The Home Loan Process

Please refer to our other Fact Sheets for information about the process of buying a home – whether that’s by Private Treaty, at an Auction or Off the Plan.

If you’re looking to buy land and build you should refer to this Fact Sheet plus our Construction Loan Fact Sheet.

This Fact Sheet is designed to give you an understanding of the Home Loan Application process when purchasing a property.  If you’re refinancing, please refer to our Refinance Fact Sheet.

Depending on your specific scenario and needs there may be additional steps or considerations – but the following should give you a solid overview.


YOUR PREPARATION SHOULD START WELL AHEAD OF LOOKING AT PROPERTY


Saving a Deposit

You’ll find plenty of information advising that 5% is the minimum deposit you need.  While this is partially correct, you will normally need 5% plus costs such as stamp duty, legal fees etc.

In any event, 5% that you’ve either saved yourself over a period of time – or held in a savings account for at least 3 months if it was a gift – is normally the absolute minimum you need to meet Lenders’ “genuine savings” requirements.

But 5% (plus costs) is by no means the best way to go.  If you can save 20% plus costs you will save yourself a small fortune on Lenders Mortgage Insurance (LMI) and by accessing better deals on your home loan.


Other ways of proving genuine savings

Of course, if you have other investments – including equity in existing property – then this can be used to evidence your savings track record.

Some Lenders will also use advance (accelerated) payments on other debts – such as car loans – to count towards genuine savings.

And some will even allow your existing rental payments to count towards your notional genuine savings.

However, please note that generally the maximum loan you will achieve (excluding LMI charges) is 95% LVR - even if the Lender does allow you to prove genuine savings by one of these alternative methods.


Lenders Mortgage Insurance (LMI)

Here is what you need to know, but are rarely told, about LMI:

  • LMI is paid by you (even if added to the loan amount) and protects the Lender but does not protect you. This means, should you default on your loan and the Lender claims against the LMI you can (and most probably will) be pursued for the amount claimed under the LMI policy;

  • Where LMI is added to the loan amount it increases both your monthly repayment and the amount of total interest payable (due to the higher loan amount);

  • At the maximum LVR of 95%, LMI could cost you 3%, or more, of the loan amount.  It varies between Lenders and goes up (as a %) the more you borrow and the higher your LVR.  So, even if you can’t get down to the ‘magic’ 80% LVR – every extra dollar you save as a deposit is going to save you dead money on LMI and extra interest; and

  • Even though LMI is a single-payment policy that essentially protects the Lender for the full term of a (say) 30-year loan there is no partial refund of any premium to you should you pay the loan out early or refinance it. Ignoring for a moment simple corporate greed and entrenched industry practices, this is largely because the risk that is being insured is almost always in the early years of a loan (i.e. when the LVR is > 80%) and the risk diminishes significantly over time as equity is gained in the property and wages increase in dollar terms compared to loan repayments.


Professional Exemptions to LMI

If you are Professionally qualified, and practising in that Profession, there are a few Lenders (mostly larger Lenders) that will offer loans to 90% without LMI. 

However, these loans are never the lowest cost options in the marketplace or even the lowest cost loans from that particular Lender.  But its definitely worth doing your sums (or having us do them for you) to see if it makes sense to use a loan product where you can have LMI waived.

Professions that may be able to access this exemption include Doctors, Dentists, Accountants, Lawyers, and some Engineers.


Avoiding LMI by using Parental Guarantee / Family Pledge arrangements

Different Lenders use different terminology for these arrangements – and only a relatively small number offer them – but they are essentially a limited guarantee that your parents (or other close family members) can ‘pledge’ on your behalf.

Put simply, the Guarantor offers equity in their property (it can be their own home or an investment property) sufficient to cover the gap between the cash you’ve saved and 20% of the purchase price plus costs.

The ‘pledged’ property may still be mortgaged.  Some Lenders will insist they take over that mortgage whereas others are happy to take a 2nd mortgage (just call or email if we’ve confused you 😊).

This allows you to avoid LMI and, because the Guaranteed amount can be as much as 25% of the purchase price of your home (so 20% deposit plus costs) this is why many salespeople like to market this as a ‘no deposit home loan’.

Please note:  the entire loan amount is in your name and your family member/s can only assist with the ‘pledged’ equity not with servicing (i.e. borrowing capacity).  You must be able to service the entire debt (to the Lender’s satisfaction).

As such, we find that these loans suit first home buyers that are on relatively good wages but may have only recently graduated, or commenced work, and have not yet saved a significant deposit.


Gifts & other Loans

It may be possible for you to use a gift of money (from parents etc) as part of your deposit and/or to avoid LMI.  N.B. if you are telling the Lender that it’s a gift – as opposed to a loan – expect to be asked for a Statutory Declaration from the person making the gift.

You may also be able to use proceeds of a loan (whether from family or a personal loan) to give you sufficient deposit to avoid LMI.

You can’t use a loan to meet genuine savings requirements.  And you’ll need to meet servicing requirements for this loan plus your new home loan (and any other debts).

If you plan to use a loan you have to pay interest on you need to compare that additional cost to the LMI cost you’re avoiding – and the interest rate of your home loan.


No Deposit Loans

You will find plenty of mortgage brokers promoting “no deposit home loans”.  This is just marketing hype and usually refers to the use of Parental Guarantee arrangements or gifts (see above). 

A lot of the detail still published on the internet is wildly out of date and some very questionable low deposit / no deposit home loan arrangements have, thankfully, disappeared since the Regulators bared their teeth around responsible lending obligations.


GETTING YOUR FINANCE READY


Getting Pre-Approved for finance

Please refer to our Pre-Approvals Fact Sheet for more information about Pre-Approvals and the many ‘urban myths’ surrounding them.

However, even though Pre-Approvals are largely not worth the paper they’re printed, on we understand that many people are going to go down this path initially.

The process for obtaining any sort of meaningful Pre-Approval involves making a full loan application.  Anything less is a waste of time and likely to give you some very misleading guidance as to borrowing capacity or your creditworthiness.


The loan application

Any reputable mortgage broker should be obtaining a considerable amount of information from you using a ‘Fact Find’ or ‘Client Needs Analysis’ process.

From this they should be making recommendations with regards to Lender/s and advice about loan structure and features.

Nowadays almost all loan applications are completed electronically.  Your mortgage broker should pre-populate the application for you based on the information they’ve gathered.

Your major task will be gathering the required supporting documentation – which is now a fairly sizable task.  The following list is far from exhaustive, and all may not be required in all cases, but should give a good guide for most people.  Each requirement applies to each borrower:

  • Two recent payslips

  • Your most recent PAYG Summary (group certificate)

  • Your most recent ATO Notice of Assessment

  • If self-employed, your most recent two years’:

  1. Individual Tax Returns;
  2. Business Tax Returns (unless you’re a sole trader);
  3. Business Financials;
  4. ATO Notices of Assessment

  • Also, for self-employed people – recent extracts from the ATO Portal confirming that your personal and business tax affairs and payments are up to date

  • Identification documents – driver’s licence, passport etc

  • 3 month’s Statements for all of your:

  1. Credit cards
  2. Savings accounts
  3. Transaction accounts

  • 6 month’s Statements for any existing home loans / investment loans, personal loans or car loans

  • HECS / HELP Statements (if applicable)

  • If your deposit is held in shares or managed funds – then recent statements for each

  • If you own investment property – then recent rental statements for each

Important:  almost all Pre-Approvals lapse within 90 days after which any ‘special offer’ you applied for may no longer be available.


Once you’ve found your home

Having entered into the Contract, ideally conditional on finance (refer Purchase Process and Pre-Approvals Fact Sheets for more detail), you should immediately contact your mortgage broker so that they can get your formal approval underway.

If you’ve already gone through a Pre-Approval process, your mortgage broker will need the full copy of the Contract plus any ‘special conditions’ and a copy of the deposit receipt. 

Depending on how long its been since you obtained your Pre-Approval, they may also need you to ‘refresh’ some of the other documentation.

If you haven’t already obtained a Pre-Approval, then please refer back to the ‘Loan Application’ heading and in addition provide the full Contract plus Deposit Receipt.

Important note re Insurance:  take legal advice about when to insure the home you’re purchasing.  Most people think they don’t need to insure it until it settles (i.e. they own it) – but this could be too late if something happens to the property once an unconditional contract is ‘on foot’.  Almost all Lenders will want to see proof of insurance before they will advance funds (settle the loan).


The approval process

There will almost certainly be additional information or documentation requested by the Lender as part of reviewing your Application.

Once you’ve satisfied any queries the Lender has, you should receive a Conditional Approval.  Next, the Lender will arrange a Valuation of the property you’re buying.  In some cases (at lower LVR) a physical valuation inspection may not be required.  With certain Lenders your mortgage broker may have been able to arrange and ‘upfront Valuation’.

In any event, once the Valuation process is completed and any other ‘conditions’ are satisfied – the Lender should issue a Formal Approval and then, a few days later, send you loan contracts to review and sign.

Although it is rarely mandated, you should consider taking legal advice prior to signing the loan contracts.

Once you return the loan contracts to the Lender – they will be checked for completeness and then the loan will be ‘certified’ ready for settlement.

At this stage the Lender, or more likely their settlement agent, should be in contact with your solicitor or conveyancer to ensure everything is in readiness for settlement.


Settlement

On the day of settlement, the Lender’s representative, your solicitor, the Vendor’s solicitor and the Vendor’s Lender (if applicable) all ‘attend’ settlement to hand over Deeds, mortgages and the money.   [In reality, settlements are rarely ‘attended’ by all of these Parties these days and a significant number are conducted electronically.]

You’ll know that everything has gone according to plan when your solicitor calls to advise that keys to your new home are available to be collected or you get a call, email, or text from your mortgage broker or the bank.


After Settlement

Once your home loan settles, and you move into your new home, it is only natural to breathe a sigh of relief and want to relax (and never have to think about your home loan again).

Its that last point that ALL Lenders are counting on.  This is why they get away with ‘out of cycle’ rate increases or re-pricing their ‘back book’ and why most people find that a few years down the track their home loan rate is far from competitive.

So – if you really want to pay as little as possible and own your home as soon as possible – don’t rest too long.  Take a bit of time for yourself by all means, but at some stage you need to think about ‘owning your home’ as opposed to just buying it.

Please have a look at our Paying off your Home Loan Fact Sheet - that deals with some simple things you can do to get out of debt sooner, smarter, and cheaper.


Conclusion

We hope this Fact Sheet has helped you with a basic understanding of the Loan Process when buying a home.  Of course, we’ll be with you every step of the way to guide, advise, and answer any questions you may have.

Please feel free to Contact Us if you have any questions.



GENERAL ADVICE WARNING

If you have been directed to this Fact Sheet by your Independent Mortgage Planner it is in order to allow you to review some relatively detailed considerations in your own time and at your own pace. Only any specific advice subsequently, or previously, provided by your Independent Mortgage Planner constitutes personal advice. In all other circumstances, the information provided in this Fact Sheet is general in nature only and does not constitute personal advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this Fact Sheet you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to speak to an Independent Mortgage Planner. We provide Credit Advice only. You may also wish to seek appropriate legal, tax, and other professional advice.

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