Are you looking to purchase a property in Australia? If so, you’ll likely need to take out a home loan and are looking for tips as a first-time borrower.

By the end of this article, you should understand how home loans work in Australia and what factors you need to consider when taking out a loan.

Questions in this article include:

• What is a home loan?
• What are the different types of loans available in the Australian market?
• What are the basic eligibility criteria in Australia?
• What should first-time borrowers consider in a home loan?

What is a home loan?

A home loan is the amount of money given to borrowers by a lender to buy real estate . It’s a secured loan, meaning the property serves as collateral for the loan.

Banks and other lenders offer various home loans with different features and interest rates. Making a home loan comparison will help you find the ideal one for you. You will have to make home loan repayments plus interest over an agreed period, typically 25 to 30 years.

A mortgage broker is an intermediary who can help you connect to lenders that meet your needs and objectives. Working with a mortgage broker may help you save time and effort as they have access to more financial institutions that would be the best fit for your personal circumstances.

What are the different types of home loans available in the Australian market?

There are numerous types of home loans available in Australia. Depending on which bank or lending financial institution you approach, they will have their own set of interest rates, features, and eligibility criteria. There's a comparison rate table below to help you find a better deal that suits your needs.

Variable Rate Home Loan

Variable-rate home loans are loans with an interest rate that may change over time. Your repayments can go up or down depending on rates set by the Reserve Bank of Australia.

Before obtaining a variable-rate mortgage, there are pros and cons to consider. Some people may prefer the flexibility that a variable-rate loan offers, while others may not.

Variable-rate home loans suit borrowers who are comfortable with market fluctuations and can afford to make higher mortgage repayments if the interest rate rises.

If the interest rate decreases, you pay less interest and are getting a better deal. You could lower your regular mortgage repayments or maintain them for the life of the loan to repay the entire loan faster.

If a lender offers you this type of home loan, it's important to review market conditions to consider how the interest rate can fluctuate and how this may affect your repayments. These higher or lower repayments will ultimately affect your financial situation.

The main benefit of variable rate loans in Australia is flexibility. Variable rate loans can be paid down or closed at any time without penalty, and they come with features such as offset and redraw. These features allow you pay down the loan ahead of schedule, but still retain access to those funds if you need them in future.

Fixed Rate Home Loan

Fixed-rate home loans are mortgages with an interest rate set for a fixed term, typically between one to five years. This fixed-rate loan can give borrowers peace of mind, knowing that their repayments will not increase during the fixed-rate period.

There are certain things to think about before obtaining fixed-rate loans. Firstly, as the interest rate is fixed, this loan type may limit your ability to pay off your loan faster, and you will not benefit if rates go down. Secondly, if you break your loan contract, there will almost certainly be "break fees." You could face a higher interest rate than the current variable rate.

Fixed-rate home loans may suit borrowers who are comfortable with making repayments over a fixed period at a locked-in rate and not have to worry about rising rates in the future.

Split Rate Home Loan

A split home loan is a hybrid mortgage where the interest rate is 'split' between a fixed rate and a variable rate. For instance, you can split your loanable amount in the middle 50:50, or 30% variable and 70% fixed. This type of loan can offer borrowers the security of a fixed interest rate while allowing them the flexibility to take advantage of lower variable interest rates.

Here are a few things to consider before deciding if a split-rate home loan is right for you. First, it's important to know that your monthly repayments will fluctuate depending on the interest rate. This means you'll need to be comfortable managing your budget and making necessary adjustments.

Second, a split-rate home loan may offer different interest rate discounts than a pure variable-rate loan. You may have lower cost savings in the long run.

Lastly, there may be better options than a split home loan if you plan to sell your home soon. This is because the fixed interest rate portion of the loan may be less attractive to property investors in a rising interest rate environment.

Principal and Interest Home Loan

A principal and interest home loan is a loan type where you will have principal and interest repayments. These loans are generally for a set period, for instance 25 or 30 years.

The main advantage of a principal and interest loan is that it can help you pay off your loan balance faster. This means your repayments reduce both the principal balance and interest simultaneously.

The downside is that your monthly repayments will be higher. Principal and interest loans are best suited to borrowers with a stable income who can afford higher repayments.

Interest-Only Loans

An interest-only home loan is a kind of loan in which you only pay interest for a specified period. The borrower does not pay any of the loan principal during this time.

When the interest-only loan periods end, the borrower must start making payments on both the principal and the loan's interest.

An interest-only loan can have several advantages. First, the initial monthly payments are lower during the interest-only period because the borrower only pays the loan's interest. This can give the borrower breathing room to get their finances in order or save up for a down payment.

Additionally, the interest-only period can be an effective way to lower the overall cost of the loan if the borrower expects their income to increase in the future. However, there are also some disadvantages to interest-only home loans. First, the borrower is not building any equity in their property during the interest-only period because the principal is not decreasing.

This can be a problem if the home's value decreases, as the borrower will still owe the full loan amount. Also, the interest-only repayments can increase dramatically after the period ends, and the borrower is obliged to start paying down the loan's principal.

Overall, interest-only home loans can be a viable option for some borrowers. However, it is crucial to understand the pros and cons of these loans before signing on the dotted line. For this reason, it is important to ensure that the borrower can afford the monthly payments only after the period of interest.

Owner Occupier Home Loan

An owner-occupied home loan is a loan type that is used to purchase a property that will be lived in by the borrower. The main benefit of this home loan is that it usually has a lower interest rate than an investment loan.

Investor Home Loan

An investor home loan is specifically designed for people looking to purchase property for asset investment purposes. These loans usually have different features to owner-occupied home loans, and higher interest rates and stricter lending criteria are frequently associated with them.

Investor home loans can be a great way to get into the property market, but there are some things to keep in mind before you apply. Here are some of the pros and cons of investment property home loans:

Pros:

• You may claim significant tax benefits: The interest paid on your investor home loan is tax deductible. You may have to pay less tax on your investment income as a result of this.
• You can use equity to buy more property: If the value of your investment property increases, you can use the equity to buy more investment properties. This can help you build a property portfolio over time.
• You can choose the best loan type: When taking out an investor home loan, you have been given the privilege of your preferred kind of rate and repayment. You may pick between fixed, variable, and split rates, as to repayment type—principal and interest or interest-only. This will help ease the burden of your financial situation.

Cons:

• You may have to pay more interest: Investment loans typically have higher interest rates than owner-occupier home loans. This means you'll need to factor in the higher interest payments when you're budgeting for your investment.
• You may have to pay the Lenders Mortgage Insurance (LMI): If you don't have a 20% deposit or more of your property value, you may have to pay LMI. This insurance policy protects the lender if a default occurs on your loan. The cost of LMI settlement can be added to your loan repayments, so it's important to factor in this when considering an investment loan.
• You may have to sell your property if you cannot afford the repayments: If you can't keep up with your loan repayments, the lender may require you to sell your property. This could mean you make a loss on your investment if the property market has gone down since you purchased the property.

Rates current as of 25th August 2023

WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

What are the basic eligibility criteria for a home loan in Australia?

Eligibility criteria are the most sought-after answer for first-time home buyers. In Australia, there are several requirements you must fulfil to be eligible for a home loan.

When working with a mortgage broker, they will gather information to assess the eligibility of the borrower and pass it to lenders. At the same time, they gather options so you can compare home loans from available lenders in the market.

Personal Details (age and residency)

If you're an Australian Expat, you may wonder what the requirements are for a home loan. One of the most crucial factors lenders consider is your age and residency status. To apply for a home mortgage, at least 18 years of age are eligible. Lenders will normally require that you be an Australian citizen or permanent resident.

Type of Property

When applying for a home loan in Australia, the property type you want to purchase will play a significant role in the process. Different loan products are available for every industrial, commercial, land and residential property, so it's important to know what you're looking for before you start the application process.

Employment and Income

If you're an Australian Expat looking to borrow, there are a few things you need to know. First and foremost, you'll need to prove your employment and income to be considered and find out your eligible home loan amount.

This may seem daunting, but for a greater chance, you will need to have steady employment. This employment can be full-time, permanent part-time, or even casual as long as you prove that you have a consistent income.

In addition, you will also need to provide proof of income. This can be through recent payslips, tax returns, or bank statements, and once you have all the required documentation, you'll be on your way. Just remember to stay patient and work with a loan specialist who can help and guide you through the process.

Assets and Liabilities

When you apply for a home loan in Australia, the lender will review your assets and liabilities to help gain an understanding of you as an applicant and your overall financial strength. Your assets are everything you own and can be used to repay your loan, while your liabilities are everything you owe.

The lender will look at your total debt repayments as a percentage of your gross income to determine if you can afford the loan. Your debt repayments include your other home loan repayments (if any) and other debts such as credit cards, personal loans, car loans and business loans.

Your assets include your savings, investments, and home or property equity. Equity is the portion of your property you own outright, minus any debts you may have against it.

For instance, if you own a home worth $500,000 and you have a mortgage of $250,000, you have $250,000 in equity. This equity can be used as security for home loans, which can help you to borrow a larger amount or obtain lower interest rates.

Credit Score

One critical factor lenders consider when determining whether to grant you a loan is your credit score. A high credit score means you are less likely to default on your loan. Hence there is a higher chance that you will be approved for a loan with better terms and conditions. Understanding how your credit score will affect your application is important if you intend to apply for a home mortgage in Australia.

What should first-time borrowers consider in a home loan?

When taking out a home loan, there are a few things that first-time borrowers should keep in mind. When choosing a home loan, consider the following factors:

Lenders Mortgage Insurance (LMI)

When you take out a home loan in Australia, your credit provider will require Lenders Mortgage Insurance if you borrow more than 80% of the value of the property. The insurance protects the lender if you default on your loan repayments and the property is sold for less than the outstanding amount of the loan.

LMI can be expensive, so it's essential to consider this in your home loan budget. You can usually pay your LMI premium as a full upfront fee or add it to your loan amount and pay it off over time as extra repayments.

If you're considering getting a home loan, speak with your lender about LMI and whether it's required of you.

Deposit Amount

When you're looking to get a loan, one of the key considerations is how much of a deposit you can afford.

In Australia, the minimum deposit is typically 5% to 20% of the purchase price, but this can vary depending on the lender and the type of loan you're applying for. There are several benefits if you're able to put down a larger deposit. Firstly, it will reduce the amount you need to borrow and, therefore, the amount of interest and ongoing fees you'll pay during the loan's term.

Secondly, having a larger deposit will save you from paying the LMI. Lastly, it will give you more equity in your home, which can be helpful if you need to sell or refinance in the future.

Coming up with a larger deposit can be a challenge, especially if you're a first-home buyer. However, there are several ways to save, such as using a savings account with a high-interest rate or taking advantage of government incentives like the First Home Loan Deposit Scheme. Talk to your lender or advisor about what is required and see if you can afford to put down a larger amount to take advantage of its benefits.

Loan to Value Ratio (LVR)

Loan to Value Ratio (LVR) is the percentage of the total property's purchase value you plan to borrow as part of your loan. The lower your LVR, the less risky you are to the lender and the more likely you will be approved for a loan. This is because a low LVR means you have more equity in the property.

Here's an example:

• Assume your lender assigns a value of $250,000 to the property
• Assume you have a $50,000 house deposit
• This means you must borrow $200,000 to purchase the property.

Your LVR would be calculated like this: ($200,000 ÷ $250,000) x 100 = 80% LVR.

In Australia, the maximum LVR typically varies according to the lender and the type of loan you're applying for. Most lenders require an LVR of 80% or less for Expat borrowers. Some lenders may still offer you a loan if you cannot come up with the 20% deposit, but a higher LVR comes with stricter lending criteria. This might mean you can only borrow a smaller sum of money and also have to pay a higher interest rate and ongoing monthly service fee.

So, if you're looking for a home loan in Australia, check whether you can afford a larger deposit as this can lower your LVR. This might help you get approved for a loan and could save you money in the long run.

Additional Fees

When getting a home loan, several fees and charges are often associated with the process. One such fee is the loan application fee, which the lender charges to process the loan. This fee is an upfront and non-refundable charge, so it's important to ask the lender about it before applying.

Other fees, such as prepayment penalties and late payment charges, may be associated with taking out a home loan. It is crucial to know these fees and what they entail before signing any loan offer document. Your mortgage broker or advisor can help explain each of the fees incurred with each lender when completing your review.

These are just a few mortgage fees encountered during the home loan process that a borrower or home buyer should be aware of before making a deal on anything. Comparing home loans and doing comparison rates can ensure you get the best possible home loan deal.

Interest Rate

It's important to consider home loan interest rates when applying for a home loan, as a high-interest rate can add thousands of dollars to the total cost of the loan.

Several things go into determining the interest rate, including the borrower's credit score, the size of the loan, how much equity is in the property and the prevailing interest rates in the market. So it's vital to shop around for the best rate and not just go with the first lender you come across.

By understanding the interest rate and why it matters, as a borrower you can ensure you get the best deal possible on your home loan.

Loan Features

When applying for a home mortgage, it's essential to consider the features the bank offers to help you manage your loan. Some common features include the following:

• A choice between a fixed and variable interest rate
• The option to make extra repayments without penalty
• A redraw facility that allows you the borrower to access extra funds already paid into the loan

Each feature has the potential to benefit the borrower, so it's critical to understand what each one entails and how it can help you. For example, a fixed rate will protect you from interest rate hikes during the term of the loan, while a redraw facility can give you access to extra funds to cover emergencies when needed.

Make sure you check what's available to you before you make your final decision.

Your Personal Needs

Consider your personal needs when applying for a home loan. Compare home loans and see how much you can afford to borrow, loan repayments you're comfortable with, and other important features.

Some needs to consider would be is the loan term suitable for your situation, what is the appropriate tax structure if purchasing for investment, what are your longer term plans for the property e.g. do you want to aim to upgrade in 3-5 years? Do you intend to start a family and if so what allowances do you need to make in your budget.

By considering these factors, you can ensure that you're getting the right home loan. You will be in a much better position to find the right lender and get approved for the loan you need.

These are just a few things that first-time borrowers should consider when taking out a home loan. Researching and comparing home loans is essential before making a decision to have a better deal in the home loan market.

How Do You Apply for a Home loan?

Applying for a home loan can feel like a daunting process, but the job of a good mortgage broker is to help you navigate this as easily as is possible.

The first step is to gain an understanding of your situation to work out what options are available to you. Australian banks do all sorts of shadings and buffers to overseas income, so your borrowing capacity, available interest rates, deposit requirements and repayment options can differ greatly between each lender.

In our first meeting we obtain some financial information on you such as your income, assets, liabilities and expenses to help work out these lender options. We also discuss what your goals are in purchasing your property. For example:

• are you purchasing something purely as an investment property, or purchasing as an investment initially with a goal to move in when you repatriate?
• What are your repatriation plans and timeline?
• Do you intend to pay down the loan as quickly as possible, or do you have advice from your accountant to maximise your interest deductibility while living overseas?
• What are some potential tax considerations you should discuss with your accountant?
• Should you put some more cash in to reduce your monthly repayments, or is it better to maximise your borrowings and keep some funds in your offset account?

The questions are numerous and we work through these step by step to come up with your recommend lender.

Once we have reviewed your lender options, we can then look at which bank we should apply for pre-approval with. The pre-approval process is where we gather up all your supporting documents, package these up and and ask the lender to consider your potential purchase and loan scenario. Once the bank has reviewed and hopefully supported the request, you can then start searching for and negotiating on properties, knowing that your finance has been pre-approved.

Frequently Asked Questions

How do you compare home loans?

Home loans can be compared in terms of fees, features and interest rates. For a first-time home buyer, it is important to do research and compare the different home loan options before making a decision. Comparing offers from different lenders is the best way to get the best deal on a home loan.

Are there features that can benefit borrowers?

Yes, certain features like fixed vs variable interest rates and redraw facilities can be beneficial for borrowers when selecting a home loan. Consider your individual needs when selecting a home loan in order to get the best deal possible.

What are some common fees associated with home loans?

Common mortgage fees include the application fee, closing costs, prepayment penalties, late payment charges and stamp duty. It's important to know these fees before signing any loan offer document.

Are there other factors I should consider when taking out a home loan?

Yes, it is also important to consider your personal needs when applying for a home loan, such as how much you can afford to borrow, comfortable repayments and the right features that would work best for you. Doing research and comparisons will help you get the best deal.

What is the best home loan rate?

The best home loan rate depends on a variety of factors, such as credit score, size of the loan, and prevailing interest rates in the market. Gathering product information from various lenders is the best way to get the best deal for you.

Conclusion

As you close your home loan journey, it's important to remember a few things. First and foremost, congratulations!

You've managed to pull together enough money for a deposit, apply for a mortgage and complete all the relevant documents without a hitch. There are many factors to consider when choosing a home loan, and it can be difficult to know where to start.

By researching and understanding the different types of home loans available, you can make an informed decision that is right for you. Australian Expats may benefit from exploring options designed for them to take advantage of favourable home loan interest rates.

Whatever your situation, be sure to compare various loan rates, features, fees, etc., before committing so you end up with the best possible deal.

So take a deep breath, step back from the situation and give yourself some time to evaluate the whole situation because this is not a decision to rush.

Aussie Expat Home Loans is the perfect solution for Australian Expats looking to purchase a home. We offer various home loan products specifically designed for Expats, so you can rest assured that you're getting the best possible outcome. Contact us today to find out more about our services and offerings and how we can help you finance your dream home.

‍