purchasing a property, it could be a good idea to obtain the advice from a suitably qualified professional, such as a trusted solicitor, before signing any contract.
How do you apply for a home loan?
There are two main ways that hopeful borrowers can apply for a home loan:
- Directly to a bank – at a branch, online or via a comparison site such as Canstar
- Via a mortgage broker
However, before doing either, it could be a wise idea to research what home loans are available on the market and what type of loan could suit your circumstances. There are many factors to consider when selecting the right home loan to apply for, including:
- Interest rates – questions to ask could include how much interest the bank will charge, whether the rate will change (variable rate) or be fixed for a period of time and whether the rate is competitive with other rates on the market
- Features of the loan – considerations include whether the loan gives you the option of setting up an offset account or redraw facility, whether you can vary payments easily and whether the balance is accessible online
- Duration (term) of the loan – how long will it take to pay it off, and what happens if you decide to pay extra
One way to investigate the home loan market is to use a comparison site, such as Canstar. As you can see in the table, below, Canstar’s database of more than 4,000 loans from over 100 lenders records a wide variance in the interest rates on offer at the time of writing. The lowest rate (as of 17 August, 2020), is less than 2%, while the highest rate is more than 5%.
Latest Owner-Occupier Principal and Interest Home Loans
Rate Statistics, as at 17 August, 2020
|Basic||Standard||Package||Average||1 Year||2 Year||3 Year||4 Year||5 Year|
|Source: www.canstar.com.au. Based on owner-occupier loans of $400,000, at 80% LVR with principal & interest repayments on Canstar’s database. Includes new-to-bank interest rates (including specials). Excludes honeymoon, intro-rate, and first home buyer-only home loans.|
Our home loan selector allows you to enter in some basic information about the type of loan you think you’d like, and then compare rates and other product information on more than 4,000 loans from over 100 lenders. You can also filter these results to include or exclude certain features. This could help you to narrow down your options and make a short list of banks you’d like to approach about a loan.
It’s also possible to connect to some lenders directly via Canstar’s selector tool, allowing you to make an inquiry directly from that shortlist.
How to approach a bank for a home loan
- Start with your own bank: After researching the market to learn what’s on offer, it could be a wise idea to contact banks that you already have a relationship with to ask them about their loans. Sometimes, lenders will offer special rates, deals or packages to existing customers that you may not otherwise be able to learn about. It could also be a good idea to ask them about deals that they offer to new customers, to see how they stack up against what you have been offered. Canstar research suggests that many banks have package deals that could provide a lower interest rate than their advertised rates. For example, on 10 August, 2020, Canstar’s database recorded that the average package variable rate was 3.22%, which is lower than the average standard variable rate, at 3.48%. Often, your bank’s online banking portal will have information about how to apply for a home loan, and typically will have a special team that deals with home loans. It could also be possible to apply online, or receive pre-approval online. If in doubt, you could try ringing your bank directly and asking for the home loans department.
- Contact shortlist of banks: After researching the market via Canstar’s selector tool and making your shortlist, contact each lender you’re considering to find out about their application processes. Some banks allow people to apply completely online, particularly in this COVID-19 era of restricted contact. It could be a good idea to start by making an enquiry online first, so that you can receive greater detail about the conditions of the loans you’re looking at and what the application process involves. Then, compare each one.
Important to note: Each time you apply for a loan it is recorded on your credit history. This could impact your credit score, which could have an impact on your ability to borrow money in the future. Think carefully before making a formal application for a loan or for pre-approval. Enquiries – just asking a lender for information – is typically not recorded on a credit report. If in doubt, ask the lender.
How to use a mortgage broker to apply for a loan
Mortgage brokers are service providers that sit in between lenders and borrowers. They can negotiate a loan on behalf of a borrower, and organise paperwork and other requirements for the borrower. There are a large number of companies and individuals operating in this space, and they must have suitable qualifications and an Australian Credit Licence.
“Credit providers and brokers that are not licensed are operating illegally in Australia,” financial regulator Australian Securities And Investments Commission’s (ASIC) Moneysmart.com.au website states. “Make sure you only deal with a company or person who is licensed. Use ASIC Connect’s Professional Registers to check your credit provider has been licensed or you can phone ASIC’s Infoline on 1300 300 630.”
It’s important to note that not all mortgage brokers will necessarily offer the full range of home loans to you. Some are bound to a certain set of lenders. Mortgage brokers make their fees in a number of ways during the home loan process. It could be a wise idea to find out what fees and charges apply, including any commissions or “trail fees” that a broker may earn from a bank.
Typically, a mortgage broker will talk to you about your needs and your financial circumstances, and help you to determine what loan or loans could suit you. The broker then goes to the lenders (typically the ones “on their books”) and creates a list of options for you to consider. Once you choose a loan, the broker generally handles the application process (although you will most likely have to complete a number of online forms and supply all necessary information). The broker will then typically also co-ordinate the financial settlement of your purchase.
How hard is it to get approved for a home loan?
How hard it is to get a home loan can depend on many factors, including how much you need to borrow, your repayment capacity and the economic environment. For example, recently some banks have tightened up their lending criteria, which means that they have introduced more checks and requirements when deciding whether to grant someone a loan.
Additionally, some banks are also requiring people to provide extra information about their employment stability, now and in the future, due to the COVID-19 pandemic.
What documents are needed when applying for a home loan?
Canstar’s research into a number of lenders’ application requirements found that different lenders may require different documents. However, it appeared that most banks typically require some or all of the following:
Home loan document checklist
- Proof of identification – this will include a number of different types of ID – usually separated into “Primary” and “Secondary” ID. Primary ID usually includes a photo, such as a driver’s licence, or a passport. Secondary ID typically includes documents such as a Medicare card, birth certificate and marriage certificate. Some lenders’ online identity verification systems also require you to take a photograph of yourself holding a specific form of ID. It could be a good idea to make sure you have:
- at least one form of photographic ID, and
- two or three secondary ID documents.
- Proof of employment – This typically involves providing:
- a certain number of most recent payslips,
- and/or supplying bank statements of the account that your wage is paid into,
- and/or a letter from your employer (especially if you are a casual employee, have an irregular income or are paid for piecework).
- A lender could also ask to see tax returns (particularly if you are self-employed).
- Extra income and assets – This could include:
- bank statements,
- share earnings reports,
- and any other proof of how your extra income is earned.
- A list of assets, which could include a car or house that you own outright. If you are a landlord, you may also be asked to provide a copy of any lease agreements you have in place.
- Expenses – Most lenders will also want to see what you spend, such as:
- your household bills
- what you pay in rent,
- and to see your transaction account and credit card statements. If you are applying for a loan with a bank you use for most of your financial matters (such as transaction and savings accounts), they could source this information from your banking history.
- If you are renting, your lender may also ask for the contact details of your property manager or estate agent.
- Debts – The lender will most likely do a credit check,
- but will also require you to provide details of any loans you already have, such as car or personal loans.
- What you want to buy or build – Unless you are applying for pre-approval, the bank will need details of what you intend to buy or build. This is so the lender can perform a bank valuation (have its specialists take a look at the property to see if the amount you are paying is an acceptable risk to it).
- If purchasing, they need a copy of the signed contract of sale
- if building, they will need a copy of the construction contract and details of the land’s location and price.
- Insurance – Some lenders may also require that you send them details of
- Deposit or grant help – If you are getting help to pay your loan, he lender could also for ask for details. This would include
- if you have, or plan to, apply for a grant,
- if someone giving you money to boost your deposit. For example, if a relative was gifting you funds for a deposit, a lender may require a letter from that relative detailing the conditions of that gift or loan (such as if you have to pay it back).
- Conveyancer’s or solicitor’s details – The bank or broker will also need to know
- who is doing your conveyancing – the legal work involved when buying a property. It could be a good idea to talk to your conveyancer about what level of involvement you need to have in the process, such as if you need to chase the bank or broker to find out if you have been approved or if they will do that for you.
As most loan approval processes are now handled completely online (due to COVID-19), it’s a good idea to have access to a document scanner or a smartphone with a high-resolution camera, to allow you to send all documents to your lender or broker via email or their online application portals. It may be necessary, in some circumstances, to have a witness to your signature or copies of documents, such as a Justice of the Peace (the lender will likely have rules around this).
Usually, a lender will require documents presented in PDF format and photos in JPG (but they will let you know during the application process). Bank, share and super statements can typically be downloaded in PDF format from the organisations’ online portals.
What happens after you apply for a home loan?
When you have completed all of the application requirements, typically your lender or broker will keep in contact with you about its progress. It could be a good idea to make sure that the bank is aware of any finance clause in your contract, and when it expires. Typically, your conveyancing solicitor will be able to help you navigate through this area.
If you are approved for the loan, the lender will typically issue you an official document (the home loan contract) that states the conditions of the loan. This would typically be forwarded to the seller’s solicitor (usually by your solicitor), which would mean that the finance clause of the contract would be met. The lender then has a set amount of time (as detailed in the contract) to settle the loan (or to provide the funds to the seller and activate your home loan). Seek professional advice.
If you are not approved for the home loan, the Australian Securities and Investment Commission’s Moneysmart.com.au website recommends that you seek information about why this occurred. Your conveyancing solicitor will generally be able to give you advice about what happens to the contract of sale, and if you would forfeit any deposit that you have paid.
The comparison tables below display some of the variable rate home loan products on Canstar’s database with links to lenders’ websites, for borrowers in NSW making principal and interest repayments on a loan of $350,000 with an 80% LVR. You can choose between the refinance, first home and investing tabs to view results most relevant to you. The results are sorted by ‘current rate’ (lowest to highest). Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.