Finding the right mortgage is an essential part of buying your dream property and it may require some legwork. Here are some of the key steps.
Finding a lender:
- Approach Your Own Bank – They will have a portfolio of products designed to fit the varying needs of their customer base. They will know your savings history and you should feel comfortable in dealing with them. However, they might not offer the best or most competitive choices. A bank loans officer will only try to sell you their own products, so don’t expect advice on alternatives.
- Mortgage Brokers – More than half of the loans in Australia are arranged by brokers who can provide advice on the most suitable loan for your circumstances. They will assess your financial capacity, understand your long-term aspirations for wealth and give you appropriate lending options. Banks and other lenders pay commissions for the loans they arrange but on the plus side, you don’t pay for their service.
Once you have found an institution or broker to source your loan, a number of steps follow:
- Calculating the loan amount – A broker or lender must calculate the so-called maximum loan-to-value ratio (LVR), which determines the maximum amount you can borrow based on your repayment capacity. Ideally, you’ll want your deposit to be 20 per cent of that sum, otherwise, you’ll have to pay lender’s mortgage insurance (LMI), which covers their risk for lending money to you.
- Type of property – Banks will want assurances around the type of property you intend to purchase, as this will be used as collateral against a loan. If you default, then they are left with a property to sell. When you find a home and make an offer, a lender will value it independently before releasing funds.
- Target suburbs – Lenders are smart. They know the suburbs that are booming and the ones suffering from oversupply. Be up-front about where you want to live. Banks will black-ball postcodes where they predict prices will fall. The issue here is: their collateral – your home – might not retain sufficient value to cover the loan.
- Purpose of the purchase – You must state whether you intend to live in the property or rent it out. Different mortgage rates apply to each of these scenarios. Rental properties require different insurance arrangements, too. If you rent the property down the track, inform your bank as this can be a condition of the loan.
- Type of Title – No lender will release funds unless the property has a freehold or strata title. Any easements or encumbrances will prevent approval as no lender wants to deal with these if they have to sell your property to get their money back in the event you default.
- Style of property – There is no single housing market in Australia. It’s full of micro-markets determined by the area and style of home. A lender will want to know whether you intend to buy an apartment, townhouse or detached house. Each of these hold different market values depending on their popularity and supply. For example, a bank might not look kindly on your buying a unit in a suburb where 3,000 apartments are about to be released. Do your research and talk to your lender in advance to avoid disappointment or a last-minute funding drama.
- Size Matters – Banks will rarely issue loans for units less than 50 square meters. So, don’t waste your time wondering around tiny loft apartments because you’ll never get the money approved. Conversely, in regional areas, lenders shy away from land sizes of more than 10 hectares.
- Pre-Approval – You can start looking for a home with conviction once you receive preapproval. It can take six weeks or more for a lender to approve your application. Once they are satisfied you have met all their criteria, you will be offered pre-approval. This is a certificate that guarantees access to an agreed loan amount. Agents will often ask if you have pre-approval. Be aware that some approvals come with conditions. These conditions must be met by you before any funds are released. Don’t get caught out by a conditional pre-approval.
- Making a Bid – With a loan approved, you can bid or negotiate for a property. Be aware that any bid you place at auction is legally binding.
- Putting down a deposit – You will place your deposit with an agent if your offer is successful. Your conveyancer or solicitor will ensure this money goes into an interest-bearing trust account and they will inform the lender of the transaction.
- Lender’s Valuation – An independent valuation of the property will commence on behalf of the lender to ensure you intend paying market value for the property. If they find you have overpaid, they may refuse to release the funds.
- Settlement and Release of Funds – At least another six weeks is likely to go by while your solicitor or conveyancer gets all the paperwork in order and settles up taxes and duties. Once complete, they will notify your lender of the settlement date and request the release of funds to complete the transaction.