The information here is an introduction designed to help you out. However, most of my advice has been passed on by answering my client’s questions on the phone or in email so don’t be afraid to contact me and ask away! Its usually better that way since its much more personal and I can understand what you are trying to achieve, therefore providing you with specific and relevant information rather than general info!
Determine your contribution
How much deposit (or how much savings) do I really need?
This question can be approached from a number of perspectives but let’s focus on the relationship of the deposit required to the resulting costs and impacts on a mortgage application and the quality loan product you can access as a result.
The amount of deposit you can contribute (together with your borrowing ability and work experience) will determine the diversity of loan options available to you in the Australian mortgage market.
First of all, you need to allow for 5% of the property purchase price to pay for property purchase costs such as stamp duty and other government fees, legal fees, bank fees, and adjustments for rates and taxes. This rough rule of thumb will usually result in money leftover, which you will no doubt need for such things as moving costs.
Now, back to our discussion about deposit and its relationship to the mortgage products available. Separate and aside from purchase costs, do you have available at least 20% of the purchase price to use as a deposit? If you do, then you are in best position to gain access to most lending options available including those with the best rates, assuming you can meet the lender’s credit assessment requirements – and you can avoid mortgage insurance fees as well.
Perhaps you have around 10% deposit? In this case fewer lending options will be available and you will incur a once-only mortgage insurance fee (which can be added to the loan with some lenders). This cost can be avoided if you have sufficient equity in an existing property. Talk to your mortgage broker or contact Aussie Finance and Property to understand more. Mortgage Insurance generally applies to all home or investment property loans in Australia if you borrow greater than 80% of the purchase price – you can read more about Mortgage Insurance here
The benefit of mortgage insurance is that you can still borrow to buy your property with less deposit required – unlike in many countries where loans for property are simply not available beyond 70% or 80% of the property purchase price.
Have you got 5% deposit available? You can borrow up to 95% generally from an Australian lender (this situation will require at least one Australian citizen or permanent resident on application) however you will pay a higher rate of mortgage insurance and much fewer lending options will be available to you.
These days different loan ratios mean different interest rate discounts! This is the loan amount divided by the estimated purchase price. It will affect the overall costs of your loan, and the types of loans and discounts to which you will be entitled.
So you may have worked out that having 20% deposit plus 5% for costs is the ideal place to be. Of course this realisation doesn’t help when the place you want to invest in (or have fallen in love with!) costs so much that your savings and cash available won’t reach this much!
As described above, you may have equity in another property, or you may have another investment that you could pledge to the lender or have them manage for you, in order to meet the 80% objective. There is also potentially the mortgage insurance strategy to consider, to enable you to purchase above 80% of the property value. Otherwise you may have to consider a gift of funds or a loan if one is available from parents or family, to top-up your deposit, or find a property that costs less – perhaps in a different area.
Understanding Mortgage types and features. Which is best for me?
Familiarise and inform yourself about the product types available and how they meet your requirements. Ask questions here. See the FAQ’s in this site.
Contemplate what effect a fixed rate mortgage will have on your budget and what effect a variable rate one will have. Consider if you want to have both a variable rate and a fixed rate mortgage (you can split the loan).
If the property is for investment purpose what is the likely effect of a tenant vacancy for any period of time on the mortgage? How do you propose to deal with this scenario? Your answer can guide your choice of the right loan product type.
What’s an offset account and do I need one?
Should I buy the property in a company or trust name for tax reasons? (investment purpose loans)
Most importantly try and think about the changes to your family’s income and expenses you might expect over the next 5 years… these anticipated changes should help guide you and determine what loan structure and features are best.
What are my likely monthly repayments with my proposed loan amount and product type, and can I afford them? This is arguably your most important consideration.
For expatriates; when do I plan to come home to Australia, and how will that impact the mortgage and my tax situation?
Talking about these issues and plans together, could provide you with the greatest help you will need in working out which loan structure and loan types are ultimately going to be best for you.
Requesting a Preapproval
Why do it?
Assuming you don’t have the full purchase price available right now in cash, to pay for a property, you will most likely be contemplating a loan preapproval.
What is it? A loan preapproval is the idea of having the “go-ahead” from a lender who will support you with finance, when you have found your property. This is a way to have greater confidence when bidding on your desired property, whilst recognising you can’t go beyond the limits a lender says you are capable of borrowing.
So you ask a lender to look over your financial situation in advance, and give you the all-clear to borrow up to a certain amount. One very important thing to remember at this stage: what a lender says you could borrow, and what you know to be affordable, given your own budget and spending habits, are two very different things. Stick with a loan that reflects what you feel you could afford to repay each month, and don’t be seduced if the bank says you could borrow a much higher amount than you could have imagined. Take advice on this if you need it.
Preapprovals are especially desirable when the property is going to auction, since you are committed to buy when the hammer falls – hence you want to know with greater certainty a lender is going to support that purchase. Buying via private treaty, where an auction is not scheduled, has a little more flexibility since you generally have time to gain full approval from a lender, before you have to sign a sales contract, in Australia.
Moving from Pre-approval to full approval and the purchase.
Once you’ve obtained a loan pre-approval, now is the best time to start property-shopping, knowing your limits and flexibility available for negotiations.
For each property you are contemplating making an offer on, have your conveyancer review the sales contract and advise you of any issues to consider.
Once you have an offer accepted on your property of choice (that’s a whole different process!) you will need to collate a few additional documents and perhaps some updated ones, for your mortgage broker to deal with the bank and request full approval for you.
The bank will want to see a copy of the vendor’s contract of sale, and (especially if more than one month has passed since the preapproval) updated payslips and bank statements showing your latest savings. Your broker or lender will organise a property valuation at this point, and it’s important to know the lender will only finance a loan amount based upon the lower of the purchase price or property valuation.
Your broker will advise the valuation outcome and hopefully very shortly thereafter a full approval will be granted by the lender.
Full approval to settlement
Once you have been ‘fully approved’, this is the safest and most appropriate time to agree to pay the deposit on the property! Your finance is in place and a lender has agreed to finance your specific property purchase (rather than a general loan amount in principle which is in essence a preapproval with conditions). You can deal with the vendor and conveyancer with confidence your loan will settle and you will soon get your property.
At this point the lender prepares a loan offer and legal documents including the mortgage document. You will need to sign and return these documents promptly to enable the lender to setup your loan facility. The lender will need at least a week usually to prepare for settlement after you have sent the loan offer back signed. If you are unsure about anything in these documents you should consider obtaining legal advice, to guide you and explain the meaning of the contract you are entering with the lender.
The actual settlement date and time is agreed between the vendor’s solicitor or conveyancer, your conveyancer and the bank’s solicitor. In something like eight out of ten cases it will be the date agreed on your original Contract of sale, however it can vary. Probably 9 times out of 10 settlement takes place on the pre-agreed date or within 2 or 3 days prior or after the agreed date.
The actual settlement day process simply involves your conveyancer going to meet with the vendor’s solicitor and the bank’s solicitor to exchange cheques and paperwork for the mortgage. The conveyancer will usually advise you as soon as it is complete. At this point your mortgage is officially in place, the property is yours and you are free to collect the keys from the agent!
For further information and planning your personal mortgage process, please contact email@example.com