So, what is a home loan you ask? In its most basic form, a home loan is money lent to you (Principle) in return for interest (rate) by a bank for a pre agreed period of time, secured by your new home.
There are a range of different home loans and words associated with home loans so I thought I would use this page to answer as many of them as I could. If you have that I haven’t covered off here, please send me an email here and I will get back to you as soon as possible.
What will I need to show you to get a loan?
Answer: What you had for breakfast, your dogs registration papers…. No, I am only joking but really you are going to have to share a fair bit of yourself with me. The banks are needing to see more and more to make sure that everything they’re making decisions on are the truth. It varies on applying for a standard loan, a low document loan and if you’re PAYG or Self Employed. But for a handy checklist, please download one here.
How long does it take to get a loan?
Answer: Another question that is hard to answer at any one time. There have been times in the past couple of years that particular banks have taken up to 3 weeks to even pick the file up! Now when you consider the average Contract of Sale has 2 weeks for you to have your finance approved you can see that this was really not acceptable at all. Depending on each banks appetite and therefore rates or offers will depend on how many applications it’s dealing with and therefore it’s turnaround times. It’s important to keep this in mind when you’re applying for a loan as if you have a finance clause that has to be met, it is worth narrowing down the banks to the ones that will meet these time frames first and then choose from those lenders.
With the correct lender though and all the correct paperwork provided, you should have a response from the bank within a 3-5 days of submitting and then depending on if they ask for any further clarification you could have an unconditional in this time too.
Should I do a credit check before applying?
Answer: It’s highly recommended. I am more than happy to run a complimentary credit check. Please just get in touch here.
What is Principle and Interest and Interest Only?
Answer: If you have a loan of $400,000 at an interest rate of 4% each month your repayment would be $1,910 each month. Of this $1,333 would be the interest, leaving $577 paying off the principle (the amount borrowed). If you were paying principle and interest you would be paying the full amount of $1,910 each month and your loan amount would be slowing decreasing as you would be paying $577 each month off on the amount you borrowed.
If you were paying Interest Only then you would only be paying $1,333 each month but the amount that you owe/your loan amount, would stay the same. If you pay Interest Only you are not decreasing how much you owe on the property so if property prices don’t go up and you go to see you may not make any money or you may even lose money if prices were to go down.
What is an LVR?
Answer: LVR stands for Loan To Value. The LVR in lending is the size of the loan compared to the value of the property. Let’s assume you’re buying a property worth $450,000.
70% LVR = Loan amount of $315,000 ($450,000 x .7)
80% LVR = Loan amount of $360,000 ($450,000 x.8)
90% LVR = Loan amount of $405,000 ($450,000 x .9)
A lot of banks will offer different rates based on what your LVR is. The lower (the less you’re borrowing compared to the value of the property) the lower the rate. This reduces the banks risk and will also result in you having lower repayments! So get saving lol!!
What is genuine savings?
Answer: The general rule of thumb for genuine savings is money held in a bank account with your name on it for a minimum of 3 months. Depending on the bank, if you’re borrowing more than 85% of the purchase price you will need to show the bank that you have genuine savings of 5% of the purchase price. Using the above example you would need to show that you had held $22,500 in your account for three months. It doesn’t have to be the full amount for the three months so long as it’s growing and you reach that target amount by the time you go to the bank.
Every bank has a slightly different opinion of what genuine savings is and some will even ignore their genuine savings rule if you’ve been renting with perfect conduct through an agency for at least 6 months.
What is mortgage insurance and do I have to pay it?
Answer: The good news? You don’t always have to pay it. If you have a 20% deposit or 10% if you are in qualifying Medical, Accounting, Legal or Mining, Energy and Resources industries and meet certain criteria. Contact me here to find out if you qualify.
If you have less than a 20% deposit then you will need to pay mortgage insurance. What this is is insurance the banks take out to cover their risk should you stop paying your mortgage and they are unable to recoup what they’ve lent you. This fee is then charged to you as the lender and added to the loan. If you would rather pay it upfront you can also choose to do this.
What is the maximum LVR I can borrow?
Answer: All of this as usual depends on which bank policies you meet. As a rule of thumb you will need between 5-8% of the purchase price for Owner Occupied purchases + costs (see next question).
For investment purchases you will need a 13% deposit + costs
I hear people say, plus costs. What are these costs?
- Legals costs
- Building and pest inspections
- Moving costs
- There may be adjustments for rates, body corp, strata etc. You will need to speak with your solicitor to find out what they are if any.
I have been told that with my income I can borrow $600,000 but the house I like is $500,000. Can I still borrow the $600,000 and use the extra money to renovate?
Answer: Unfortunately no. The way a loan works is that the bank will offer to lend you a percentage of the value of the property, also known as an LVR. So if the property you’re buying or refinancing is worth $500,000 then the most a bank will lend you is 95% of the value so $475,000 even if you’re capable of paying more.
If you would like to learn more Click Here for your Complimentary Home Loan Assessment.