Researching

How to research home loans like a pro

Just as you’d swipe and scroll the web for the perfect new pair of shoes for a night out, it’s in your best interest to do your homework when it comes to home loans, too. After all, you’ll want a lender that suits your lifestyle – and the best way to find the right fit for you is by asking a few key questions.

First, get your head around loan types

When you’re researching lenders, it can help to narrow down what type of home loan will meet your exact personal needs – for example, you might want to compare variable interest loans if you like the idea of not being locked in to a particular home loan product or interest rate. Or maybe a fixed rate is your thing so you know exactly what your repayments will be. You can even get a loan with a combo of the two (called a split loan) for added flexibility. Loan types are not one size fits all and are designed to meet your individual finance goals. So, spend some time reading up on all of the options available and speak to your lender to help answer any questions you might have

Then, ask your lender anything (and everything)

Once you’ve got an idea of what type of loan suits you, it’s time to jump on the phone and ask potential lenders some pointed questions. Gathering all the information you can will help you decide on a home loan – so get your notepad out and fire away.

What is your interest rate and comparison rate?

Interest rates are key when looking at any loan and you should compare the loan’s interest rate and its comparison rate. How is a comparison rate different? Well, a comparison rate helps you work out a closer estimate of the total cost of a particular loan per year. It includes the interest rate and most fees and charges relating to a loan, reduced to a single percentage figure. It does not include government fees and charges and charges that are only charged in certain circumstances (e.g. if you pay off the loan early).

While the comparison rate goes close to showing the true cost of a loan, it still doesn’t quite paint the complete picture. You’ll need to ask your lender about the loan’s features, such as terms and repayment frequency (more on this later).

What are your fees?

The cost of (most) loan fees is included in the comparison rate. But it’s still a good idea to get all of the possible fees down on paper so you know what’s ahead and can budget properly. Different lenders may call these fees different things, but they’ll know what you’re talking about when you ask about the cost of:

• lenders mortgage insurance (LMI) – a one-off fee (or can be paid in instalments if your lender offers the option) that most lenders charge if your deposit is less than 20% of the value of the property (Note: although you pay for LMI, it protects the lender, not you)
• break costs – a fee that may be charged in certain circumstances such as if you exit a fixed-rate home loan before the end of the fixed-rate
• discharge fee – also called the termination fee and may be charged when you pay out your home loan in full
• annual fees – many loans come with ongoing fees, which may be charged every month or year
• establishment fees – some lenders charge an application fee or settlement fee, which may include the legal costs of preparing your home loan documents.

There may be other fees, too. By law, a lender has to tell you about all the expenses linked to a home loan – so ask away.

What extra features do you offer?

Some loans come with extra features that may help you pay off the loan faster or reduce the amount of interest you pay over the life of the loan. These are must-knows, as they can help you come to a final decision.

Ask about things like:

• extra repayments – if you’re in a position to make extra repayments (on top of the minimum repayment amount), this could help you pay off the loan faster
• redraw – if you’ve made extra repayments, this feature lets you, you guessed it, redraw or access those extra repayments if you need the money
• an offset account – this is a transaction account linked to your home loan, and the money in this account reduces the amount of interest payable so you could pay off your loan faster.

There may be extra fees for these features, so make sure you ask about the cost and factor this into your decision, too.

How much can I borrow?

Before you start house hunting, you’ll need to know how much you can borrow. A lender should be able to give you an idea of your borrowing power once you tell them about your financial circumstances like your income, debts, assets and expenses.

How much deposit do I need?

The answer to this one depends on how much you want to borrow and whether you’re prepared to pay LMI. If you’re keen to avoid paying this insurance, lenders like to see at least a 20% deposit (that is, 20% of the value of the property). Or, if you’re happy to wear the cost of LMI, or if you haven’t quite reached 20%, you’ll need to find out from the lender just how low you can go. But remember, the lower the deposit, the higher the cost of LMI.

How long does it take to get a loan?

If you’re getting to the pointy end of the house-hunting process, then you might be keen to know just how quickly you’re going to get your home loan approved. It’s useful to find this out in the early stages too, so you can plan ahead. Some lenders can turn your loan around in weeks, others it could be months.

Do you offer pre-approval?

By going through the pre-approval process, you find out exactly how much you can borrow – which then helps you narrow down your house-hunting options. Ask the lender if they provide formal, written and signed pre-approvals – some lenders offer non-formal versions, which aren’t rock-solid when it’s time to apply for the actual home loan, but they’re good as an indication when you start out. A pre-approval is usually valid for a period of 90 days.

Prepare to answer a few questions yourself

During your chat with a lender, they’ll likely ask a lot of questions back at you, too. So it’s a good idea to have prepared some information about yourself.

Expect to answer questions about:

• your personal life, like partners and kids
• your income
• your debts, including credit card limits
• your monthly expenses (and, yes, this includes things like your Spotify subscription)
• your deposit (and whether you can show that you’ve done the hard yards in saving this yourself).

Get as much of this information as you can ready before you jump on the phone.

Tips to research home loans like a pro

1. Get to know the different types of home loans.
2. Make a list of all the questions you want to ask a lender – then call them up and ask away.
3. Prepare handy answers to the types of questions a lender might ask you in return – such as who you intend to buy with, what your income is and how much you have saved for a deposit.

Researching

Before you borrow: here are some of the things you need to know about borrowing power

Borrowing. Power. These two words will have a massive influence on how you choose your first home. And getting to know the ins and outs of this important part of home loans – from savings to expenses, income to credit score, debts to assets, plus more – could help you tinker and improve it down the track. So let’s take a closer look at all the things that work together to decide your borrowing power.

First things first: borrowing what now?

Borrowing power is the maximum amount of money you can borrow from a lender (like us) based on your financial situation. While you might look at it as a question of whether it will help you get the home you want, the lender looks at it as a question of whether you’ll be able to pay back what you owe them (while handling life’s speed bumps along the way).

By the way, your borrowing power isn’t set in stone. There are things you could do that might improve it. So, once you feel like you’ve got a handle on the ins and outs, read an expert’s tips for boosting your borrowing power here.

The deposit difference

A hard-won deposit, built by savings upon savings, tells the lender that you’re a good saver – someone who’s able to put money away over a consistent period of time. How much you have for your deposit can change the game, too. The amount relative to the valuation of the property (known as the loan-to-value ratio) can influence the size of your loan, not to mention dictate whether you need to factor in additional things like lenders mortgage insurance or a friendly guarantor to help secure the loan.

Money coming in

Do we even need to say it? How much you earn will affect how much you can borrow. Income is one of the first things lenders look at when determining how much you can borrow, but it’s not the only thing. And income isn’t just your regular salary – it’s that, and more. For example, if you’re buying with your partner, both incomes will get considered. Types of income come into play too: things like overtime, bonuses and commissions all need to be proven. And if you plan on making your first home an investment, your bank may factor in your potential rent. No matter what income you receive, a lender will want to see a record, so start putting together that paper trail.

Savings habits

A whopping deposit will help with your loan-to-value ratio (LVR), but lenders want to see it all, including how you got there. Hopefully your savings history is in good shape, but if not, now’s a great time to start. Proof of regular savings (alongside other things like paying off bills regularly and on time) tells a lender that keeping up with a regular mortgage repayment won’t be too much for you to handle.

Money going out

Borrowing power is as much about the money you spend as the money you make. What kind of expenses does a lender look at? Well… everything! Your regular living expenses and any regular payments you make (like car loan payments, rent or even Netflix subscriptions), for a start. They will review your expense history and often ask for bank statements as proof. The name of the game for them is to make sure you can live comfortably while paying off the amount you’ve borrowed.

If you’re going through the early stages of discovering your borrowing power, say by using our ING borrowing power calculator, it’s important to be honest and realistic. Think hard about all your expenses, and don’t gloss over any, so you can get a more accurate estimate.

Debts to deal with

The role debt plays in borrowing power is two-fold: your repayments count towards your expenses (like the car loan payments we mentioned above), and the balance of the debt can be viewed as a liability. Debts can decrease the amount you can borrow, or even affect whether the bank says “Yes!” to your loan application at all. Keep in mind that if you have credit cards, it’s not just about what you owe. If you have a $20,000 credit limit on your credit card, a lender will treat it as if you have $20,000 owing on your card. Simply, if it can or does affect your ability to make repayments, a lender wants to know about it.

Your credit score

Your credit score acts as a record of your financial history and shows whether you have been paying any loans, credit cards and bills on time. It doesn’t directly affect borrowing power, but it does determine whether a lender will lend to you. A good history tells your lender that you’re reliable. You can check your credit score online for free within minutes, which could be worth doing before applying for a loan. It might help you identify any problems and give you a gentle push to start creating a disciplined history.

All about assets

The value of your assets factors into your borrowing power because these assets work as security if you hit one of life’s hurdles and are unable to make loan repayments. You might own your assets outright – like that car you paid off years back – or they might be financial, like your savings, share portfolios or other investments. They can all work together to determine your borrowing power. Assets also demonstrate your ability to put away money over time – lenders love to see that.

Last but not least: ch-ch-ch-changes

Things change. Incomes rise and fall. Interest rates can go up and down. Families grow (sometimes by surprise). New business ideas blossom. When life happens, a lender wants to know you have the ability to handle it. So they generally factor in a little buffer zone when they consider your borrowing power. Basically, they want to see you living within your means. It gives the bank peace of mind when they give you the loan – and it will help you feel good about the next steps too.

The building blocks of borrowing power

• Your deposit
• Your income
• Your expenses
• Any debts you have
• Any assets
• A buffer zone for life’s surprises