Home Loan

What is a home loan and how do they work?

A home loan is the sum of money a person borrows from a lender in order to purchase a home or property. The borrower repays the loan amount, plus interest, over a period of time. Home loan terms can vary but are generally between 25 to 30 years, with set payment schedules of weekly, fortnightly or monthly. The home loan is usually secured using the home or property purchased.

Home loan vs mortgage: are they the same?

The terms home loan and mortgage are often used interchangeably in Australia. However, they actually refer to different elements of borrowing money to purchase a property or home:

A home loan refers to borrowing money from a financial institution in order to purchase a property or home. A home loan may be unsecured but is generally secured by the property you intend to purchase.

Mortgage refers to the ‘lien’ on the loan. It is the legal agreement that gives the lender a claim over your home should you fail to meet your loan requirements. So if you default on the loan, the lender is able to sell the property in order to recoup their losses.

So a ‘mortgage loan’ is a type of secured home loan that is tied to the real estate you intend to purchase.

How much can I borrow?

When considering both potential properties and your home loan options, it’s important to get an idea of how much you can borrow before you approach lenders or look for properties. Knowing this information will help you make informed decisions that are right for you.

Ultimately, how much you can borrow will depend on both your borrowing power and each individual lender’s own policies and requirements. To determine your borrowing power, lenders will look at factors such as;

• Income
• Your savings, including your home loan deposit
• Assets
• Debt
• Living expenses
• Credit history
• The value of the property you wish to purchase (if you have found one)

Using a borrowing power calculator, like the one below, can give you an estimate of your borrowing power based on your current finances. While this estimate is not a guarantee, it can provide a useful guide for your financial goals.

If you’re concerned about your borrowing power, consulting with a mortgage broker can help give you a better idea of your current financial situation without the need for an official credit check. Contact Oceania Finance mortgage brokers today to find out your borrowing power.

How much deposit do I need?

When saving for a deposit, it’s a good idea to save around 20% of your potential property’s purchase price. Saving a 20% deposit can make you more appealing to lenders and help you avoid Lenders Mortgage Insurance.

If you’re struggling to save your 20% deposit, consulting a mortgage broker can help you expand your options. At Oceania Finance, our Mortgage brokers have access to a wide range of lenders and take the stress out of finding the perfect lender for you.

How home loan repayments are calculated

Generally, there are two parts to home loan repayments: the principle and the interest. The principal is the amount you borrowed and the interest is charged by the lender. In a standard principal and interest home loan, you will repay the principal and interest each month.

Each lender and each home loan will have their own specific way of calculating home loan repayments. But generally, lenders will base your home loan repayments on the following factors:

• loan amount
• length of the loan term
• current interest rate
• type of interest rate applied to your loan; fixed or variable
• type of home loan (i.e. standard principal and interest or interest-only)
• Whether you are a property investor or intend to live in the property
• frequency of repayments, i.e. weekly, fortnightly or monthly

How home loan interest is calculated

Home loan interest is typically calculated by taking the outstanding loan amount and multiplying this by your home loan interest rate, before dividing that amount by 365 days. Typically, lenders will calculate interest daily and include the charge in your monthly home loan repayments.

While understanding how home loans are calculated is important, the best way to calculate your home loan repayments is by using a free online loan repayment calculator like the one below. This figure is an estimate and should be used as a guide only, but it’s a great way to check your financial health when considering your home loan options.

Home loan fees

Depending on your loan terms and the type of loan, there may be fees and extra costs associated with your home loan. These fees are not always taken into consideration when using online loan repayment calculators but it’s important to look out for them when applying for a home loan.

Fees you may come encounter in your home loan include:

• Upfront fees: application fees, legal fees, lenders mortgage insurance, government charges (such as stamp duty) etc.
• Ongoing: monthly service fees, annual fees, redraw fees, late payment fees etc.
• Exit fees: discharge fee, early exit fees, fixed-rate break costs etc.

What are the different types of home loans?

There are different types of home loans available in Australia which are usually defined by either their payment type, the type of interest rate, or their purpose. Most lenders offer home loan options based on the type of interest rate; either a fixed rate or a variable rate.

The most common types of home loans in Australia include:

• Fixed Rate Home Loan
• Variable Rate Home Loan
• Split Home Loan
• Construction Loan
• Guarantor Home Loan
• Low Doc Home Loan
• Bridging Loan
• Line of Credit Loans
• Interest Only Home Loan

Which home loan is best?

Every home loan is different and comes with its own set of pros and cons. Ultimately, deciding which home loan is the best for you will come down to your individual circumstances and financial situation.

However, questions to ask when researching home loan options include:

• What are the pros and cons of each home loan option you’re considering?
• What are your financial goals?
• What are your home ownership goals for the future?
• What features and benefits would you like included in your home loan?
• Are there any fees or extra costs associated with the home loan?
• What is the comparison rate?
• Do you have a preferred lender in mind?
• How long do you want your loan term to be?

How to apply for a home loan

When applying for a home loan, each lender will have their own application process for each loan type and it will also depend on whether or not you use a mortgage broker.

However, here are some tasks you can do to get you started and to make the application process smoother:

• Identification: with any home loan you will need to provide sufficient proof of identity. This can include passports, birth certificates, drivers licences, medicare cards, and citizenship certificates.
• Income: you will need proof of income when applying for a home loan. Ensure you have any relevant payslips, income statements or tax returns at the ready.
• Expenses: lenders will need to look at your expenses so it’s a good idea to tally these yourself before applying for a loan.

Need some help?

Applying for a home loan can be an anxious and stressful time. Our local, experienced mortgage brokers at Oceania Finance are here to help. We’re committed to providing a personalised service so that we get the best rates and terms for you. We’ll be with you every step of the way during the home loan process so you can focus on what’s important to you.

Contact us today to find out how we can help you move forward.