Before trying to get a loan, work out what you can afford each week in loan repayments. A free financial counsellor can support you with this and budgeting. They are available free-of-charge through the Credit and Debt Hotline on 1800 808 488. Other sources of help may include your local neighbourhood centre, community legal centre, charities and church groups. If you need an interpreter, call the Telephone Interpreter Service on 13 14 50.
Also consider expenses including:
The MoneySmart website (managed by the Australian Securities & Investments Commission, ASIC) provides useful information, budget calculators, case studies and tools on credit, home loans and managing your finance.
When you borrow money from a bank (or other credit provider) to buy property, it will hold a mortgage over the property you buy. A mortgage acts as a form of security if you fail to make the repayments. As the property owner, you are the ‘mortgagor’ and the home loan provider is the ‘mortgagee’. If you fail to make your loan repayments, the bank may be able to take possession of the property.
When you mortgage your property, the bank will lodge their interest in the property with NSW Land and Property Information. This means that the mortgage will appear on the property’s title certificate and you cannot sell it without your bank’s consent.
Shop around for a home loan provider (also known as a mortgage provider) as you would for any other product that you buy.
Loan providers offer different interest rates and different features and services with their loans. Doing your homework could save you thousands of dollars in the long term.
You may use a finance broker (also called a mortgage broker) or comparison services to compare home loans and choose a provider.
A finance broker is an agent between you and your home loan provider. They look at your individual situation and may recommend one or more credit products that meet your requirements. This may save you time, and hopefully money, but they may be receiving a commission from the home loan provider. So, there is always the risk that they could recommend a mortgage that isn’t the best one for you.
In some cases, a broker will also ask you to pay a commission. However to charge you a commission they must have a signed a finance broking agreement with you. They are not entitled to a commission unless they obtain the credit on the exact terms specified in the finance broking agreement.
If you decide to use a finance broker or comparison provider, ask questions such as:
It may help to use a free online home loan comparison search tool or service to compare a range of providers.
Before you start looking for a property, you may want to consider applying for ‘pre-approval’ from your home loan provider.
Lenders normally offer ‘conditional’ pre-approval depending on the size of the loan you want and your financial circumstances. This approval indicates that you are eligible to apply for a home loan up to a certain limit. They are often obligation-free so neither you, nor your home loan provider, are committed to a loan contract.
Pre-approval is useful for showing vendors that you are serious about making an offer, and streamlines the process of finalising your finance before making an offer. This reduces the chance of delays in making an offer and you being ‘gazumped’ (see Gazumping in Making an offer).
If you have already received conditional approval from your lender, final approval of the loan application will be granted on certain conditions (eg. a valuation report, providing evidence of assets or providing other documents required by your lender). Your mortgage contract will generally be given to you at this point for your signature and this is often termed seeking ‘unconditional’ approval.
Once these documents are signed, returned and checked by the lender, you and your lender are obliged to follow the terms of the contract.
While you should have your solicitor or conveyancer review your mortgage contract, you should also review it yourself. Before you sign it, be sure it meets all of your needs. You should also make sure you understand the fees the contract says you will be charged. For example, the contract may say you will be charged for cash and cheque deposits to your account. You should especially be aware of what fees you will be charged if you refinance your loan or change a home loan provider.
The National Consumer Credit Protection Act 2009 gives protection to people borrowing money. It requires home loan providers to give you information that is clear and easy to understand. This will help you decide whether you can afford to borrow.
Before you sign a mortgage contract, the home loan provider must give you:
Pre-contractual statements should tell you:
|IMPORTANT: Always read the mortgage contract thoroughly before you sign it. You are not obliged to sign anything on the spot! You may wish to take a copy home to study it, and get legal advice on any terms you are unsure about.|
A comparison rate is a tool to help you identify the true cost of a loan. It is a rate that includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure. For example, a credit product’s advertised interest rate may be 6.49% and its comparison rate 6.75%.
A comparison rate must be included in any advertisement for a home loan that shows an interest rate.
If you don’t have a good credit rating you may not be able to get a home loan. If you have had problems paying off a loan or credit card in the past, your details may be held with a credit reference company.
If a home loan provider rejects your loan application because of your credit record, you may want to check what your record says.
In Australia, there are two main credit reporting agencies where you can request a free copy of your credit report: Veda and Dun & Bradstreet. Check with both agencies since you may have a report with more than one credit reporting agency.
Sometimes when you have trouble borrowing money from a home loan provider, a friend or family member may be willing to guarantee the loan. This will make them a ‘guarantor’ under the law. However, this is a big step and a decision that shouldn’t be taken lightly. Essentially, it will mean that if you don’t pay, they will have to!
Before you take out the loan, your guarantor must be given a copy of the mortgage contract and the document explaining a guarantor’s rights and liabilities. If you stop making payments, the home loan provider will first take action against you. They can usually only take action against the guarantor after they have tried all avenues to get the money from you.
As a general rule, banks only lend up to around 80% of the property’s value (when finalising the loan, your bank will have the property valued by a certified property valuer). However, some banks will allow you to borrow greater than 80% of the property’s value if you take out LMI. This is a one-off payment added to your home loan and used by banks to reduce their risk of loss should you default on your loan. While LMI allows you to purchase a property with a smaller deposit, it does increase your overall loan. Before signing a mortgage contract with LMI, understand how much you are being charged for LMI. You also need to make sure you can afford the repayments on the larger loan
If you decide to take out a home loan where both your name and your partner’s name are on the mortgage contract, then you become a co-borrower. This means that you will both be responsible for the debt. If the payments stop, the home loan provider can choose which one of you to sue for the whole debt. This may depend on:
There is no legal requirement that you and your spouse or partner must both sign a loan contract unless you are co-borrowers.
Vendor financing arrangements may seem simple but have the potential to deprive you of hard-earned savings. Anyone considering vendor finance as a way of purchasing a home should seek expert and independent legal opinion.
Income protection insurance covers you in case you can’t make repayments because of unforeseen circumstances such as unemployment, sickness or injury. The benefits and costs vary so shop around first.
Mortgage providers can’t force you to take out income protection insurance. However, they can insist that you take out insurance for the building and contents. There is no obligation to take out insurance through the insurance arm of the credit provider. Shop around to find the best deal.
If you have selected a property to purchase and you are finalising your finance, your lender will conduct a valuation of the home and land to assess the viability of your mortgage and the asking price. Paying too much for a property can put your equity and the lender’s equity at risk. If there is a large difference between the asking price and the lender valuation, your finance could fall through. This is why it is crucial that you do your research on the property and look at similar recent sales in the area. If the asking price seems unreasonably higher than recent sales of similar properties, you may have difficulty obtaining finance for that purchase price.
Your mortgagee can only change the contract if the contract specifies that changes may be made. Read the contract carefully so that you know what changes may occur.
The mortgagee must generally notify you of interest rate increases. Notice must be given no later than the day on which the increase takes effect.
Notice must be 20 days if:
If the mortgagee does not notify you individually about the change, the mortgagee must publish the change in a newspaper, which has state-wide circulation and will confirm the information on your next statement.
If you can’t meet your repayment obligations due to temporary unemployment, sickness or other reasonable cause, you can apply to the mortgage provider to vary your payments. If you can’t reach an agreement contact the Australian Securities & Investments Commission (ASIC) at www.moneysmart.gov.au or phone 1300 300 630 for help.