Home Loans FAQs

If you are considering taking on a home loan, you may have some questions you’d like answered. Here are some common queries people search for when researching home loans, complete with links to articles containing further information. 

How to get a home loan

Generally speaking, the process of getting a home loan involves comparing your options, working out how much you can afford to borrow for the property you want to buy, and then applying for a specific home loan – either directly to the lender of your choice or indirectly, via a mortgage broker.

If the lender approves your application and agrees to lend you the money you requested, it will offer this money to you in the form of a home loan.

You will then need to pay back the loan over time, in line with the lender’s terms and conditions.

How much can I borrow for a home loan?

The amount of money you are able to borrow for a home loan will depend on your personal financial circumstances, as well as the loan provider you choose and its lending policies.

You may be able to borrow more or less money depending on the lender’s assessment of your circumstances, which could include your credit score.

How much deposit do I need for a home loan?

As a general rule of thumb, it is often worth saving up a deposit of at least 20% of the value of the property you want to buy.

Lenders may also refer to this as a maximum loan-to-value ratio (LVR) of 80%, with your deposit being the other 20%.

The reason this number is important is that borrowers with smaller deposits often have to pay for lenders mortgage insurance (LMI), which we explain in more detail below.

Another advantage of saving up as big a deposit as you can is that it can reduce the total cost of your home loan, as interest is only charged on the money you borrow.

That said, there are some ways you may be able to reduce the amount of LMI you need to pay or avoid paying it altogether, even if you have a small deposit.

One example of this is the Federal Government’s First Home Loan Deposit Scheme (FHLDS), which allows eligible participants to take out a loan with as little as a 5% deposit, without needing to pay LMI.

What is a fixed rate home loan?

A fixed rate home loan is one in which the interest rate you pay is locked in place or ‘fixed’ for a set period of time.

What is a variable rate loan?

A variable rate home loan is one in which the interest rate you pay is not set in place, and can fluctuate, depending on the market conditions and the decisions of your lender.

How do I calculate home loan interest?

When you’re comparing home loans, you will usually see products advertised with an interest rate and a comparison rate, each expressed as a percentage of the loan amount.

The interest rate is the proportion of the outstanding home loan amount that you have to pay in interest each year.

A common practice is for lenders to spread out the interest you pay throughout the full term of the loan.

Bear in mind that these advertised interest rates generally don’t include any fees and charges on the loan.

A comparison rate (explained in more detail below) is a government-mandated interest rate designed to give borrowers a fuller picture of the costs of a home loan, as it includes the effect of many of these fees and charges.

Canstar offers a mortgage repayment calculator that lets you estimate how much interest you might have to pay on a home loan, based on the amount you borrow and your interest rate.

Bear in mind that this calculator doesn’t include the effects of any upfront or ongoing fees, and for simplicity’s sake it assumes your interest rate remains the same throughout the loan.

→ Explore: How is interest calculated on your home loan?

What is a comparison rate?

A comparison rate is an interest rate figure designed to represent the total annual cost of the loan, including its annual interest rate and most ongoing and upfront fees and charges.

Under the law and on the Canstar website, all comparison rates for home loans in Australia are based on a $150,000 loan over 25 years.

How to refinance a home loan

The process for refinancing a home loan is similar in many ways to applying for any other home loan.

Borrowers still have the choice of which home loan to apply for, and you don’t necessarily have to stick with the same lender who gave you your original loan.

In fact, a number of lenders offer incentives to people who refinance from a different bank.

Bear in mind, though, that these incentives aren’t the only factor to consider, and that you may have to pay certain application or switching fees if you do choose to change lenders.

Should I fix my home loan?

The decision of whether or not to fix your home loan is a personal one, and should be considered carefully in light of your financial needs.

For example, if you think variable interest rates will rise in the near future, getting a good deal on a fixed rate could be one way to lock in a rate you’re happy with for a few years.

On the other hand, ASIC’s Moneysmart notes that fixed rate home loans often have fewer features than variable ones, and locking in now could mean you miss out on some savings if variable rates fall during your fixed term.

If you’re unsure, taking out a split loan could be one option to consider, though some lenders may charge a fee for this.

What are break costs?

The “break cost” or “break fee” of a home loan is a fee some lenders may charge people who want to end their fixed-rate home loan before the end of the fixed-rate term in the contract. This fee is designed to compensate the financial institution for any loss of profit it faces as a result of a customer breaking the terms of the contract, including administration and its own wholesale borrowing costs. It does not typically apply to other types of loans, such as variable-rate loans.

How long does home loan approval take?

The length of time it takes for a lender to approve or reject your home loan application may vary, depending on factors such as the particular lender you choose and your financial situation.

In some cases, obtaining home loan pre-approval or conditional approval beforehand may speed up the time it takes your chosen lender to assess your formal application.

What is home loan pre-approval?

Home loan pre-approval, also known as conditional approval, is an initial approval process where a bank provides a borrower with an estimate of how much they could borrow, based on information they have provided to the bank.

Pre-approval does not necessarily mean the bank will approve the borrower’s formal home loan application, but it can nonetheless give a borrower more confidence in working out how much they can realistically afford to spend on a property.

What is lenders mortgage insurance (LMI)?

Lenders mortgage insurance is a type of insurance that a lender takes out to protect itself in case of default from the borrower, but which the borrower must pay for.

It usually applies to home loans with a high LVR (more than 80%), or in other words when the borrower has a deposit of less than 20% of the property’s value.

What is LVR (loan-to-value ratio)?

The loan-to-value ratio (LVR) of a home loan is the amount you are borrowing under it, as a proportion of the lender’s valuation of the property you’re buying.

For example, a bank may approve your loan for 80% of the property value – an LVR of 80% – in which case you would need to pay the remaining 20% as your deposit. Many lenders’ best mortgage rates are reserved for borrowers with a low LVR.

What is a credit rating (credit score)?

A credit rating or credit score is an assessment of the creditworthiness of an individual borrower, based on their borrowing and repayment history (as shown on their credit report).

Lenders consider your credit rating when deciding whether or not to give you a loan, how much to lend you, and what interest rate you will pay.

What is equity?

Equity is the difference between the value of your property and the outstanding balance of the loan that was used to fund it. For example, if an owner has purchased a house valued at $400,000 and has paid the loan down by $100,000, the owner has equity in the property of $100,000.

Equity can potentially be negative, if your property’s value falls below the balance of your mortgage.

Some property investors may use their positive equity in properties they already own to help them access additional investment home loans.

What is the First Home Owner Grant (FHOG)?

The First Home Owner Grant (FHOG) is a government grant given to first home buyers.

What is the First Home Guarantee (FHBG)?

The First Home Guarantee (FHBG), formerly called the First Home Loan Deposit Scheme (FHLDS), is a government measure designed to help people enter the property market for the first time.

The scheme offers 35,000 places to homebuyers per year, allowing them to purchase an eligible home with a 5% deposit and no lender’s mortgage insurance. The loan must be sourced from a set list of lenders, among other criteria.

Can you buy a house with no deposit?

In Australia, you may be able to get approved for a loan of 100% of the purchase price of a home through some lenders if you can meet certain conditions, such as having a guarantor on the loan. This is usually determined on a case-by-case basis by the lender.

That said, it’s generally not all that common for lenders to offer home loans with absolutely no requirement for the borrower to have a deposit.

What is a home loan guarantor?

If someone “goes guarantor” on your loan, it means that they are promising (“guaranteeing”) that they will be liable for the loan if repayments are not made.

The guarantor must also be able to demonstrate their own capacity to repay your loan.

How does negative gearing work?

Negative gearing is when the income (such as rent) that an investor makes from an investment property is less than the interest and fees on the home loan and the maintenance costs for that property. Negative gearing is currently available as a tax deduction against that investor’s income.

What is a mortgage offset account?

A mortgage or home loan offset account is a savings account linked to your home loan to reduce the interest charged on the loan. The money (or credit) in your account is offset daily against your loan balance, which reduces the daily mortgage interest charges.

What is a redraw facility?

A home loan redraw facility is a feature that enables the borrower to withdraw funds they have already paid.

Usually, this is conditional based on if they are far enough ahead on their loan repayments. This is not available on all loans.

What is a mortgage broker?

A mortgage broker is a type of financial professional who specialises in helping their clients to find a home loan. Their job is to gather information about the needs of their clients and to suggest lenders and products that match those needs. Once they have helped their client to select a home loan, a mortgage broker may also assist the home buyer with the application process.

What is a construction loan?

A construction home loan is a type of home loan designed for people who are building a home or doing major renovations, as opposed to buying an established property. It has a different loan structure to home loans designed for people buying an existing home.

What is a land loan?

A land loan is a type of home loan that you can take out from a bank or other lender to purchase vacant land. Typically, this is done in order to build a house on the land in future, either as a home for you or as an investment property. It can also be the case that a buyer wishes to hold on to the land as an investment, to sell in future if the value increases. With a land loan, the block of land is used as security for the loan.

What is a bridging loan?

A bridging loan is a special type of short-term loan designed to cover the purchase price of a second property and give you time to sell your existing property, even if you already have a mortgage. It essentially creates a financial “bridge”, allowing homeowners to traverse the gap between buying and selling.

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