Understanding the basics of Home Loans
In today’s world, buying your first home seems much more difficult than what it used to be. For those of you who are in the home loan market to buy a property, here are a couple basic points to improve your understanding of this grueling process.
Who lends money for your property purchase?
One of the basic and simple place to start your home ownership journey is to find out who will lend you money for your purchase? And then, how much can you borrow?
Most times as long as you have a good enough deposit (at least 5% of the property value) and income to repay the mortgage there will be a bank or institution who will be willing to lend you money. It’s a matter of finding that right solution out there.
Generally, if your situation is uncomplicated there will be plenty of options available in the market.
Things banks check when giving out a home loan?
The lender, usually through a mortgage broker or the bank itself is the entity who lends money, at a cost. It is expected of the borrower, through a mortgage agreement, to pay the sum of money given to them, plus interest, in a limited amount of time agreed by both sides at the time of the loan. Generally, the largest amount one can borrow as a mortgage from a lender is 95% of the value of the home, meaning at least a 5% deposit is necessary. So here are some of the important things banks consider when lending you money
- Employment and income: Usually this means having held your current job for a certain time period. Exceptions may be made however depending on the type of employment you hold (e.g. self-employed). The amount of income you declare to the ATO is what is considered as income here nothing more and nothing less.
- Credit history: Generally, banks will check your credit history via D&B (Dun and Bradstreet) and Veda. Veda gives a score from 0-1200, the higher the score, the better you look to lenders.
- Expenses: Increasingly banks are now assessing expenses in more detail. Your marital status, number of dependents, and reoccurring regular expenses will have an impact.
- Debt: Anything from personal loans, car finance, and credit cards fall into this category. The total exposure (the total of all debt) will be considered by the lenders. Different banks will take a different view on how they assess your debt situation depending on the lenders risk appetite. In some cases even though you pay off your credit card always on time and never incurred an interest banks may ask you to reduce the limit to fit in with their lending criteria.
- Genuine savings: Genuine savings means that you have savings over time, banks may want to see your bank statement in to determine this. If you’ve been renting for the last 3 months, some exceptions may apply. We recently wrote about how to turbocharge your home deposit which may be worth a read.
- Location/type of property: Lenders may be more hesitant to approve loans for properties in smaller towns, high-rise units in the CBD or unusual properties. This is where finding the right lender with the right solution really matters.
A tip: If you are stretching your borrowing to 95%, you can expect to be charged a Lender’s Mortgage Insurance (LMI). This serves to insure the lender in case you are unable to repay the amount of the loan and can add up to tenths of thousands of hard-earned dollars.
Good income means an abundance of choice
Your income will be one of the largest factors that will determine how much you will be able to borrow. This is because, for banks, it comes down to one thing. How able are you to pay back the loan. The better the income to home value ratio you have, the less risk they will be taking on, thus, they will feel more comfortable in giving you the home loan.
What if you can’t pay off your home loan?
Ultimately, banks want to get paid, therefore they are there to help with any problems you may have. Most banks have programs called Financial Hardship Assistance. Whether you have a problem to maintain repayments within the terms of your credit contract, ranging from short term management to overdue amounts, to cases of severe financial hardship, banks will help you in any way they can. If you do miss payments on your mortgage, do not panic, you can expect at least 90 days before you receive your first credit score hit.
When entering a mortgage agreement, you must ensure you get the best possible rate which will leave you with the least amount of risk and largest possible comfort. For those of you who are already have a Home Loan, now may be a good time to get lenders to bid for your loan.