Learn about loans

Disclaimer : the following notes are general information that do not take into account your personal financial circumstances. You should make your own enquiries about what is suitable for your situation or seek advice from a relevant licenced professional.

  • First Home Owners …
    • Grants – click on this link to a government website for more information First Home Owner Grants 
    • ATO super saver account … click on this link to the ATO website for more information ATO Super Saver Scheme
    • Home Guarantee Scheme HGS
    • Family guarantee – eliminates LMI and let’s you borrow 100% of the purchase price plus costs as long as your income is sufficient for servicing. The guarantor’s property is secured for a certain amount against the loan. Guarantors should get legal advice before they enter into this arrangement.  
  • Conditional approval (or pre-approval) … an approval based on your circumstances before a property is selected. It can give you some confidence about how much you can spend.  But, you need to be cautious.
    • unless your pre-approval is based on a fully documented and assessed loan application, you could be very surprised when it comes time to get formal approval.  The way each lender assesses your circumstances can vary significantly. It is not until a lender reviews your documents, that you can have any certainty as to how your circumstances will be considered in the credit assessment process.  
    • The other thing to note with pre-approvals is that they are subject to a suitable valuation once the property is selected
    • If lender policies change before they issue a formal approval, your loan may not be approved. Lenders are never committed to a loan until they issue a formal approval and you have accepted it
  • Fixed interest rate loans … have the same repayments over a set period, which gives you certainty for budgeting purposes, however there are often limits on additional repayments you can make and redraw restrictions. There can also be significant ‘break costs’ if you want to pay out the loan before the end of the fixed rate term. If the variable interest rate drops below your fixed rate you have to maintain the fixed rate repayments. 
  • Revert rate … is the interest rate applied to the loan after the fixed rate or any special introductory rate ends. Sometimes the revert rate can be significantly higher than the rate you first pay, so it’s important that you’re aware of this.
  • Interest only repayments  … means that your repayments only cover the monthly interest charge.  Because the principal is not being reduced the total cost of the loan is higher than if your repayments covered part of the principal as well. If you have an investment property you should seek advice from your accountant to decide if this option is best for you.
  • Redraw and offset facilities … redraw refers to the ability to take back additional payments that you have made against your loan, but is subject to your lenders policies … which can change. An offset account is a separate account from your loan account where the lender reduces the interest rate on the principal by the balance of your offset account. If you have an investment property you should seek advice from your accountant about which option is best for you.
  • Lenders Mortgage Insurance (LMI) … Insures the lender against loss if you default on the loan. This is generally paid by the borrower when the Loan to Property Value Ratio (LVR) is over 80%.  This LMI cost and policies vary between lenders. If the property market is going up quicker than you can save, it may be worth the cost.
  • Documents required to support your loan application … this is an overview of the types of information and documents that may be required to support your loan application. However, these policies vary between lenders.
    • Last 2 pay slips for each borrower, plus last Payment Summary if 3 months YTD information not shown on pay slip
      • Employer contact details
    • Last 2 years financials, plus business and personal tax returns for self employed applicants
      • Accountants contact details
    • Last rent statement for each rental property
    • Evidence of any other income you want to be used for servicing
    • Last 6 months bank statements for all loans
    • Last rates and utilities notices for all properties
    • Last 3 months bank savings statement to verify ongoing living expenses, plus evidence of genuine savings
    • Last 3 months credit card and any other loan / lease, statements
    • Contract of sale – signed and dated – if purchasing a property
  •  How do lenders assess your application … credit policies differ between lenders and can change regularly. This is an overview of the types of factors that most lenders consider.
    • Income available to service the loan
      • Net income – salary, bonuses, commissions, rent (usually only 80% of gross rent is used but this can be lower depending on the lender and the postcode)
      • Ongoing expenses – actual living expenses or HEM whichever is greater, other loans, credit cards, HECS
    • Property valuation … the Loan to Property Value Ratio (LVR) is based on the valuation report which is prepared by an independent valuer. Some lenders also have specific policies for certain postcodes, so it is good to get your broker to check the postcode (of property that will be security for the loan) before you lodge an application.
    • Employment history … stability / risks
      • time in industry
      • training and education
      • probation
      • commissions
    • Credit checks … defaults, number of enquiries, some lenders don’t credit score
    • Assessment rate* … this is used by lenders to judge whether you can service the loan. This varies from 6.4% to 8.2%. *(this is not the actual rate used for the repayments you will be asked to make)
    • Interest only (IO) repayment option … this increases the servicing income required, because when payments switch to P&I, the original amount of the principal has to be repaid over a shorter period. Lenders assess servicing based on the highest repayments during the life of the loan, so the IO option will mean your borrowing capacity will be reduced.
    • Lenders Mortgage Insurance (LMI) … Insures the lender against loss if you default on the loan. This is generally paid by the borrower when the Loan to Property Value Ratio (LVR) is over 80%.  This LMI cost and policies vary between lenders. If you have to pay this cost it needs to be factored into your repayments if added to the loan (capitalised) or your funds required for settled if you pay this cost at settlement..
    • Genuine savings – to ensure your are not borrowing the deposit and incurring undisclosed debts.
    • Are you over 50 … if you’re over 50 you may need an exit strategy by age 70 to explain how you will pay out the loan when you retire