Owning your own home is the great Australian dream, but signing up for a home loan is a long-term financial commitment. That's why it's so important to set a budget and compare products to find the best rate, terms, and fees.
If you've got your deposit ready and aren't sure what to do next, here's what you need to know about how to apply for a home loan.
1. Know how much you can afford
The first step in applying for a home loan is working out how much you can afford.
Our borrowing power calculator can help you estimate your monthly repayments, which you can then build into your current household budget to determine how much you're willing and able to pay.
Remember to leave some room in your budget to cover potential interest rate rises, pay for any account keeping costs or fees, cover stamp duty on the property, as well as other admin fees like solicitor costs.
Budgeting correctly is vital to ensure you keep up repayments on your home loan and don't risk losing your property.
2. How big is your deposit?
The more money you have saved for a deposit, the better. Typically, lenders will require you to have a 20% deposit for a home loan, but some may let you borrow with as little as 5%.
However, anything less than a 20% deposit will means you'll have to pay Lenders Mortgage Insurance (LMI) which can be a big cost in itself - usually thousands of dollars. Plus, a larger deposit will likely strengthen and improve your chances of approval.
If you're a first home buyer, there are government schemes where you can have a small deposit (as little as 2%) and avoid paying LMI.
The First Home Guarantee, Regional First Home Buyer Guarantee, and Family Home Guarantee are examples of these.
3. Compare home loan features
Home loan providers typically offer a number of home loan products, all providing a different set of features. Compare them all and remember there's more to a home loan than just the interest rate. Consider any account-keeping fees, and take advantage of any deals such as discounted establishment fees, introductory rates or special add-ons. Also take note of the loan terms, features (e.g. offset account) and penalties that may be applied for non-payment.
Do your own due diligence to find a home loan that would best suit your financial and home buying situation.
4. Select the type of loan
Do you want a fixed or variable interest rate? The monthly repayments on a fixed loan are the same for a set period, offering more stability and making it easier to plan your budget. A variable loan swings with market shifts, which may allow you to take advantage of interest rate cuts, but also leaves you vulnerable to rate rises. A fixed rate doesn't typically have additional mortgage features such as an offset account or redraw facility, while a variable rate does.
5. Get pre-approval
Home loan pre-approval approves you to borrow up to a certain amount, giving you a good idea of what you can and can't afford. It is typically valid for 90 days, but could vary depending on your circumstances and the lender's. Keep in mind getting pre-approved doesn't guarantee your home loan application will be successful.
To qualify for pre-approval, you'll need to supply:
- Proof of identity including your drivers licence and passport
- Full employment history with references from employers
- Personal details, including your date of birth and address as listed on utility bills
- Details of any assets, existing debts and expenses with bank statements
- Recent proof of income such as pay slips
- Latest Notice of Assessment from the Australian Taxation Office, or if self-employed, two to three years' worth of tax returns or Business Activity Statements (BAS)
- Bank statements showing evidence of savings
- If purchasing an investment property, confirmation of rental income for the property
- Estimation of the purchase price and type of property you are seeking to buy
This is because home loan providers want to be as sure as possible that you can afford to meet your loan repayments. The lender will then use this information to determine your borrowing capacity. To avoid financial strain, it's important to stick to your budget even if a lender offers you a bigger loan than you were expecting.
Once you're pre-approved, you can generally make an offer on a home and the loan is confirmed to close the purchase.
6. Finalise your application
After you've received pre-approval and are ready to make an offer, you'll need to have a conveyancer or solicitor review the contract of sale.
If you make an offer and it is accepted, the lender will instruct a property valuation. If the lender decides that the value of the property is less than what you are proposing to pay, they might deny your application.
This is because the lender may see the loan as too much of a risk. Lender valuations can look conservative, especially in a hot property market.
Once the lender is satisfied with the valuation, you'll then need to pay the deposit and finalise mortgage documentation with your solicitor.
7. The lender approves or rejects the loan
Final approval is when the lender has everything they need and can confirm they are willing to reject or approve your loan. If so, they will issue a letter confirming their approval. This is called unconditional approval.
If your home loan application is more complex or you haven't provided all the necessary documentation, there may be a bit of back and forth with the lender before they can finalise their offer.
8. The lender sends you the offer
Once you've been approved for the loan, the loan offer will be issued to you. The lender will usually send you the contract for you to sign and accept.
Make sure you review this carefully (can go through it with a solicitor) and return it to the lender as soon as possible.
9. The loan is settled
The settlement stage is where the property ownership is transferred from the vendor to the buyer. During this process, your legal representatives (solicitor or conveyancer) will meet with the representatives of the seller and the lender to review, exchange, and sign all the relevant documents. Your lender will disburse the funds for your home loan to the seller. The title of the property will also be transferred.
After settlement occurs, you'll be able to pick up the keys to your new home.
10. Stamp duty - when you have to pay it
Stamp duty is a tax on the purchase of a property, a mandatory (in most cases) one paid to your state or territory government. It also includes the cost of transferring the ownership of the property from one owner to the other, which is sometimes called transfer duty.
The cost of the property and where you live will determine the amount of stamp duty you'll need to pay.
Stamp duty is often required to be paid within 30 days of signing a contract or 30 days from settlement. This means you'll need to make sure you budget for stamp duty on top of your deposit and other expenses.
First home owners may be eligible for stamp duty concessions depending on their relevant state or territory government.
For a $600,000 property to live in (and you aren't a first home buyer), you could pay up to $23,000 on stamp duty. Visit our stamp duty calculator to find out how much you'll be required to pay.
Start comparing home loans from all the major Australian lenders now, or use our handy home loan comparison calculator to help you find a great rate.
Purchasing a home is a significant milestone in life, but securing a home loan can sometimes be a daunting process. Especially if you’re unsure what you need to do to guarantee you’ll actually be granted the green tick of approval at the end.
But don’t fear, there are a few ways to improve your chances of gaining home loan approval. In this article, we will discuss some key tips that will not only enhance your eligibility for a home loan but also make the process smoother and more manageable.
1. Strengthen your credit score and history
Being able to prove you can repay your home loan is almost the biggest requirement you’ll have to meet. And in this case, your credit score plays a crucial role.
When assessing your home loan application, a lender will use your credit report to paint a picture of your overall trustworthiness as a borrower. Any defaults, such as outstanding bills, missed/late payments or even a history of applying for other loans with other providers in the past, whether it's approved or not, is recorded on your credit history - and will likely trigger a red flag that could lead to rejection.
To increase your chances of home approval, be sure to get ahead of the game and obtain a copy of your credit report from bureaus such as illion, Experian or Equifax. Check for any errors or discrepancies regarding your personal information and payment history. If you do find an error, report it immediately to prevent derailing your home loan application.
The next thing you’ll want to do is pay off any existing debts, make timely bill payments, and keep credit card balances low as this can boost your credit score significantly over time. Lenders look for borrowers with high credit scores, because the higher the score, the less likely they’ll default on their home loan.
Essentially, you want to show the lender you have a stable and clean track record.
2. Save, save, save
If you’re buying a property and haven’t saved a big chunk of money to prepare yourself, are you really ready for a home loan? Mmm, probably not.
Lenders will want to see that you have a solid history of saving money for a rainy day, while also building up a strong deposit over time - generally 20%.
Many lenders have strict guidelines when it comes to their maximum loan-to-value ratio (LVR), which essentially is the limit on how much of the property's value can be borrowed and indicates how much of a deposit is required. Most lenders need at least a 20% deposit made up of genuine savings - money you have personally put aside yourself over a period of time. Not a cash gift from a relative.
Some lenders might approve an application with an LVR of up to 95%, but this will require you to pay Lenders' Mortgage Insurance (LMI). This is a hefty sum in itself.
One of the most common reasons a home loan application is rejected is that a lender's minimum deposit threshold wasn't met. So, remember: the bigger your deposit, the less you need to borrow, the less LMI you have to pay (if at all), and the lower the risk you are to a lender meaning a higher chance of home loan pre-approval.
3. Watch your expenses
Spring clean your expenses soon rather than later - at least three to six months out from applying for a home loan.
Rectify any spending habits you feel are atypical or could hinder your chance of home loan approval. Do you use UberEats every second day? Do you constantly use Buy-Now-Pay-Later? Are you always at the local pub buying drinks and betting on Keno? If so, it may be time to cut these out. Lenders will more often than not trawl through your bank statements and the like to find out how well you manage your money.
Remember, you could always reinstate these guilty pleasures after your new loan settles, if your budget allows for it.
4. Wrangle your debt
Getting a home loan when you already have debts is challenging. This is why it makes sense to pay off the smaller debt to prepare you for the big one that’s incoming.
Lenders evaluate your debt-to-income (DTI) ratio, which compares your monthly debt payments to your gross monthly income. A lower DTI ratio indicates better financial health. Prioritise paying off existing debts before applying for a home loan, as it will reduce your DTI ratio and improve your chances of home loan approval.
Consider getting rid of any personal loans, car loans, credit card debt - and consider closing any BNPL accounts. HECS/HELP tertiary education debts are also increasingly being factored-in to home loan assessments.
It could even be as simple as lowering your credit card limit. When lenders assess your borrowing power, they take into account your credit card limit, not what is currently outstanding. So, if you have a credit card with a $10,000 limit but you only owe $2,000, the lender will be eyeing off the $10k.
Why? That’s the amount of money available for you to spend - what’s stopping you from using it?
You stand a much better chance of being approved for a home loan if you cut back to one credit card with a reasonable limit.
5. Stick to one loan application at a time
While it’s great to compare what’s out there, submitting applications to multiple lenders at once will show up on your credit report. And not in a good way.
Acting in haste will not cut it when applying for home loans. See to it that you do your research first to determine which product will work best for your financial and lifestyle circumstances - that’s the one you apply for.
Should you get home loan pre-approval?
While obtaining home loan pre-approval is not a requirement for borrowers, there are some benefits to think about. Pre-approval involves the lender reviewing your financial documents, credit history, and income to determine your borrowing power.
Home loan pre-approval can strengthen your position as a buyer, demonstrating to sellers that you are a serious and reliable candidate. It also provides clarity on your budget, allowing you to search for homes within your price range confidently.
Not only does pre-approval show sellers that you’re serious, it can also help to progress with your finance as soon as you find your dream home. Pre-approval is usually valid for 90 days so you have three months to shop around for a property.
But remember, getting pre-approved doesn't guarantee your home loan application will be successful, so don’t rely on it.
6. Don’t apply for a new job, and have a steady job
If you’ve got your eye on a new job that pays more than your current one, you may think that this would be beneficial to your home loan application. Unfortunately, it can have the opposite effect.
A lender wants to see stability, and sadly changing jobs isn’t considered a sign of stability, especially if you are changing entire industries.
Generally speaking, most lenders like it if you’ve been with the same employer for a minimum of six months, excluding probation periods. You’ll likely need to provide three to six of your most recent payslips to prove you are earning enough reliable income to repay your mortgage.
Lenders generally look favourably to those with steady ‘esteemed’ professions - think lawyers, doctors, teachers, nurses, and engineers on permanent, full-time work. Casual, contract or self-employed work might work against you.
