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Financial planningPersonal home

Home loan 101

1 May 2019 | 7 min read
Thinking about buying a house or curious to see how it all works? Here is a one-stop shop for everything you need to know about purchasing a property.

If you’ve been searching for information on home loans and how to buy a house, you’ve probably noticed that there’s some things you ‘kind of’ already know but some things you don’t.

We’ve spoken to one of our expert lenders to help answer your most asked questions - from deposits to home loans and how you actually pay for it.

Let’s start at the very beginning.

What is a home loan?

A home loan is a loan you take out from a bank to purchase a house. They are typically for 80% - 92% of the total purchase price of the house, depending on how much of a deposit you have saved. Home loans can be taken out for up to a 30-year term.

Deposit

A deposit is the upfront amount you pay for a house. This is usually around 5% to 20% of the total house price. If the house price is $400,000 and you want to put down a 20% deposit, you will need $80,000.

How can I find out how much I can borrow for a home loan?

There are online calculators available that can give you a rough estimation of your borrowing power. The calculators are based on what savings you have, what your income is and what your expenses are.

When inputting your expenses, it’s important to include all your regular payments - including gym memberships and streaming services. You can learn more about what to include in our handy guide here.

How can I find out what home loan is best for me?

There are a couple of options. You can call us and speak over the phone, or head into a branch and talk about it face to face.

A benefit of going into a branch is the opportunity to discuss your options, explore the potential of a better rate and ask any questions.

Many interest rates online are what are called ‘carded rates’ – the standard rate being advertised. Much like if you have a family plan to bundle home and internet, if you have savings accounts or a credit card opened, you might be able to get a more competitive rate. 

What is a mortgage broker?

A mortgage broker acts on behalf of the customer to talk to banks and secure home loan rates. So, essentially, they are a middleperson.

Not all mortgage brokers act independently, in fact quite a lot have ties with certain banks, so if this is a path you want to go down be sure to do your research on what value you are getting from the arrangement.

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What are the different kinds of home loans?

There are two main types of home loans: variable and fixed rate. These both refer to the structure of interest payable on your loan.

Variable

A Variable home loan means that your interest rate will go up and down with the market. Interest rates are set by the Reserve Bank and they affect everyone with a variable home loan. If the Reserve Bank announces a rate increase your repayments may go up, and if they announce a decrease your repayments may go down. The main benefit of a variable home loan is its flexibility. You can make extra repayments and have a full offset account linked to it, without any fees or penalties. 

Fixed Rate

A common misconception of the fixed rate loan is that you’re locked in to the same rate for the life of your loan. Don’t fret – that’s far from the truth. In a Fixed Rate home loan, you lock in an interest rate with your bank for anywhere between 1-5 years, and then set a new interest rate at the end of that term.

Having a fixed interest rate means there is less flexibility in your repayments, you pay the same amount ever month and there may be restrictions on extra repayments. However, having a regular repayment rate can really work to your benefit.

A fixed rate home loan gives you peace of mind because you’ll know exactly how much you need to pay for the term you’ve locked in for.

If you can’t decide between the two, it’s possible to get what’s called a split loan – so you can opt for a fixed rate for a portion of your loan, and a variable rate for the remainder.

How do I use my home loan to purchase the house, and when does that happen?

This part might come as a surprise - you won't ever see the money from your home loan. Part of the process of purchasing a house is appointing a conveyancer to act on your behalf. Similar to a solicitor, the conveyancer will liaise with the bank and the real estate agent, to manage the payment of funds.

The payment to the purchaser is made on settlement date and on that day you pay everything: stamp duty, lender’s mortgage insurance and total value of the house.

You can negotiate settlement date with the real estate agent where dates can range anywhere from a few weeks up to 120 days from the date of purchase.

How often do I pay home loan repayments and how much are they?

You can choose between fortnightly and monthly repayments and interest is calculated daily.

You can still have flexibility with how often you make repayments, regardless of frequency. If you want to pay portions weekly or even daily - you can, just long as you meet the minimum payment by the due date as set out in the letter of offer you will receive.

Your repayment amount is defined by considering a few different factors including your total loan amount, interest rate and the term of the loan.

For example, someone who has taken out a 10-year, $500,000 home loan will have higher repayments than someone who opted for a 30-year loan of the same amount.

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What is a deposit and why do I need one?

A deposit is your personal contribution to the purchase of a house. It’s what we call your ‘blood sweat and tears’ deposit, because it’s the investment into the property you’ve made with your own money.

A deposit secures you the house while you organise the rest of the funds through your home loan.

How much of a deposit do I need?

The absolute minimum amount you can have for a deposit is 5% of the total purchase price.

A 10% deposit is recommended for a first home owner - 5% for the house and 5% for associated costs, including mortgage lenders insurance, stamp duty and conveyancer fees.

If you can supply a 20% deposit, you may not need to pay Mortgage Lenders Insurance (MLI).

When do I pay a deposit?

It differs slightly, depending on how you purchase the house.

If you purchase by offer

After you put your offer in, you will sign a contract of sale and pay the real estate agent a holding deposit typically around $1,000. You can negotiate the exact amount of the holding deposit with the real estate agent. This holding deposit is to confirm your interest and ensure they won’t show the house to anyone else.

The remainder of your deposit is payable to the seller once you have received formal approval from that bank for your home loan. You typically have 10 days to get this together.If you have pre-qualified for a home loan, also referred to as being ‘pre-approved’, you will have this organised in time.If you’ve only saved a 5% deposit, you will need to negotiate with the agent to pay a 5% deposit after the 10 days, with the rest to be paid at settlement.

If you purchase at Auction

If you purchase the house at auction, it’s mostly the same as by offer, except you pay the full deposit on the day of the auction. Read our guide here on how to prepare to purchase at auction

How do I pay a deposit?

The deposit is paid by a regular EFT transfer, which you can do through internet banking, over the phone or in person at a branch. The real estate agent will give you their BSB and account number, and you will pay it per the terms on your contract of sale.

Are deposits refundable?

Usually, you put a deposit down ‘subject to finance’, which is also called conditional approval. If your home loan is declined and you’re no longer able to purchase the house, you will get your deposit back.

However, if you put an offer in at an auction and you are declined for finance, you will lose your deposit. It’s important to have pre-approval to ensure you can come up with the money in time.

Need more information? Give our lending team a call here for any other questions you might have. 

Note: This article contains general advice only. Readers should seek a trusted professional’s advice on financial matters.

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Bendigo and Adelaide Bank Limited, ABN 11 068 049 178 AFSL / Australian Credit Licence 237879. Any advice provided on this website is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should consider whether it is appropriate for your situation. Please read the applicable Disclosure Documents before acquiring any product described on this website. Please also review our Financial Services Guide (FSG) before accessing information on this website. Information on this page can change without notice to you.

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