Most lenders will approve a property loan 'in principle'. This means that they have worked out what the maximum amount you can borrow is, so you can then use this figure as a guide when searching for homes for sale. Once you make a purchase, the loan is then formally approved.
How to choose a lender and the right loan
Lenders fall under one of two categories - the institutional, which include banks, credit unions and building societies. And the non-institutional, which include vendors and solicitors. As you can imagine, all of them compete for your business. Each will have special packages, different methods of payment and levels of interest rates to entice you to take a loan with them.
It's fortunate then that when it comes to real estate, finding the right property usually takes some time, so you can use this time to research and understand what each of the lenders are offering and how to work out who has the right deal for you.
AFG, Australia’s top independent financial services company, has the widest range of financial services products available from dozens of lenders. They can help you get the best finance deal. And their service is totally free. For a free consultation contact AFG today.
Applying for a loan
When you find a lender with a loan that you like, it's time to start the application process.
For this, you should brace yourself for a million and one questions from the lender, so they can work out your borrowing capacity.
Have the following paperwork ready to make answering these questions a little easier:
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Copies of all current bank account statements
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Proof of share holdings and other assets
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Details of any second income, bonuses, allowances or benefits
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Payslips or letter from employer detailing your salary and length of time working there
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If self-employed, tax agent income statements and income tax returns
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The amount of deposit you have
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If selling your home, copies of exchanged contracts or a solicitor's letter confirming a firm buyer
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If you have decided on a property, bring a photocopy of the front page of the contract of sale
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Details of all credit cards
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Ensure you know your credit history before you apply for a loan
Types of loans
Know what loan you need. The main types are:
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Variable home loans
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Fixed home loans
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Split loans
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Capped rate loans
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Honeymoon loans
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Home equity loans
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Bridging loans
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Variable home loans
A variable home loan is one of the most popular. It means the interest rate varies throughout the term of the loan and is subject to change according to the general economic climate and the official rate set by the reserve bank. This means that you will feel any rate rises - and rate cuts.
Fixed home loans
A fixed home loan means that the interest rate stays the same throughout the term of the loan. This means that any adjustments by the reserve bank are irrelevant, and won't affect you.
Variations of these two loan types include split, capped rate, honeymoon, home equity and bridging loans.
Split loans
Split loans allow you to combine the best of both worlds, and have part of your loan amount at a fixed rate and part at a variable.
Capped rate loans
These are loans with rates that cannot exceed a set percentage for a fixed period of time, but may decrease in that time.
Honeymoon loans
This type of loan sees lower rates for the first 6 to 12 months then reverts to a standard rate and the repayments increase.
Home equity loans
A home equity loan essentially lets you borrow against the equity of your home. It is also seen as a 'revolving line of credit', where all your salary and wages go into it. The advantage is that your loan may be paid off more quickly and cheaply. You also get a credit card to pay for day-to-day expenses, which are then paid off at the end of each month.
Bridging loans
What if you find the perfect home before you can sell your existing one? A bridging loan covers the financial gap while you are trying to sell your old place, but have to act on the new one straight away. This type of finance is often more expensive as there is more risk.
Your lender will want to ensure that the amount you paid for the property matches the approximate market value. Therefore they will have their own valuer assess the property prior to signing off the loan.
Legals