BASICS OF THE HOME LOAN PROCESS
- Thalia Comino
- Jul 28, 2023
- 5 min read
Understanding the home loan process is essential when embarking on your home ownership journey.
With various types of home loans available in Brisbane, it's crucial to grasp the differences and choose the right option for your needs.
In this article, we'll delve into the basics of the home loan process, guiding you through the types of loans available, the required paperwork, calculating your borrowing capacity, and the benefits of getting pre-approval through a mortgage broker.
So, let's get started!
Table of Contents
Types of Home Loans Available in Australia
There are a number of home loan options available to Australian borrowers. The most common types of home loans are fixed-rate loans and variable-rate loans.
Fixed-Rate
Fixed-rate loans have interest rates that remain the same for a fixed period, usually between one and five years. This consistency in interest rates means that your monthly repayments will be the same each month, making budgeting easier.
However, you may miss out on lower interest rates if market rates fall during the term your loan is fixed.
Some fixed loans will allow extra repayments but only up to a certain limit (called a tolerance level) and usually don't allow you to pay off your loan before the term ends, so keep this in mind.
Variable-Rate
Variable-rate loans have interest rates that can increase or decrease over time in line with market conditions. This changeable rate means your monthly repayments can go up or down, making budgeting more difficult.
However, you may benefit from lower interest rates if market rates fall during the life of your loan.
Variable-rate loans also offer flexibility, allowing you to make extra repayments if you wish to pay off your loan sooner.
Other Types
Other types of home loans available include:
Split-rate loans (which have both fixed and variable interest rate components).
Introductory rate loans (which offer a discounted interest rate for a set period at the start of the loan).
Equity release loans (which allow you to access the equity in your home).
What Paperwork You Need for a Home Loan
You'll need a few key pieces of paperwork when applying for a home loan.
Financial Documents
You'll need to provide copies of bank statements for all your current accounts going back at least three months. Most lenders require 6 months. Most lender requires these to verify your monthly income and expenses and ensure you have the funds needed for a deposit and settlement costs.
Tax Returns
Your lender will use your latest tax return and Notice of Assessment to verify your income and employment.
Credit Reports
You'll need a copy of your current credit report. The lender needs to know how responsible you are with managing debt and can assess this via your credit score on your credit report.
This knowledge will also give the lender an idea of your debt-to-income ratio and help them determine what interest rate you qualify for.
Employment Verification and Salary Records
A history of your employment is also needed including most lenders require latest payslips.
This history can be in the form of pay slips or other documents that show your income and job stability over the past two years. If you're self-employed, the lender may also require additional documentation, such as Business financials and BAS statements.
Calculating Your Borrowing Capacity
Calculating your borrowing capacity is one of the first steps in the home loan process. This step will help you determine how much money you can borrow from a lender.
To calculate your borrowing capacity, you'll need to consider your income, debts, and other financial obligations.
Your income is the most essential factor in calculating your borrowing capacity. Lenders will look at your gross income (the amount of money you earn before taxes and other deductions) to determine how much you can repay each month.
In general, lenders like to see your income and employment history stable.
Debts are also an important factor in calculating your borrowing capacity. Lenders will look at your current debts - including credit cards, car loans, student loans, and any other monthly payments - to see how much debt you carry.
They'll use this information to decide how much additional debt you can afford to take on with a home loan.
Other financial obligations, such as child support, can affect your borrowing capacity. Lenders will consider these payments when determining how much you can repay each month.
Once you've considered these factors, you can calculate a rough estimate of your borrowing capacity. This number is not set in stone - it's simply a starting point for further discussions with a lender about how much money you can borrow for a home loan.
Getting Pre-Approved Through a Broker
Figuring out how much you can afford to borrow is one of the most critical steps in the home loan process. Lenders will look at your income, debts, and credit history to determine how much they will lend you.
This process can get tricky and, if done incorrectly, could mean your application doesn't succeed.
Instead of going it alone, consider getting pre-approved through a mortgage broker.
The benefits of using a mortgage broker is that the broker can shop around for the best rates and terms from various lenders, so you don't have to do all the work yourself. They are experts in the process and can help you to present your mortgage application in the best possible light.
Once pre-approved for a home loan, the lender will give you a letter indicating how much they will grant you. This pre-approval can give you an edge when you make an offer on a house, as your offer won't be subject to finance.
Final Thoughts
Navigating the home loan process can be complex and headache-inducing. But it's worth understanding the basics to achieve your dream of homeownership.
Understanding the different types of loans such as fixed-rate, variable-rate, split-rate, introductory rate, and equity release loans can assist you in making a smart financial choice.
Additionally, collecting the necessary paperwork will ensure a smooth application process.
Calculating your borrowing capacity is vital to determine a realistic borrowing limit.
So, consider seeking pre-approval through a mortgage broker to simplify the process and increase your chances of success. Their expertise and access to multiple lenders can save you time and present your application in a favourable light.
With the proper knowledge and support, you can make your homeownership dreams a reality and secure the perfect home loan.
