Lending 101 Guide

If you’re new to home buying, then it may all feel a bit intimidating. Relax! Here’s a quick summary to put you in the picture.

Let’s start by saying that everyone who’s now a homeowner was once a newbie, just like you. So remember, if they can get there, so can you!

We’d also like to say that Ink Wealth has been helping people get into home ownership for donkey’s years, so you can throw any question you like at us. Curly ones, dumb ones (but hey, there’s no such thing as those). Whatever variety. Feel free to hurl away!

  1. Starting out: If you’re yet to go house shopping, then talk to us first. We can help you figure out if you’re ready to apply for a loan, and if so, how much you can expect to be able to borrow. This is called a ‘pre-approval’ loan application. and it gives you the confidence to negotiate on a property knowing how much the bank has agreed to lend you. As a finance broker, we deal with dozens of Australia’s leading lenders, so we can find the loan that’s right for you. We can also help you identify all the additional costs involved in buying a property so you’re as well prepared as possible.

  2. Finding your property: Once you’ve found the home you’d like to buy and your offer has been accepted, then it’s time to step up the process. You’ll want to review the contract of sale with your solicitor or conveyancer, and arrange pest and building inspections. We will now order the bank valuation and proceed through to formal loan approval of your loan, which takes about 5 days. (This is why it’s important to have already gained pre-approval, as it makes the formal loan approval process quicker.) Whether you buy at auction or privately, you are usually required to pay a 10% deposit to exchange contracts, which takes the property off the market.

  3. Fixed/variable/both: With your home loan, you can usually choose between a variable home loan (where your interest rate goes up and down in line with market interest rates) or fixed rates (where you peg your rate at a fixed level). Some people choose to nominate fixed rates for a certain number of years (say 1, 3, 5, 7 or 10 years), and it’s also possible to have a mixture of fixed and variable rates. We can chat with you about the pros and cons of each in relation to your circumstances.

  4. What your lender will look at: The lending institution is obliged to verify that you will be in a position to meet loan repayments. They will consider things like your employment history and stability of income. In a perfect scenario, you (and your partner if you are buying with someone else) will have been with the same employer for at least 2 years, but there are extenuating circumstances. If you’re self-employed, your lender will look at the income you declared to the tax office over the past 2 years and take the lower of the two, and add 20%. Lenders will expect to see that you have accumulated genuine savings of at least 5% of the value of the property you are hoping to purchase – and that these have been in place for at least 3 months. (One-off lump sum deposits or gifts are unlikely to count towards this)In their decision, your lender will also take into account the property you are purchasing – mainly from the point of view of how easily it would be to resell it if you were to default. The larger the pool of prospective purchasers, the more favourably the lending institution will regard your loan application.How’s your credit history? If you have had any trouble in the past with credit – perhaps you’ve had an application declined, or you’ve failed to pay a bill – this can show up in your credit rating. Lending institutions prefer to deal with people with a clean record, but if you’ve had problems, it’s best to be upfront about it. Sometimes there’s a reasonable explanation, but since your credit history is one of the first things the lending institutions will be checking, it will look worse if you try to cover it up.

    Like in the last point, it’s impossible to overemphasise the importance of being honest in your loan application. Lenders look poorly on prospective borrowers who fail to disclose something material in their application, or gloss over the truth (trying to represent a casual job as a permanent one for example).

  5. Lenders Mortgage Insurance: Your lending institution will take a worst-case-scenario view – and factor in for the possibility of you defaulting on your loan. And while the home you buy is security on the loan, the lending institution will want to make allowance for the chance that the property you are purchasing declines in value, so they can protect themselves in the event that they need to sell it. This is where Lenders Mortgage Insurance (LMI) comes in. If you need to borrow more than 80% of the value of the property, in most cases you are likely to be required to take out LMI. The policy is held by the lending institution, with the premium costs passed on to you, the borrower.

  6. Once your loan’s approved: Happy days! You are now ready to complete the purchase, and your loan is paid to the vendor upon settlement. Stamp duty is paid on settlement, although in some states in Australia, first home buyers may be able to gain a full or partial exemption. Your Ink Wealth Advisor can help figure out if you are eligible for this.

Bottom line, as a broker, we’re very familiar with the criteria required by different lenders. This means we can recommend which loan you should apply for to boost the likelihood of getting a green light.

We’d be delighted to chat with you about any of this. Give us a call to find out more.