The Australian mortgage process for most people can be a daunting one, designed to confuse you, confound you, send you in circles chasing paperwork and leave you wandering whether the bank really wants your business.
Well this article is designed rather ambitiously to explain it all, to unravel the mystery and bring you all you need to know about buying property with a mortgage in Australia (Important disclaimer: at least this was the case before the editing room cuts and people’s fears of boring you to death!).
Let’s start off where most people usually do – How much deposit (or how much savings) do I really need to get what I want?
Determine your contribution
Simply put, the amount of deposit you can contribute (together with your borrowing ability and work experience) will determine the range of loan options available to you in the Australian mortgage market. Now this of course does not consider what’s best for tax reasons, what’s best in terms of leaving a savings buffer in your bank account for unexpected expenses later on, what’s best to invest in other things etc. or even whether or not you should be buying property at all, in your own specific situation (ok promise to end disclaimers here..).
First of all, in Australia it’s wise to allow for 5% of the property purchase price to pay for property purchase costs, such as stamp duty and other government fees, legal fees, bank fees, and adjustments for rates and taxes. This rough rule of thumb will usually result in money leftover, which you will no doubt need for such things as moving costs.
Now, back to our discussion about deposit and its relationship to the mortgage products available. Separate and aside from purchase costs, do you have available at least 20% of the purchase price to use as a deposit? If you do, then you are in best position to gain access to most lending options available including those with the best rates, assuming you can meet the lender’s credit assessment requirements – and this way you will avoid mortgage insurance fees as well.
Perhaps you have less than 20% deposit? In this case fewer lending options will be available and you will incur a once-only mortgage insurance fee (which can be added to the loan with some lenders). The benefit of mortgage insurance is that you can still borrow to buy your property with less deposit required – unlike in many countries where loans for property are simply not available beyond 70% or 80% of the property purchase price.
This cost can be avoided if you have sufficient equity in an existing property. Talk to your mortgage broker or contact Aussie Finance and Property to understand more. Mortgage Insurance generally applies to all home or investment property loans in Australia if you borrow greater than 80% of the purchase price – you can read more about Mortgage insurance here
Understanding Mortgage types and features. Which is best for me?
It’s a good idea to familiarise yourself about the product types available and how they may meet your needs. Here is where a good mortgage broker is worth engaging, they deal with these products and their benefits and limitations day-in and day-out. Ask questions. For example, contemplate how important it is to have certainty with your monthly mortgage repayment no matter what (fixed rate loan feature) or the ability to pay off the loan fast without penalties (more so a variable rate feature). Consider if you want to have both a variable rate and a fixed rate mortgage (you can split the loan).
For investors what is the likely effect of a tenant vacancy for any period of time on the mortgage? How do you propose to deal with this scenario? Your answer can guide your choice of the right loan product type.
What’s an offset account and do I need one?
What are my likely monthly repayments with my proposed loan amount and product type, and can I afford them? Most importantly try and think about the changes to your family’s income and expenses you might expect over the next 5 years… these anticipated changes should help guide you and determine what loan structure and features are best. These are arguably the most critical considerations, affecting not only loan product choice but ultimate borrowed amount.
From a structural point of view, for investment properties, should I buy the property in a company or trust name for tax reasons?
For expatriates; when do I plan to come home to Australia, and how will that impact the mortgage and my tax situation?
Talking about these issues and plans together with your broker and/or financial adviser could provide you with the greatest help you will need in working out which loan structure and loan types are ultimately going to be best for you.
Requesting a Preapproval
Why do it?
Assuming you don’t have the full purchase price available right now in cash to pay for a property, you will most likely be contemplating a loan preapproval.
What is it? A loan preapproval is the idea of having the “go-ahead” from a lender who will support you with finance, when you have found your property. This is a way to have greater confidence when bidding on your desired property, whilst recognising you can’t go beyond the limits a lender says you are capable of borrowing.
So you ask a lender to look over your financial situation in advance, and give you the all-clear to borrow up to a certain amount. One very important thing to remember at this stage: what a lender says you could borrow, and what you know to be affordable, given your own budget and spending habits, are two very different things. Stick with a loan that reflects what you feel you could afford to repay each month, and don’t be seduced if the bank says you could borrow a much higher amount than you could have imagined. Take advice on this if you need it.
At this stage your lender is likely to perform a credit history check. Managing your credit history has never been more important in Australia, and this is especially true since Australia changed to comprehensive credit reporting from March 12 this year. Much more detailed information about your credit card and loan repayments history is steadily becoming available to lenders and banks when assessing your loan application. Your credit history will affect your ability to obtain a mortgage, so you need to pay attention to paying existing commitments on time and keeping within your credit limits. Ordering a credit check on yourself prior to sending in a loan application is a very good idea. Your broker can help with that.
Preapprovals are especially desirable when the property is going to auction, since you are committed to buy when the hammer falls – hence you want to know with greater certainty a lender is going to support that purchase. Buying via private treaty, where an auction is not scheduled, has a little more flexibility since you generally have time to gain full approval from a lender, before you have to sign a sales contract, in Australia.
Moving from Pre-approval to full approval and the purchase.
Once you’ve obtained a loan pre-approval, now is the best time to start property-shopping, knowing your limits and flexibility available for negotiations.
For each property you are contemplating making an offer on, have your conveyancer review the sales contract and advise you of any issues to consider.
Once you have an offer accepted on your property of choice (that’s a whole different process!) you will need to collate a few additional documents and perhaps some updated ones, for your mortgage broker to deal with the bank and request full approval for you.
The bank will want to see a copy of the vendor’s contract of sale, and (especially if more than one month has passed since the preapproval) updated payslips and bank statements showing your latest savings. Your broker or lender will organise a property valuation at this point, and it’s important to know the lender will only finance a loan amount based upon the lower of the purchase price or property valuation.
Your broker will advise the valuation outcome and hopefully very shortly thereafter a full approval will be granted by the lender.
Full approval to settlement
Once you have been ‘fully approved’, this is the safest and most appropriate time to agree to pay the required vendor deposit on the property! Your finance is in place and a lender has agreed to finance your specific property purchase (rather than a general loan amount in principle which is in essence a preapproval with conditions).
At this point the lender prepares a loan offer and legal documents including the mortgage document. You will need to sign and return these documents promptly to enable the lender to setup your loan facility. If you are unsure about anything in these documents you should consider obtaining legal advice, to guide you and explain the meaning of the contract you are entering with the lender.
Settlement time.
The actual settlement date and time is agreed between the vendor’s solicitor or conveyancer, your conveyancer and the bank’s solicitor. In something like eight out of ten cases it will be the date agreed on your original Contract of sale, however it can vary. Probably 9 times out of 10 settlements takes place on the pre-agreed date or within 2 or 3 days prior or after the agreed date.
The actual settlement day process simply involves your conveyancer going to meet with the vendor’s solicitor and the bank’s solicitor to exchange cheques and paperwork for the mortgage. The conveyancer will usually advise you as soon as it is complete. At this point your mortgage is officially in place, the property is yours and you are free to collect the keys from the agent!
This Mortgage application guide has been produced by Daniel Shillito, who is a Mortgage Broker, Financial Adviser and specialist in Expat services at Aussie Finance and Property Group. Views expressed here are his own. This information is naturally general advice and you shouldn’t assume that it meets all of your specific needs. Daniel can be contacted at daniel@aussiefpgroup.com Phone +44 (0)20 3239 0479 or visit www.aussiefpgroup.com
IMAGE: Alexander Raths
