6 things to consider before applying for a home loan
A mortgage may be the biggest financial commitment you ever make. So you want to get it right – whether that’s calculating how much you can comfortably afford to borrow or figuring out how to increase your chances of home loan approval.
With that in mind, here’s what to consider before applying for a home loan.
1. Am I an attractive borrower?
Getting your home loan application approved isn’t just about your ‘purchasing power’ – how much you earn or the size of your deposit. Lenders also want to know your serviceability – your capacity to repay the loan.
To work that out, they’ll look at several factors including your:
- Credit file – to see if you’re a responsible borrower with a track record of meeting repayments
- Existing debts – such as personal loans, car loans and credit cards
- Ongoing financial commitments – such as childcare and school fees
- Living expenses – to help them calculate how much you can afford to borrow S
So if you’re wondering how to get approved for a home loan …you should make sure you’re in the best financial shape possible in the months leading up to your application.
That means:
- Checking your credit file – so you can see if there are any faulty entries that need correcting
- Paying down debts where possible – to boost your borrowing power
- Reducing or eliminating unused credit card limits – because many lenders consider the total limit as a liability (debt) even if you never hit your limit or make all your repayments on time
- Tracking your monthly expenses – to give you an accurate picture of where your money is going
- Staying in your current job – as being unemployed or on probation can severely limit your options
2. How much should I borrow?
Before you begin looking for a new home, you need to calculate your borrowing power. This will give you a budget, so you don’t fall in love with a property you can’t afford.
Take your income and deduct:
- All your current financial obligations and monthly expenses, including food, transport and entertainment
- The likely costs of owning a property, such as rates and taxes, utility bills, insurance, repairs and maintenance
Remember, life doesn’t always go as planned – so don’t drain your emergency stash to increase your deposit and cut down on LMI
How much do you have left?
That’s the maximum you can afford to pay every month towards your home loan repayments.
Is it doable?
To figure that out, ‘try before you buy’. For six months, live on how much you’d have left after making your mortgage repayments, to see how it feels.
Once you’ve established your budget, you can start house hunting. Be clear about what matters most to you – such as location, features or size – to help you narrow down your options.
3. How much deposit do I need?
Saving a deposit is probably the most challenging aspect of entering the property market – with the 2019 ANZ-CoreLogic Housing Affordability Report finding it takes an average of nine years for the typical capital city household to save a 20% deposit.
However, saving a 20% deposit isn’t essential, and doesn’t always make financial sense.
To understand why, let’s look at the reason a 20% deposit is typically recommended – which is to avoid lender’s mortgage insurance (LMI).
LMI is a one-off insurance premium you may be charged to protect the lender if you default on your mortgage. LMI is based on a percentage of your loan amount. So the smaller your deposit, the larger the bill.
But while LMI can add thousands of dollars to your overall costs, it isn’t always something to be avoided. That’s because it can help you get into the housing market faster – which, when prices are rising, could be cheaper than waiting and paying more for a property.
So how much deposit do you need?
The sweet spot is around 12%. Having less than 10% can lead to a large LMI bill, higher rates and fewer lenders willing to consider your application. But 12% gives you competitive pricing, more lender options and a moderate LMI bill.
Whatever you do, don’t drain your emergency stash to cut down on LMI.
4. Am I eligible for any first home owner grants?
Both the federal and state governments acknowledge that it can be difficult for first home buyers to get on the property ladder. So they have several initiatives that can help including:
- The First Home Loan Deposit Scheme – which helps eligible first home buyers purchase a home with a deposit of as little as 5% without paying LMI
- The First Home Super Saver scheme – which allows you to save money for your first home inside your super fund (potentially reducing your tax bill)
- Stamp duty concessions and exemptions – which vary depending on where you live
- First home owner grants – which, again, vary depending on where you live
While qualifying for these schemes can help you buy your first home sooner, there might be some trade-offs. For example, you may be forced to buy a new property or build your own, rather than purchase an established property.
5. What’s the right home loan for me?
What's the best home loan? It’s not necessarily the one with the lowest rate – because price matters only when you can borrow what you want when you want.
Lenders have different views on how they assess income and expenses, including one-off purchases, overtime, shift allowances, commissions and bonuses. All these can make a huge difference to how much you can borrow.
You also have to consider:
- Interest rate type (fixed, variable or split)
- Interest rate structure (principal and interest or interest-only)
- Loan term
- Repayment frequency
- Fees (upfront and ongoing)
- Features (e.g. offset, redraw, extra repayments)
But you don’t have to do this alone.
Partnering with a good broker – one who specialises in borrowers just like you – can make a huge difference.
A good broker will provide expert guidance and help you compare hundreds of different loan options, so you end up with the best loan for your situation.
Here's why you should (almost) always use a mortgage broker to help you choose a home loan, especially for first home buyers.
6. What documents do I need for a home loan?
Make sure you’ve got your paperwork sorted before you apply. While requirements vary from lender to lender, typically you’ll need to prove your:
- Identity (passport, driver’s licence)
- Income (payslips, tax returns)
- Assets (bank statements, share certificates, details of real estate)
- Liabilities (loan and credit card statements)
Lenders also want to see proof of ‘genuine’ savings. These are savings you have saved yourself over time (usually between three to six months). Typically, one-off deposits, such as gifts, inheritances, tax refunds and bonus payments from work, don’t count as genuine savings.
Want expert home loan advice? Schedule a discovery call with one of our licensed advisors.
Let Life Sherpa® help you get the right loan
Vince Scully
Founder and Chief Sherpa
With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Vince founded the Calliva Group; a fund manager, product issuer, advisor and lender to Government and private clients. Vince is an advisor to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie bank’s infrastructure team.
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