Home Loans - Getting Started

What is a home loan?

A home loan or mortgage is a loan agreement between a lender and a property owner. The property will be the security holding by the lender. In general, the loan agreement will include a few important things, such as: loan amount, interest rate, loan term (generally 25-30 years), security and its value. This article outlines the key basics for you to get started and wrap your head around home loans.

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When do you need a home loan?

In general, you need to apply for a home loan when you are going to purchase an established property or when your purchased off-the-plan property is going to be settled soon. In this section, we will give a few most common scenarios when you need a home loan.

If you are going to purchase an established property via auction, you may need a conditional approval subject to valuation before auction. But even with the conditional approval, as there is no cooling off period when you auction successfully, if the valuation goes way below your purchase price, or there are some changes affecting your financial situation, which leads to a decline by the lender, then you may risk the 10% deposit.
If you are going to purchase an established property without an auction, which happens more frequently in a slow market, then you still need to get a conditional approval subject to valuation before you sign the contract and pay a small deposit (generally, 0.25% of the contract price). Normally, with a private sale (with a real estate agent or not), you will have a cooling-off period of 5 business days, in some cases, 10 business days. In general, your banker or mortgage broker will help you get unconditional approval within this timeframe. On the safe side, you will then be able to confidently pass the rest of the 10% deposit to the vendor without worries before the cooling-off period expires.
Off-the-plan property purchase means that you buy the property without seeing it. It may take a few years for the developers and builders to get their project done. What you need to do is to prepare finance roughly three months before the expected settlement. As there are delays or advances among different projects, the timing may be tricky. The best thing to do is to liaise with your solicitor, sales agent, and the developer, and update the information with your banker or mortgage broker.

In terms of loan application, there is no substantial difference between buying an established property, or going to buy a land and then do the construction. Generally, before you are going to sign the construction contract (Fixed Price Building Contract is always required), you need to get conditional approval done. After signing the contract and paying deposit, you then will get valuation and unconditional approval done accordingly. You can learn more about how construction loans work here.

However, if you are an owner builder looking for a construction, the process is a bit more complex and you need to make sure you have a specialist mortgage broker (like Reservoir Finance) helping you.

There is no secret for “Loyalty Tax” in Australia among many sectors, including your electricity, mobile phone, and your home loan interest rates. Therefore, first of all, a home loan “Health Check” is very crucial and it should be done every 6 months. It doesn’t matter whether you are our clients or not, feel free to contact us at [email protected] for a free Home Loan Health Check. More than likely, your home loan interest rate is higher than the current market offers, and you will be much better off if you are going to refinance your home loan with another lender. There are also other cases that you may need to refinance your home loan. For example, you may want to cash out from the equity of your property and use the money to do renovation or buy a new car; or, you may want to consolidate your other personal loans, car loans, or credit cards for better liability management.

Home Loans by Purpose

Overall, there are only two types of home loans by purpose, for owner occupying or for investment. However, we include “First Home Buyer Home Loans” to reflect the special nature of this type of home loans in the current Australian property market, where promoting home ownership is not only supported by the general public but also by the state and federal governments.
Owner occupied home loans are for those who are going to buy a home for self-occupying, or refinance their current owner-occupied home loans. Overall, owner occupied home loans have lower interest rates than investment home loans. Lenders are also considering higher LVR (loan to value ratio) than investment loans.

Home ownership has always been a part of the “Australian Dream”. Due to the last cycle of real estate booming, housing affordability became a hot topic in the political space. Arguably, Scott Morrison’s favourable policy for the first home buyers before the election played a part in the last federal election in 2019. Policies include stamp duty rebate and First Home Owner Grant from the state level, First Home Loan Deposit Scheme from the federal level. On top of this, there are many deals (such as discounted rates or higher LVR) from lenders and even brokers!

Real estate investment is not uncommon in Australia, and it’s arguably the best investment choice for the general public. Investment loans are for investment properties, and all interests and related banking fees are tax deductible.

Home Loan Repayments

Principal plus Interest home loans

Principal plus interest repayment allows you to pay off your principal starting from day one. It also benefits borrowers in a way that you pay less combined interest rates than other repayment types. However, starting from principal and interest repayment means a relatively tighter cashflow while interest only repayment allows you a few years’ low cash flow.

Interest Only home loans

Once heavily targeted repayment type by Australian regulator ASIC is now having some fresh air. Interest only repayment is typically welcomed strongly by investors who are not interested in paying off the loan in the long run and want to save cash flow for other matters. Since mid 2019, banks re-opened maximum 10 years interest only period for investors, while interest only for owner occupiers is still nearly impossible as the lenders (to be precise, regulators) think it’s not a good idea to pay off your own home later than sooner.

Interest in Advance home loans

Interest in advance home loans is a special type of interest only loans. It is designed for investors looking for tax benefits in a particular financial year.

Home loans by interest rate type

In general, there are only two types of interest rate, variable and fixed. However, there are many variations and combinations. Our in-depth guide compares the pros and cons of both and shows how much money you can be saving when applying some advanced strategies.

Variable rate home loans

A variable rate loan allows you to take the advantage of an interest rate decreasing market, while putting you at a disadvantage when the rate goes up. All major banks and many smaller lenders offer an offset account function for variable rate home loans by charging an annual fee. The main advantage of a variable rate is flexibility. You can pay off your loan sooner, or refinance in a desired time without paying break fees.

Fixed rate home loans

A fixed rate home loan gives you peace of mind as the rate for the fixed period won’t change. A typical fixed period is normally from 1 to 5 years, with the lowest rates generally given for 2 or 3 years fixed. The disadvantage of the fixed rate loans is also flexibility as break fees will occur once you want to pay off the loan or discharge the loan. Also, the majority of lenders won’t give offset function during the fixed period, except one big four lender offers an offset account for one particular product, and only a few smaller lenders offer offset accounts for their all fixed rate loans. For more information and take the advantage of both having a fixed rate and offset account, please email [email protected] for more information.

Split home loans

As there are advantages and disadvantages for both variable and fixed rate home loans, some people may want to have a combination between these two. With most lenders, borrowers can split their home loans into a few splits. For example, based on your future financial situation prediction, you may want to have 1/3 loans as variable, 1/3 loans as 1 year fixed, and 1/3 loans as 3 years fixed.

What documents are needed to apply for a home loan?

Home loan applications are complex and require lots of documentation. There are 6 broad categories:

  • Identity – Who are you?
  • Income – How much do you earn?
  • Liability – How much do you owe?
  • Expenses – How much do you spend?
  • Security – What will the lender hold?
  • Assets – What does your personal balance sheet look like?

Read our in-depth guide here to find out what documents and why they are needed.

How much can I borrow?

We are able to provide a detailed borrowing capacity calculation for you – for FREE. But we may need you to help us understand your financial situation better.

Please fill in the following two calculators on our website, print the calculators as pdf, save and send them to [email protected] – we will get back to you within 1 calendar day.

Calculator 1: How Much Can I Borrow? (No worries if the calculator gives you a result lower than your expectation. We can always help.)
Calculator 2: Budget Planner. (It’s always important for us to understand your incomes but also expenses. Be patient as it’s not a short form.)

We, Reservoir Finance mortgage brokers, will help you all the way for your financial future. With good preparation under the hands of professional and dedicated brokers, your home loan applications and financial future will be on a good track.

For further reading, check out our guide on how you can increase your borrowing power.

Other useful information

Home Loan Reviews
Useful Calculators
Lenders Mortgage Insurance Explainer

We can help you choose and apply for a home loan with ease!

There are many reasons why going with a broker for home loans is a better outcome. One of them is making sure that you choose the right home loan for your personal circumstances.

Reservoir Finance is a 100% independent mortgage broker who are values based. Meaning we do not take shortcuts for a quick win. Contact us using the form below or call us on (02) 8288 9123 and we’ll be glad to have a chat with you and help you out!


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