Q&A: Answering some of the questions we hear the most
There’s a lot to know about loans, especially if you’re taking one out for the first time. So let’s look at some of the common questions, which hopefully will be some of your own.
How much can I borrow?
The answer to this one is ‘Depends’! It differs from lender to lender and can vary quite a bit depending on their criteria. When asking how much you can borrow, you need to consider how much you can afford to pay back, because this is what a lender bases their decision on. They will look at factors such as your assets, your income, your savings, your deposit and the value of the property to ascertain whether you are a good risk to pay back a loan.
How much deposit do I need?
Again – depends! It depends on how much you want to borrow. If you’ve got a fair chunk of the deposit already saved, your mortgage broker may negotiate a lower interest rate for you. Generally, most banks want 3%-5% ‘genuine savings’ – that’s regular savings in your bank account for at least three months.
You should aim to have at least a 20% deposit when applying for a home loan, otherwise your lender may require Lenders Mortgage Insurance (LMI) to be included with the loan. This is insurance that covers them if you default on your loan and it comes out of your pocket not theirs, so aim to avoid it if possible.
What’s the length of a mortgage?
How long is a piece of string? The most common length is 30 years, however the shorter your loan period, the higher the loan repayments.
How is interest calculated?
Your bank will take the outstanding loan amount at the end of each business day and multiply it by the interest rate that applies to your loan, then divide that amount by 365 days (or 366 in a leap year). It will then charge the interest to you monthly.
Why do I need a conveyancer or solicitor?
Their job is pretty important and includes:
- Checking the contract and certificate of title to make sure your name is against the right property.
- Preparing the paperwork for the property transfer.
- Liaising with your lender and the seller’s conveyancer to oversee the rest of your payment for the property.
- Checking the seller has paid all rates and taxes.
- Lodging the documents to ensure the property is officially changed from the seller to your name - the buyer.
What types of loans are there?
There are a wide variety of different loans, with the major types of home loans being;
- Variable rate – The interest rate varies over the life of the loan. If interest rates rise, you pay more, and vice versa.
- Fixed rate loan – This is the opposite of a variable rate loan. Your interest rate and repayments stay the same, no matter what. No surprises.
- Split loan – You’re able to fix part of your loan, and leave the rest variable. It’s like the best of both worlds.
- Packaged loan – Professional packages offer discounts on standard variable and fixed rates, the waiving of fees, and in some cases, great deals on other products from the same lender.
- Low-doc loan – a higher interest loan for self-employed people with limited proof of income.
- Introductory rate loan – a loan offering a low interest rate for a short period, after which it become the standard variable rate.
- Bridging loan - a short term loan to pay for a new property before you have sold your existing property.
- Line of credit loan – allows you to draw against your loan balance up to a certain credit limit.