Frequently Asked Questions

• What is Pre-Approval
• How much deposit do I need?
• How much can I borrow?
• What will my repayments be?
• Calculating my interest payments
• What documents do I need?
• Lenders Mortgage Insurance
• My credit history
• I have bad credit
• Can I improve my credit rating?
• Changing my repayments
• Getting a Valuation
• Direct salary crediting
• Genuine or Non-genuine Savings
• My credit cards
• Stamp Duty Guide
• Why refinance?
• Can I access the equity in my home by refinancing?
• Can I refinance to take advantage of better rates and features not offered by my current loan?
• When should I refinance?
• How much will refinancing my loan cost?

What is Pre-Approval

A pre-approval or indicative approval is an indication from a lender of how much you may be able to borrow, based on (usually) very limited information. It is not a loan approval, and in no way obligates the lender to approve your loan. In order to obtain pre-approval, a lender will normally ask you about your income, your outgoings (living expenses, loan payments and so on) and how much deposit you have available.
If you are thinking about purchasing a property, and don’t know how much you will be able to borrow, an indicative approval will give you a rough idea of your borrowing power, helping you to look at properties in a suitable price range.
The next step after pre-approval is to lodge a full loan application. You will need to complete your chosen lender’s application form and supply documents to verify some of the information you have given.

How much deposit do I need?

Currently, many lenders will allow you to borrow up to 95% of the property value or purchase price (whichever is lower) when buying. This means that you will normally need to find the remaining 5% yourself. Some lenders will ask to see evidence of 5% ‘genuine savings’ (which is money you have saved up yourself over time). Others offer loans which allow you to make up the 5% from other sources, such as a parental gift, or funds from the First Home Owners Grant Scheme.
A family member may be able to act as guarantor on your loan, or you may prefer to put a savings plan together. Don’t forget, you will also have other fees and charges to pay on top of the purchase price. You may have to pay Stamp Duty, Lenders Mortgage Insurance, legal fees, and also fees charged by your lender for setting up your loan. It’s a good idea to get an estimate of these costs before you lodge your loan application.

How much can I borrow?

This depends on your income and your outgoings. In other words, a lender will consider your financial position to determine your borrowing power. Most lenders’ websites offer a simple ‘borrowing power’ calculator which allows you to work out roughly how much you could potentially borrow. However bear in mind that it is just that – a rough guide!
A proper assessment will require a lender to look at not just your income and outgoings, but also other variables such as your employment, credit history, assets and liabilities. A lender needs to build up an accurate picture of you as a borrower in order to determine how much money you can afford borrow – and pay back.
Each lender has their own assessment process, so you will find that the maximum amount you can borrow will vary slightly from lender to lender. Outgoings include an allowance for your normal living expenses, regular financial commitments to all loans (eg HECS debt, personal loans, car loans and other mortgages) and your credit card limits (not just how much is owing on the card).

What will my repayments be?

Loan repayments generally depend on four things:

• Loan amount
• Term of the loan
• Interest rate
• Repayment method

As a guide, terms of 25-30 years are common for home loans.  The longer the term of the loan, the more time you have to pay it back so your regular repayments may be lower.  Bear in mind however, that the longer you take to repay a loan, the more interest you will ultimately have to pay.
Those who can afford to, often choose to make higher regular repayments to pay their loan off sooner. Their intention is to reduce the total interest payable over the life of the loan.  Note that some loans have ‘early repayment’ penalties, which apply if you pay the entire loan off within the first 3-5 years of the loan. 
You'll find some online tools in our Calculators sections to help you work out how much your repayments might be and how much interest you will eventually pay. You can also experiment with overpayments to see how much you could save over the life of the loan by putting in a little extra now and again.

How does the lender calculate the interest on my loan?

Most lenders calculate interest daily, which means they look at the balance of your loan at the end of each day and re-calculate the interest due. 
Some lenders allow borrowers to pay a full years’ interest in advance, offering a discounted interest rate in return.  If you’re not sure, ask your accountant whether this could benefit you.
With a Principal and Interest loan, each loan repayment you make is a combination of interest payment and principal payment (the principal payment reduces the balance of your loan).  At the start of the loan your balance is at its highest, which means most of your regular repayment goes towards paying the interest charged by the lender with little left over to reduce the balance (principal).
Provided you keep up with your repayments, the balance  will reduce slowly and along with it, the interest you have to pay.  Over time, less of your repayment is used to pay interest and a larger portion is used to reduce the principal.  You will notice that this accelerates towards the end of a loan.  When the loan becomes very small, there is not much interest to pay.  More and more of your regular repayment is going towards reducing the loan balance.
With an interest only loan, your regular repayments only cover the interest charged by the lender.  In other words you are not reducing the balance of the loan.  At the end of the loan term, the full loan balance is payable.

What documents do I need?

Your chosen lender will ask you to provide documents simply to verify the information you have put in your application, particularly information about your income, other financial information, and proof of identification.
If you are employed, you will need to provide copies of recent pay slips, and if you are self-employed, the lender will ask to see copies of your business and/or personal tax returns, normally from the last 2 years.
If you are purchasing a property, the lender will also ask to see a copy of the contract of sale to verify the purchase price. A contract of sale is a signed document (contract), which confirms the purchase price of your new property, the property details and who the purchaser is. Your contract of sale also includes any special terms and conditions attached to the sale of the property which you need to be aware of. The agent acting on behalf of the vendor (seller) will be able to supply you with this document.

Lenders Mortgage Insurance

If you are borrowing more than 80% of the property’s value, you will normally have to pay Lender’s Mortgage Insurance (LMI).  LMI protects the lender against a loss in the event of a borrower defaulting on their home loan.
This type of insurance enables buyers who have a deposit of less than 20% to purchase property, and although it is an upfront cost, you can often add it to the balance of your loan instead, depending on how much you are borrowing. LMI is not to be confused with Mortgage Protection Insurance, which protects your loan payments in the event of death, injury or if you become too ill to work. This type of insurance is optional.

My credit history

Anyone can obtain a copy of their own credit file by contacting Veda Advantage.  Veda Advantage is the largest credit bureau in Australia, and provides vital credit information services to individuals and businesses across Australia and New Zealand.  Veda Advantage will post your file to you for free within 10 working days, but if you want it sooner than that, you can pay a fee and have it dispatched within 1 working day. 

I have bad credit

Many lenders may not accept your loan application if your credit file shows a history of defaults or missed payments, but there are still a number of lenders with products available to applicants with a history of loan defaults, arrears or even bankruptcy.  
If your credit file does show any missed payments, defaults and so on, a lender may restrict the amount you can borrow, but this will depend on your individual circumstances and specific credit history. You will also normally be charged a higher interest rate on your loan, but don’t despair; some lenders will look at reducing your rate following a period of good repayment conduct.

Can I improve my credit rating?

If you’ve applied  for a loan, a credit card, or even a mobile phone contract in the past, chances are you will have a credit file.  This contains:

• Personal information about you, including name, address and date of birth
• Consumer credit information relating to you, ie credit applications which have been made in the last 5 years, and any overdue accounts, and
• Public record information, including any court judgements against you, or bankruptcy details.

Lenders use this information to assess any application for credit, so what if your rating is less than perfect?  Take sensible measures to improve your credit rating such as reducing credit card balances, and making all future payments on time.  Log on to Veda’s website at www.vedaadvantage.com for more information on requesting a copy of your own credit file.

Changing my repayments

Increasing your regular loan repayments is usually allowed, but decreasing your regular repayments is normally not allowed.
The regular amount which you agreed to pay in your loan contract is normally the minimum payment required in order to pay your loan off by the agreed date. Because you are charged interest on your loan, the longer you take to repay it, the more interest you will ultimately have to pay back. Making higher regular repayments or making more frequent repayments enables you to pay your loan off sooner, reducing the total interest you pay over the life of the loan.
Although most variable rate loans allow you to make overpayments to your loan, certain discounted and fixed rate products do restrict overpayments during the discounted or fixed period. If you want to be able to increase your loan payments after the loan settles, you should check with the lender to make sure your chosen product allows this.
Finally, remember that most lenders will charge a penalty for repaying the loan in full within the first few years.

Getting a Valuation

Before approving a loan, the lender must carry out a valuation on the property in order to determine how much they can lend against it. This is different from a market-based property valuation that you might get from an online property valuation or a real estate agent.
Be mindful that you may have to pay for the valuation, although one standard valuation fee is often included with your loan application.  If two or more properties are involved, it is likely that you will have to pay for these additional property valuations yourself. 
Also note that the lender’s valuation will often be consistent with the final purchase price of the property, but if a shortfall arises it must be covered by you at settlement. In other words, if the purchase price is $20,000 higher than the valuation, you will need to have an additional $20,000 at settlement to pay the vendor as it cannot be borrowed from the lender. You should seek professional advice from your solicitor under these circumstances to ascertain if you should still proceed with the purchase.

Direct salary crediting

Direct salary crediting allows you to deposit your salary directly into your home loan account, effectively reducing the amount of interest you have to pay on your loan.
Let’s look at an example: John owes $200,000 on his home loan.  He is employed and takes home $4,000 per month.  Instead of putting this into a normal savings account, he deposits the $4,000 straight into his home loan account.  The balance of his loan is effectively reduced to $196,000 and he will only be paying interest on this amount.  By doing this every month, over time John will ultimately reduce the amount of interest he pays on his loan.
Note that the interest is only offset as long as the money stays in John’s account! If he withdrew the $4,000 the next day, the savings would be negated.

Genuine or Non-genuine Savings

To a lender, genuine savings means money which has been saved up gradually (ie by putting $200 away each month for a period of time). Non-genuine savings for example, might be money inherited from a family member, or money from a government grant. In other words funds which have not been ‘genuinely’ saved by you.
Let's look at two different buyers, John and Mary...
They both earn $80K pa, and both want to purchase a property for $300K.  John has no savings of his own, but can scrape together a 5% deposit ($15K) thanks to the First Homeowners Grant Scheme ($7,000) and $8,000 gift from his parents.  Mary also has a 5% deposit ($15K) but has saved this up gradually over the last 2 years.
When only a small deposit is offered by a customer, the lender wants to ensure that the applicant has the capacity (and discipline) to repay the loan.  Mary is a stronger applicant than John because she has arguably demonstrated a better attitude to budgeting and saving.
Many lenders will often require proof of genuine savings before approving a 95% loan.  Some lenders will allow you to borrow up to 95% without genuine savings though. These loans can be popular – especially with first time buyers – as they help people to realise their goal of owning their own home sooner, without having to save up a deposit over a period of time.

My credit cards

When working out my affordability, why does the lender insist on using my credit card limit, and not of the balance?  I don't use the card much, so I never get near the limit.
Because we can all access the full limit(s) of our credit card(s) at any time, lenders use the limit(s) when calculating our ability to repay the loan, and not just the current outstanding balance. 
Although you may be able to increase your borrowing power by lowering the limits of your cards, make sure that it is in your best interest to do so and that it does not impact on any of your other financial affairs.  You should not necessarily reduce your credit card limit simply to improve the prospects of your borrowing capacity.

Stamp Duty Guide

The Amounts show above are Stamp Duty rates only. Transfer fees and State Government tax may be payable by the purchase of real estate (in NSW&QLD) based upon the purchase price. The duty and fees are payable to the Office of State Revenue. In the State the property is located. Some first home buyers may be eligible for a concession on stamp duty. The above information has been obtained from sources we deem to be reliable. However we cannot guarantee its accuracy and interested persons should rely on their own enquiries. Or more information please contact the Office of State Revenue. In the state in which the property you enquiries relate to.

Why refinance?

There are a variety of reasons to think about home loan refinancing. The can include:

• Covering the cost of home renovations or a new home build.
• Consolidating debts to take advantage of lower interest rates.
• Finding a better deal or simply wanting to change lenders.

Speak with one of our expert mortgage advisers and compare home loans from the top banks and lenders in Australia.

Can I access the equity in my home by refinancing?

Refinancing is a common way of accessing the equity that you have built up in your property.  How much additional money you will be able to borrow will depend on several factors including the lender’s credit guidelines, how much equity you actually have in your property, and what you plan to use the money for.
Your existing lender may also be able to help, so if you are thinking about refinancing, don’t forget to discuss your requirements with them as well.

Can I refinance to take advantage of better rates and features not offered by my current loan?

Over time, your needs may change.  The loan which was perfect for you a few years ago may not be the best loan for you today.  Australian lenders are fiercely competitive and continually try and improve their rates and products relative to their peers. Refinancing allows you to change your existing loan to one which might be more suitable.
You may want to switch from a fixed rate loan to a variable loan (or vice versa), or you might want a loan with more flexible features, such as redraw or a Line of Credit.  Again, you may not have to change lenders.  Ask your current loan provider whether you may be able to modify your existing loan.  This may be a more affordable option for you.

When should I refinance?

The only time to consider refinancing is when you are certain that it would be in the best interests of you and your family (financially or otherwise).  Everyone is different, and your reason(s) for refinancing may be different to someone else’s.

Moving house or buying an investment property are good opportunities to take stock and review your options and to investigate whether another lender will better suit your current needs.

Remember to weigh up all the costs involved, and don’t forget to discuss your situation with your existing lender as they may be able to offer you a great solution.

How much will refinancing my loan cost?

If you refinance to a new lender, there are various costs which you need to be aware of.

• Deferred Establishment Fees: most lenders charge a ‘penalty’ if you leave during the first 3-5 years of your loan contract.
• Discharge fee: Most lenders will also charge an administration fee for closing your loan.
• Fixed rate break costs will be payable by you if you try to refinance your loan in the middle of a fixed rate contract.
• There will be some Government fees to pay such as mortgage registration and transfer fees.
• Your new lender may also charge you Application Fees, Legal fees or Settlement fees.
• Lastly, if you are refinancing a loan which is more than 80% of the property value, you may have to pay Lenders Mortgage Insurance.
• Before making any decision, make sure that you are aware of the costs involved in refinancing your loan, particularly when switching lenders.  It’s a good idea to compare the benefits of the new loan with the total upfront cost of refinancing.