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Home loan basics

3 February 2022 | 5 min read

Congratulations! Buying a home is one of life’s most important milestones. But there’s lots to learn when taking out a loan to make sure it’s the right one for you.

At Bendigo, we talk to all sorts of borrowers every single day. Here, we explore their most common questions.

What is a home loan?

A home loan, which is also called a mortgage, allows you to borrow funds from a financial institution to pay for a home. Most people don’t have hundreds of thousands of dollars or more to pay for their home outright. So, borrowers need to ask banks to lend them the money to buy the property, which they typically pay off over a 20 to 30 year period, minus their initial deposit.

How much can I borrow?

Lots of different factor will determine how much you can borrow. You will need to factor in things like your income, the type of property you want to buy and its price, as well as your savings and expenses. It’s also a great idea to factor in things like taking time off to start a family or study and how this may affect your ability to pay down your loan. It’s a good idea to be conservative when estimating how much you can borrow so you don’t over-extend yourself and find it hard to make the repayments down the track.

There are also online calculators that will help you work out how much you can borrow. ASIC’s MoneySmart calculators can help you work out how much you can borrow for a mortgage and also a personal loan.

Which home loan is right for me?

There are many different options when it comes to taking out a home loan. You may wish to take out a basic home loan without many features such as a credit card. Or you may decide you need features such as a an offset or redraw facility and the ability to make extra repayments or repay the loan before the end of its term.

Usually, the more features that come with your loan, the more expensive it is. You can compare and contrast costs and features by checking the loan’s comparison rate, which includes the cost of any extra features, not just the loan’s underlying interest rate.

The loan you choose will depend on your circumstances. For instance, if you receive bonuses you may wish to deposit these funds in an offset facility, to help reduce the amount of interest you pay. The idea is to choose the loan that supports your lifestyle.

What does a mortgage broker do?

A mortgage broker will typically be able to recommend loans from a variety of different lenders. Mortgage brokers make it easy for you to access a wide variety of loans. They also advocate for you with your financial institution and help to manage the loan application process, including ensuring you have all the right documents and paperwork to apply for a loan. They do earn a trailing commission you won’t typically pay if you go direct to a bank, so weigh that up when deciding whether to use a mortgage broker or deal directly with a bank or other financial institution when taking out a loan.

What are the different types of loans?

The way interest is charged on your loan will typically determine its structure. There are three different ways interest can be charged on your loan: through a variable rate, fixed rate or by splitting the loan into fixed and variable components.

  • Variable rate mortgage

The interest rate you pay will rise and fall as the Reserve Bank of Australia’s cash rate rises and falls. These loans also allow you to make extra repayments and typically come with other facilities such as offset account. You may choose a variable rate if you think rates will fall, so the amount you pay reduces with the official cash rate.

  • Fixed rate mortgage

You pay a fixed interest rate for a specific term, typically three years. Then, you can re-negotiate the rate you pay. You may choose to fix your interest rate if you have a view interest rates will rise.

  • Split

Another popular option is to split your loan between fixed and variable. So you pay a fixed rate of interest on part of the loan and a variable rate of interest on the remaining portion of the loan.

What will my repayments be?

Your repayments will depend on a range of different factors, including the size of your loan, the size of your deposit and how often you make repayments. You may find you can pay off your loan sooner if you make repayments every fortnight rather than monthly.

What is a deposit and why do I need one?

A deposit is your contribution to the cost of a house. A deposit secures the house while you organise the rest of the funds through your home loan.

How much do I need to save for my deposit?

The minimum amount for a deposit is 5% of the total purchase price. A 10% deposit is recommended for a first home buyer, comprising 5% for the house deposit and 5% for associated costs, including lenders mortgage insurance (LMI), stamp duty and conveyancing fees. You may not need to pay LMI if you can pay a 20% deposit.

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 of 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 been pre-approved for a home loan, 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? Chat to our lending team for any other questions you might have.

Any advice provided in this article 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.

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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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