How to get your property loan green light
You’ve either been saving for a while and are now ready to think seriously about buying a property, or you’ve had your own property for a while and are ready to use the equity for another purchase. Things are changing quickly in the finance market so we have outlined a summary of the current process for getting the loan green light.
The short version of the loan process is as follows:
- Select your broker
- Initial meeting
- Coordinate your materials
- Confirmation of budget or pre-approval
Life would be wonderful if everything could be completed at dot point level, but the reality is there’s a little more detail required.
The loan process – summarised
Speak with a mortgage broker
To discover your eligibility for a property loan, the best place to start is to speak with a mortgage broker. There are many benefits to using a mortgage broker:
- In most cases, the services of a broker are free to their clients as the banks pay the broker a fee when a loan is approved.
- They have access to a wide range of major banks and lenders, and specialist lenders, which can be helpful if you do not quite fit into standard policies.
- You will get a fast and easy approval compared to going to the bank directly because the broker will handle the application process from start to finish.
- Mortgage brokers have strong negotiating power to get tough loans approved and to negotiate sharp interest rate discounts on your behalf.
This is the first contact you will have with your mortgage broker. This stage is usually used to discuss your situation, your needs and objectives behind getting a property loan.
At the end of this discussion, the broker will determine if you’re eligible for a home loan. It’s also your opportunity to decide if the broker is someone you want to work with through the loan process.
Documents you will need
Throughout the application process, you’ll usually be notified of a list of documents you’ll be required to supply. These documents will include the following:
- Payslips: These must be recent and when multiple payslips are required, they must be consecutive. They should clearly show employer name, your name and salary.
- Account statements: These must show account numbers, balance, limit and transactions for the period specified.
- Liabilities and Expenses documentation: Includes statements for car loans, other mortgages or credit cards.
- Asset documents: These documents can include bank statements or rates notices to show your savings record.
- Contract of Sale: Send through the details of the property you wish to buy and the signature pages. There’s no need to send through the entire contract.
- Certified Identity Documents: This must show the certifier’s details, document number and date of issue. If you’re a non-resident or Australian expat then Australian consular staff are usually the best option for your IDs to be certified. Check the lenders requirements closely.
- If your name has changed due to marriage or divorce, please provide a marriage certificate or other verifications. Statutory declarations will suffice.
Returning your application and documents
Once you have selected your broker, you will be asked to finalise an our short application form. This should be submitted with supporting documents such as your ID, pay slips and bank statements.
By providing all supporting documents in one go, it allows your broker to give you a quick and accurate assessment.
After your application and supporting documents are presented to the broker, they will be able to complete a preliminary assessment of your situation. The preliminary assessment is a very detailed process where any possible problems from a lending point of view are identified.
In addition your borrowing capacity or borrowing power will be calculated. Your broker will then assess which lenders can assist and compare the most suitable loans at the lowest interest rates.
After the preliminary assessment, the broker will present two or three loan recommendations for you to choose from.
Submit to a lender
Once you have chosen the most suitable loan for you, your broker will prepare to submit your application to the lender. You will be asked to provide any final documents and to sign the lender’s privacy form. While the broker waits for these documents, your application will be prepared and uploaded into the lender’s system or application portal.
Your broker will highlight the strengths of your application and present it so it suits the way that the particular lender will assess the loan. Once your broker has everything they need, they submit the application to the lender’s system and email your supporting documents to the lender.
What are the main loan decisions I will need to make?
Fixed vs Variable Home Loans: Advantages and Disadvantages
There is always a great deal of debate in the media around fixed versus variable home loans, so how do you know which to choose?
There has been quite a range of changes to the official cash rate throughout the past 12 months, but with or without changes in the official cash rate, variable and fixed home loan rates have been on the move for years. And while it’s too early to predict what home loan rates will do in next 12 months, borrowers remain quite interested in fixed rates at the moment.
It’s not altogether surprising. Currently, on Canstar’s database (as at 9 November 2019) the average standard variable home loan rate for owner occupiers is 4.42% p.a., while the average 3-year fixed home loan rate is 4.10% p.a..
So should you choose a fixed or variable home loan? No matter what the interest rates are doing, a fixed rate home loan will not be for everyone. It’s important to think about fixed vs variable rate home loans and the pros and cons of fixing your home loan.
Advantage of a fixed rate home loan
The main advantage of a fixed rate loan is that it gives you cash-flow certainty. That is, you know exactly how much your loan repayment will be over the fixed term period. When you are a new homeowner or are setting up a business, this certainty can give you great peace of mind.
Disadvantage of a fixed rate home loan
The main disadvantages of fixed rate home loans are that fixed term loans tend to be inflexible – and can be expensive if you break the contract. You also miss out on the benefits of any interest rate decreases over the timeframe of your fixed term.
Remember that as always, conditions and potentially fees will apply to fixing your home loan, and you should look at the comparison rate of products on your shortlist as well as their current advertised rates.
Fixed rate home loans provide stability of knowing that the repayment will be the same every month. A fixed rate term does lock applicants into one interest rate for a period of time, however; so if interest rates drop, it might end up costing comparatively more in interest.
For this reason, it’s important to think carefully when choosing whether to fix a home loan and how long to fix for.
Should you split your rate?
Variable or fixed or both? How much interest you pay over the life of your loan – and month to month – depends on your interest rate and your loan term. When choosing your interest rate, the two main options are a variable interest rate that can change when the cash rate changes or when the institution feels like it, or a fixed interest rate that stays the same for a certain time period no matter what the market does. But there is a third option – the split loan.
In a split home loan, you are essentially splitting your home loan into two separate loans charged at different rates. Usually, a portion of the balance of your loan is charged at a fixed rate for a period of time, while the rest of the balance is charged at a variable interest rate. When the fixed rate period ends, the loan continues on the variable interest rate.
The benefits are that the fixed rate portion lets you know what your monthly repayments will cost, while the variable rate means you’ll benefit if interest rates go down. Splitting your home loan also typically helps you pay less interest on your monthly repayments and over the life of your loan.
Not every financial institution offers a split loan option, so check the Split Loan Option column in our comparison tables when searching for a loan that suits your needs.
What does it mean to be pre-approved for a mortgage?
Mortgage pre-approval is an initial assessment from a lender indicating how much you may be able to borrow. It requires you to submit a brief application, usually online, and provide financial information for the lender to verify. Some lenders call it pre-approval, conditional approval or approval-in-principle.
But pre-approval does not mean full approval. You may submit a full application later only to be rejected. But pre-approval gives you a better idea of how much you can actually borrow. It means taking the first step, and it shows a potential seller that you’re serious about buying.
The smart home buyer arrives at an auction or inspection with a mortgage pre-approval and increases their chances of a successful purchase.
How long does pre-approval last for?
Most lenders can issue you a pre-approval lasting anywhere between three and six months. This gives you time to hunt for properties and get your actual application together.
Is pre-approval binding?
No. Getting pre-approval doesn’t mean you have to borrow any amount of money from the lender. And the lender has no ultimate obligation to lend money to you. But it’s a good start.
How do I get pre-approved?
Follow these steps to get your mortgage pre-approval:
- Compare mortgages and find a suitable lender. This will also give you an idea of what kind of mortgage you’re looking for.
- Do a budget and get a rough idea of how much you can afford to borrow based on your income, expenses and deposit size.
- Review your finances and gather mortgage documents to prove your identity, income and employment.
- Complete the lender’s pre-approval process.
How long does it take to get pre-approved?
With many lenders offering online pre-approval, the whole process can take hours rather than days. Online pre-approval is usually a system-generated process that is very quick but doesn’t involve a qualified credit assessor reviewing your pre-approval application.
Some lenders may offer this, while others may require a fuller assessment that involves a lender’s credit department. This usually involves a credit report. Your lender may offer one or both versions of pre-approval, and you might still be able to apply entirely online.
What are the benefits of pre-approval?
Pre-approval brings the following benefits:
- You can get a more realistic idea of your borrowing power. This keeps you focused on properties you can afford.
- It signals your seriousness to sellers. Pre-approval strengthens your negotiating position when it comes time to agree on a price. You will be considered a preferred buyer, similar to a cash buyer, and having a lender’s seal of approval in place can help you win a bidding war against others who may not qualify.
- A pre-approval can also reduce stress by helping to speed up the documentation process once you’ve found a home.
When should I apply for pre-approval?
You should get pre-approval once you’ve done your initial research. You should already have an idea of your borrowing power, your price range and the areas you’re looking to buy in. Once you start looking seriously at properties with the intent to purchase then it is time for pre-approval.
What comes after pre-approval?
Once you find a property to buy, you need to get full or unconditional approval. This requires a more detailed application. You should keep in mind that pre-approval doesn’t mean you’re guaranteed to get a home loan. The following need to happen first:
- The lender must conduct a valuation of the property and be satisfied that you haven’t paid too much
- You need to provide a contract of sale
- You shouldn’t change jobs halfway through the process.
Once your application is approved, your lender will explain all the fees and charges involved in establishing your loan and answer any questions you may have. Once this is completed, it’s time to draw up the loan documents. You’ll need to read your loan contract carefully before signing, and your lender will check that you’ve filled out everything correctly.
Your conveyancer or solicitor can then review the contract of sale, before you and the seller can sign a copy. Once a settlement date has been arranged, your lender will provide confirmation of your loan details. This is also the time at which you can expect to be charged for stamp duty and registration costs.
Then it’s time to start managing your loan and, most importantly, this is also the time you get the keys to your new home.
The details above are a compilation of information from a range of websites including Canstar, and Finder.com.au