If you’re embarking on your first property purchase, congratulations! We’ve pulled together this general information on everything to know about home loans. First-time buyer mortgages can feel like a minefield of information, terms and conditions. So, we’ve provided some all-around basics to give you a solid footing.
If you want to know more or speak to an ethical mortgage lender, contact ActOn Wealth today. As a boutique firm of independent mortgage brokers, we’ve provided the best borrowing advice to hundreds of Australians. Nothing gives us more satisfaction than helping them secure the right home loan and get off to a great start.
Mortgage Explained
A mortgage is a loan used to purchase real estate. The person borrowing agrees to a series of terms and conditions to repay the lender over time. Until the loan is paid back in full, the lender uses the real estate as collateral to secure the agreement.
How Do Home Loans Work?
Very few of us have 100% of the funds to purchase a property or piece of land outright. A mortgage enables you to make this significant purchase, albeit with someone else’s funds and your deposit. In return, you pay interest over a set period until the loan is paid.
The money paid each time (usually weekly, fortnightly or monthly) typically remains the same, although the debt slowly reduces. This is referred to as a fully amortising mortgage. Standard terms are 15 to 30 years although there are shorter and longer options. Some - but not all - home loans will allow you to pay off more than the necessary regular amount to pay the full mortgage sooner rather than later.
We mentioned the lender uses the property as security. If the borrower fails to make repayments, known as a default on mortgage, the lender may foreclose and take possession of the real estate.
How Does Mortgage Interest Work?
Australian mortgage interest is usually calculated daily and charged to the loan account monthly. The interest charged depends on the loan balance and the relevant interest rate linked to the loan.
Types of Mortgage Loans
Several different types of mortgages are available in Australia.
Variable Rates Mortgage
A variable rate mortgage is Australia's most common home loan type. Interest rates fluctuate when the Reserve Bank of Australia (RBA) changes the official cash rate. This means the amount of interest you repay on your loan will increase or decrease per interest rate changes. That’s great when interest rates are low, but can be challenging if they soar. Indeed, even a slight increase will affect a mortgage repayment.
Fixed Rate Mortgages
A fixed-rate mortgage means you are locked into a specific interest rate for a set period (typically from one to five years). It doesn’t matter what rulings the RBA makes over this set time - your loan repayment amount remains unchanged. That can be positive for people who need secure payment plans in place. However, it can be frustrating if mortgage interest rates dip - and remain low - for much of this period.
Split Rate Mortgages
This is a little like the financial Goldilocks—it tries to meet somewhere in the middle by dividing the loan into fixed and variable interest. This type of loan helps borrowers offset some of the risk and find more flexibility.
Interest-Only Mortgages
Think of a home loan as a pie. A large portion of the pie is the property's value (the ‘principal’), and a significant slice is the interest owing on the loan. Ultimately, to own the property, you need to pay the full pie - the cost of the property and the interest. However, you can opt to only pay the interest for some time. That proposition can be helpful for investors who need to maintain a strong cashflow. However, eventually you do need to start paying the principal.
Principal and Interest Mortgage
This involves the borrower making regular payments to both parts of the pie - the principal and the interest. Over time, the principal you have repaid increases (you’ve paid back more of the pie), whilst the interest decreases. So you can pay off your loan gradually and build equity.
Low Deposit Mortgage
As property prices increase, so does the home loan deposit borrowers are expected to cover upfront. However, if you don’t have the preferred deposit (usually 20% of the total price of the real estate), you can apply for this type of mortgage, also known as a high loan-to-value ratio (LVR) loan. In this scenario, the lender assumes a greater risk and therefore the borrower must take out Lenders Mortgage Insurance, or LMI.
Reverse Mortgage
Typically available to older homeowners, a reverse mortgage enables you to borrow against your existing home's equity. There is no need to make regular mortgage repayments; the loan is repaid when the property sells or the borrower passes away.
Mortgage Calculator
ActOn Wealth’s online mortgage calculator is the fastest way to compare mortgages. Simply complete the fields and press enter to learn the total cost of the interest payable and the estimated repayment amount.
The Mortgage Process
One of the first things most first-time buyers ask us is, “How does a mortgage work?” There are a lot more details to this journey, but we’ll keep things to a general overview here. Our knowledgeable mortgage brokers can fully step you through the mortgage process.
Application Process—You apply to a lender who assesses your financial status (income, expenses, assets, debts, credit history) and determines your eligibility.
Loan Approval—If the lender approves the application, they will offer you a loan amount with specific terms and conditions. You must understand all the information they provide before you proceed.
Deposit—You must pay the deposit in full, typically 20% of the total purchase price. If you don't have this amount, you must apply for lender's mortgage insurance.
Property Valuation—The lender will value the property to ensure it adequately reflects the loan amount. They may ask to make a physical inspection and review the title and various other legal documents.
Loan Settlement—Following loan approval and all conditions being met, the lender proceeds to settlement. They will transfer the loan funds to the seller, complete the legal documentation, and register the mortgage against the property title.
Repayments—Now the title has been transferred to you, loan repayments commence.
Documents Required For a Mortgage Loan
Let’s not mince words - this process involves a lot of paperwork! The following is not a complete list, but it gives you a good idea of the most relevant documents you need:
Proof of identification—Typically your passport, Australian driver’s license, or government-issued ID.
Proof of income—Including payslips, tax returns, a letter from your employer confirming your title, salary, length of employment and whether you are full or part-time.
Proof of assets—Any assets demonstrating your financial stability and ability to provide security, including bank statements, property valuations, shares and investments.
Proof of liabilities—Loan statements, rental agreements, child support payments and any other financial obligations you must continue to meet.
Savings history—You may be asked to prove your ability to save and be financially responsible.
Credit history—Lenders will run a credit check to determine your creditworthiness.
Property details—Provide the purchase contract or vendor statement if you've found the property.
Meet an ActOn Wealth Mortgage Broker
As you can see from this initial introduction, there is a lot to understand about home loans. Not to worry—that’s what we’re here for!
We have some of the best mortgage brokers in Melbourne who can provide the right loan advice for you.
We’re fully qualified financial planners, giving us a broader appreciation of your financial story. Understanding the bigger picture can help you in many other ways.
As a boutique non-aligned financial planning firm, we’re not tied to products. Our impartial recommendations are in your best interests, not ours.
Mortgage FAQ
What is a mortgage?
It is a type of loan used to buy a house or property.
How long does it take for mortgage approval?
The process can take anywhere from a few days to several weeks and depends on many variables, including the application complexity, borrower responsiveness, how many other applications are in play, etc.
What is a reverse mortgage?
It helps ageing homeowners (60 years+) access the equity in their homes without needing to sell.
What is an offset account?
This type of account links to a home loan and helps reduce (or offset) the outstanding loan balance. The higher the offset account balance, the lower the mortgage interest. For example, if you owe $300K on your home loan but have $50K in your offset account, interest is calculated on $250K ($300K - $50K).
Can you salary sacrifice your mortgage in Australia?
This depends on your employer (some industries allow this).
Can I get a mortgage without a deposit?
Most lenders like to see a borrower with a deposit of at least 20% of the real estate value. When that’s not possible, the borrower can take out a loan but will be forced to pay Lenders Mortgage Insurance. However, you must have at least some savings available for a deposit.
Can stamp duty be added to a mortgage?
Stamp duty is a government tax and cannot be financed through a home loan. However, you may be able to borrow additional funds from the lender as part of the ‘borrowing costs’.
Please note: The information provided in this blog post is for general informational purposes only and is not intended to be specific financial advice. Each individual's financial situation is unique, and you should seek advice from a qualified professional tailored to your personal circumstances before making any financial decisions. ActOn Wealth does not assume any liability for reliance on the information provided herein.