Hello! I’m Andrew Winter, host of Selling Houses Australia. And I’m teaming up with Compare the Market to help Australians demystify the home financing process because well, home loans can be a real headache can’t they? And it’s never been more important to make sure you are on the best deal possible when it comes to financing the biggest asset you’ll ever own.
And, whether you are buying your first home, your next home, an investment property, or you are simply looking to refinance, wouldn’t you – wouldn’t we all like to know how to get a great deal on a home loan? Apart from the occasional scary interest rate cycle and the obligatory once-in-a-decade refinance, home loans are generally out of sight and out of mind for many Australians. But there are always going to be savings on the table for savvy and proactive borrowers who know which home loan levers to pull, and when. Understanding how home loans work could help you get a better deal when you decide it’s time to refinance.
So come with me, as we go over the five ‘Cs’ of home loans: Character, Capacity, Capital, Collateral, and Conditions, and how they factor into a home loan application. Once we’re done, you will be seeing through the eyes of a home loan provider and understanding explicitly what they’re looking at and for in a home loan application. After you watch these videos you will have no choice but to become the best home loan candidate you possibly can be – you’ll be simply unstoppable!
So welcome, to Compare the Market’s Mortgages Made Simples.
The criteria for home loan approvals can seem somewhat overwhelming to the everyday Australian, as can the reason(s) a home loan application was rejected.
That’s why Compare the Market’s teamed up with the host of Selling Houses Australia, Andrew Winter, to bring you Mortgages Made Simple; a five-part video series covering just about everything there is to know about home loans and the application process – along with how to use that knowledge to make yourself a more attractive home loan applicant.
The series is based around the five ‘Cs’ of home loans – Character, Capacity, Capital, Collateral and Conditions. These essentially amount to:
Understanding how these key factors can affect the odds of a home loan application being approved will be invaluable when it comes time for you to lodge your own home loan application – so take notes!
And once you’ve finished the series and you’re ready to apply for a home loan, we can help you on that front too!
Our new home loan platform is the ultimate home loan research tool. You can use it to check your credit score, calculate your borrowing power and retrieve unlimited free property reports and suburb profiles to help you with your property search.
When it comes to applying for a home loan, you’ll be able to compare your options, decide on a home loan and then apply for it with the help of our Home Loan Specialists, all in the one place!
Whether you’re a first home buyer, a next home buyer, an investor or a refinancer, we’ve got your back at every stage of the process, from comparison to decision.
Hello there! I’m Andrew Winter, host of Selling Houses Australia, and welcome to part one of Compare the Market’s Mortgages Made Simples. This is the first C – Character. We’ll be going over your personal financial habits and your credit score, along with how lenders assess them.
Let’s get into it!
First and foremost, let’s look at your long-term spending habits. It sounds obvious, but for the benefit of any first home buyers here – lenders really, really care about how you are spending your money. When you submit a home loan application, the bank will go through as much as six months’ worth of your bank statements with the finest of fine-tooth combs as they slowly build up a complete and holistic picture of your spending habits.
They will look for the uniform spending patterns that are generally indicative of a measured, budget-conscious individual. If they don’t see any such patterns, they may be less enthused about the idea of lending you a huge sum of money. It’s important to note that they will carry out these bank account forensics regardless of the size of the loan you are applying for, and they will do this regardless of how much money you make. You could apply for a modest home loan while making a million dollars a year and the bank would still do a detailed audit of your finances so they can be confident that you will be able to meet the repayments on the loan.
They are particular like that. But crucially, it’s not just how you are spending that matters – it’s also what you are spending the money on. Lenders may take a dim view of quote unquote ‘frivolous’ spending such as excessive gambling or large unexplained cash withdrawals; particularly if this kind of behaviour leads to you regularly overdrawing your account, or ending up with payment dishonours on your regular direct debits. And, as we mentioned, whichever lender you apply with will be looking for as far back as six months when assessing your financial habits – so you’ll ideally want at least six months of good behaviour under your belt to start out.
Lenders also want to see that you are meeting the repayments for any existing debt you might have, like a credit card or a car loan. And that reminds me – if you are having trouble meeting the repayments on a loan, or if you think you will have trouble soon due to an impending change to your circumstances, reach out to your lender as soon as possible. Maybe you’ve been made redundant, or have some parental leave in your future – regardless of the specifics, if your material circumstances change in any significant way you’ll want to let your lender know. It’s not a massive deal and it doesn’t even require that much effort on your part, but it makes it so much easier for the lender to understand your ongoing needs and circumstances, and tailor the assistance they provide to you accordingly.
Right! Now onto your credit score; this is a biggie. Not only does your credit score play a major role in telling lenders what kind of borrower you are but it can affect the selection of home loans you have access to, and whether you end up with a home loan at all! So, what is a credit score?
It’s easiest to think of it as a rating – shorthand for how good or bad you are at responsibly handling your financial commitments. Your credit score is based on your credit report, which is an accurate record of your credit-related financial activity over the past few years. When I say “credit-related financial activity” I’m talking about things like meeting loan repayments, paying utility and phone bills on time, managing a credit card, that sort of thing. These are all activities you will find recorded in your credit report, and if you are making your repayments on time and managing your credit responsibly, they’ll be helping to improve your credit score.
But what you’ll also find listed in your credit report are any and all applications for credit you’ve made, along with any late loan payments or bills that are more than a month overdue – those will stay on your report for up to two years. Your history of making loan repayments and paying bills will also stretch back two years, and any existing credit or loans will also stay on your credit report for two years after being repaid or otherwise closed. Defaults, court judgements, and any applications for credit or a loan will stay on your credit report for five years, and ‘serious credit infringements’ will hang around for seven years.
Bankruptcies and debt agreements will remain a feature of your credit report for five years after they start or two years after they end, whichever comes last. Formally recorded financial hardship will hang around for just a year. Now, a late bill or missed repayment will always be a negative on your credit report. But I mentioned that your credit report will list every time you’ve applied for credit or a loan in the past, and I want to talk about that for a second.
Because simply applying for credit is not inherently bad for your credit score, but applying for too much credit, now that could do some damage. If you apply for credit, the provider in question will check your credit score as part of their approvals process. This check is called a ‘hard enquiry’ (even if it’s commonly known as a ‘hit’) and it’ll go straight onto your credit report – whether your application was successful or not. Too many recent hits on your credit report will be an immediate red flag to any lender or credit provider.
Checking your own credit score on the other hand, is known as a ‘soft enquiry’ and doesn’t appear on or affect your credit report. So be mindful of this when weighing up whether it’s the right time to apply for a home loan or not – if you suspect you’re not a rock-solid applicant just yet, it may be worth holding off for now. Ok, so now let’s talk about some concrete ways to set about improving your credit score, and getting it home loan-ready. This won’t necessarily be a fast process – Rome wasn’t built in a day and neither was anyone’s credit score.
But the good news is that improving your credit score isn’t a particularly complex pursuit! Paying your bills on time, responsibly managing a credit card; these sorts of things will go towards improving your credit score, slowly but surely. The other thing you’ll want to do if you are serious about your credit score is dead simple – check it, and check it often. Luckily for you, Compare the Market’s new home loan comparison tool has a built-in free credit score checker that can retrieve your credit score for you in minutes, and will actually send you an update each month afterwards showing you if your credit score has changed and if so, how.
It’s brilliant! Well, that’s the first C done. I’ll see you next time for the second C – Capacity.
Hello! I’m Andrew Winter, host of Selling Houses Australia, and welcome to part two of Compare the Market’s Mortgages Made Simples. In this section, we will be talking about the second C, Capacity – which is about your, you guessed it, capacity to handle and repay the home loan you are applying for. There’s a lot of ground to cover here, but the big-ticket item is your regular income vs your regular expenditure.
Yes that’s right, we are talking about your spending again! But this time it will be about the numbers attached to your spending, rather than the nature of the individual transactions, and how it all factors into something called your borrowing power.
Your borrowing power is the maximum amount of money that a lender is likely to give you in the form of a home loan. It’s based on how much you can afford to put towards a repayment per pay, which in turn determines how large a home loan you can afford at a given interest rate.
And on that note, it’s important to understand what does and doesn’t affect your borrowing power, because interest rates certainly will. The higher the interest rate is on a home loan of a given size, the more you’ll have to pay in interest – meaning a rate hike will shrink your borrowing power, and push certain home loan sizes out of your affordability range. Something that doesn’t affect your borrowing power in the slightest? The size of your deposit.
Shocking I know, but think about it – imagine you’ve worked an ok-paying job for decades, and you’ve managed to save up, say, a million dollars. It’s a silly number but bear with me. Rule of thumb says a conventionally ideal deposit is at least 20% of the loan right? So your million dollars would make for a 20% deposit towards a five million dollar home loan, that bit checks out fine.
But now think about how big the repayments would be on a five million dollar home loan. Do you think the income from your ok-paying job is going to cover them? Probably not. Having a saved deposit is crucial to being approved for a home loan, but when it comes to borrowing power, it’s all about how much you earn and spend.
So, let’s take a look at the factors that have the largest impact on your borrowing power, and how a lender will go about assessing them. When it comes to your primary source of income – that is, ‘your job’ – the lender is going to be looking for a few different key things.
The first thing they’re going to want to see is stability – how long have you had your current job, and how long have you been in that industry? You don’t need to have spent the last decade in your current role by any means, they’ll just be looking for evidence that you are experienced at what you do, and presumably more likely to remain employed.
That being said, if your job history is made up of countless short-lived stints at different companies, the lender may be less confident in your ability to stay employed. So that’s your income, but what about your expenditure and liabilities?
At this stage in the game, the lender has figured out how much you make, and is now trying to calculate how much of that income is generally going to be accounted for by your regular everyday expenditure. As we’ve mentioned, they’ll take a pretty thorough look through your bank statements and spend some time getting to grips with the kind of spender you are.
But to get a firmer idea of how much you spend relative to your peers, the lender may also use something called the Household Expenditure Measure, or the HEM for short. The HEM is a benchmarking tool that tells us the average amount of money that different types of households are spending on a standardised set of goods and services. By comparing an applicant’s expenditure against the HEM, a lender can see whether that applicant spends more or less than what’s considered ‘average’ for their household type – which will be determined by your location, whether it’s a single or a coupled household, and how many children you have, if any.
If your regular expenses are below the relevant HEM benchmark, the lender may ask to see more detailed evidence of your spending before completing their assessment of your financial habits. If your self-declared expenses are well below the relevant HEM benchmark, the lender may even just decide to use that benchmarked value instead when calculating your borrowing power. Lenders don’t like uncertainty, and the HEM gives lenders a standardised set of values they can use when the applicant’s self-assessment might look a bit skewiff. So, that’s a fairly good look at how a lender will assess your finances in order to determine your borrowing power.
But how can you actually improve your standing in this respect? Well there are a few steps you can take to potentially improve your borrowing power in the short term – beyond being a more responsible spender as we discussed in Part 1 of this series. The first is taking a look at your existing accounts, debts, lines of credit, all of it. Can any of the existing debt be consolidated?
Multiple credit cards for example, could be rolled into one using a balance transfer – now you’re paying back just one big debt instead of several smaller ones, and probably paying less in interest as a result. Even better, could you pay off the debt entirely? No debt means no repayments, meaning more money available for your home loan repayments. And if you’re refinancing an existing home loan, you may be able to consolidate smaller debts like a credit card balance or a car loan into your new home loan – provided you have the borrowing power necessary to take on what would subsequently be a larger home loan.
And while yes, increasing your home loan by more than a little bit might seem like an intimidating prospect, the difference is, now your debts are all in the one place and on the same single-digit interest rate – as opposed to the double-digit interest rates you tend to see on those smaller debts. And finally, it is absolutely worth taking a look at your own bank statements before you send them off to your lender for review. Flag any one-off expenses like say, a dentist’s visit or a pet bill – something you wouldn’t expect to pay frequently. If you can catch these individual transactions and flag them as such, it may see you end up with more borrowing power than if you’d not done so.
Lenders can’t always tell what are and are not regular expenses, so you may end up artificially inflating your spending in their eyes if you don’t put in that little bit of extra effort at the start. Well, that’s the second C! We definitely covered a lot there, hope you were taking notes! I’ll see you next time in Part 3, where we’ll be discussing the third C, Capital.
Hello! I’m Andrew Winter, host of Selling Houses Australia, and welcome back to part three of Compare the Market’s Mortgages Made Simples. So we’ve covered off Character (how you make and spend money) and Capacity (how much money you make and spend). Now let’s talk Capital; which means your deposit, what it can be made up of, and some of the ways you can give it a boost if it’s not quite adequate.
Your home loan deposit can be comprised of a few different elements, but let’s start with the most fundamental and universal of the lot – your genuine savings. Yes I know, savings is such a chore and saving up for a home deposit can seem daunting. The good news is that you don’t actually need a full 20% deposit in the form of genuine savings, as much of your deposit can come from elsewhere, like cash gifts from your family or selling off other assets. But the bad news is that at the end of the day, you will need to have a decent chunk of change saved up, and saved up the hard way at that.
As we’ve discussed at length, the lender will have an all-seeing birds-eye view of your finances – that includes your saving habits! That means your lender will be on the hunt for evidence of both genuine savings, and the habits needed to build these savings up – if you don’t have them, you’re less likely to be approved for a home loan. So save yourself up a nice little sum – maybe five percent of the total home loan value you’re planning on applying for. This part is so non-negotiable I really can’t say it enough, you will not get a home loan as a first home buyer without a deposit.
But I did say that savings don’t have to make up the entirety of your deposit – so what else can you draw on to build up your deposit? Consider your current assets – do you have some shares you could sell to give your deposit a quick boost? Gifts from parents are a classic too aren’t they? The bank of mum and dad may not be an actual bank, but their money’s just as good as yours in the eyes of the lender.
That goes for cash gifts from any member of your family: be it an uncle, sister, grandma, cash gifts from family are a-ok, and frequently used by first home buyers. If your parents can’t afford to give you cash but they still want to help, you could consider asking them to go guarantor on your home loan. That way, instead of handing you cash, they are offering up equity that they’ve built up in their home – their equity gets stumped up as additional security against your home loan, and the value of the equity boosts your saved deposit. But if a family member goes guarantor for you and you can’t meet your home loan repayments, your family member will be on the hook for however much of your deposit they’d guaranteed.
So just, keep that one in mind before you go running off looking for a guarantor. The other biggies for any first home buyers struggling to build a deposit are the First Home Owners Grant and the First Home Guarantee. The First Home Owners Grant is handled at the state and territory level, and is a cash sum given to eligible first home buyers. It’s typically not something you’ll be able to use to form part of your deposit though – it’s usually paid after the loan has settled.
Great for paying down a big chunk of your home loan early, but not so great for building a deposit. Now if this is your first time buying a home and you don’t know why that 20% benchmark is so important, it’s because of two concepts: loan-to-value ratio and lenders’ mortgage insurance – or LVR and LMI for short. Let’s start with LVR. Every home loan has a loan-to-value ratio, and it’s simply an expression of how much your home is worth, vs how much you owe.
For example, if you borrow $500,000 for a home loan but offer up a $100,000 deposit (that’s 20% if maths isn’t your strong suit), your loan-to-value ratio will be 80%, as you’ve borrowed 80% of the property’s value. LMI on the other hand, is less universal. A lender will typically ask you to pay LMI if the LVR on your proposed home loan would be higher than 80%, meaning your deposit was less than 20% of the loan. It’s not worth taking lightly – LMI can cost you thousands of dollars depending on your LVR and the size of your home loan.
And it’s not just for first home buyers either – if you refinance or take out a new home loan with less than 20% equity, you’ll most likely have to pay LMI too. It can either be paid upfront as a lump sum but is usually paid off over time via your home loan repayments. Something else worth mentioning while we’re here – while you’re crunching the numbers on your saved deposits, don’t forget to account for your upfront expenses! Conveyancing services, stamp duty, building and pest inspections; these will all need to be paid for before your loan settles, which means a significant sum will need to come straight out of your pocket in the lead-up to settlement day.
So be prepared, don’t let your planning be ruined by an overlooked expense, and make sure you know exactly what your costs will look like, so you can factor them into your deposit calculations. That’s another C done and dusted! We’re really blowing through them now aren’t we? Remember, you can always revisit previous sections for a quick brush-up if needed – we are covering a lot of ground here, no need to try and remember it all first time round.
I’ll see you next time for the fourth C – Collateral.
Hello! I’m Andrew Winter, host of Selling Houses Australia, and welcome back to part four of Compare the Market’s Mortgages Made Simples. In the second-to-last instalment of this series, we will be talking about the fourth C, Collateral, which is all about the property you are buying and what your home loan is secured against. We’ve all got a dream home, but unfortunately you can’t just pick any property you’d like to buy and get a home loan for it – even if it’s within your budget!
That’s because home loans are secured loans, meaning there’s an asset tied to the loan which the lender can take legal ownership of in the event that you can’t meet your loan repayments. In the case of a home loan, the home in question is the asset, which means that if you can’t meet the repayments of your home loan, the bank would be within its rights to repossess your home and sell it to pay off the loan. But the important bit there is the lender being confident that they would be able to sell your home for an adequate price if push came to shove, and that’s why lenders can be quite particular about the types of properties they secure large sums of their own money against.
Some lenders also just flat-out refuse to deal with properties in higher-density buildings, perceiving them as a riskier bet. And what’s extra fun is that the lenders that do cover high-density housing will probably charge you a higher interest rate for the privilege. With that in mind, be sure to check your loan options when looking at different property types, as different lenders will have different products and rates available depending on the property you are trying to buy. And while we’re here, let’s briefly talk about guarantors again.
Something a lot of people don’t realise is that all these hidden no-no’s for picking a lender-friendly property? They apply to guarantor properties as well. What this means is, depending on what kind of property your prospective guarantor lives in, the lender may not view equity in that property as particularly valuable. Subsequently, they may say no to letting that equity form part of your property deposit.
So just keep that in mind if you’re thinking you might want or need a guarantor in order to get a home loan. If you are already on the property ladder and looking at your next home, you may want to consider how different property types in different locations tend to fare value-wise. For example, an off-the-plan apartment is much less likely to appreciate in value over the years than say, a queenslander on acreage. Obviously that’s a huge generalisation, but it’s one based in truth – land is king if you’re looking for capital growth, and freestanding homes typically come with more land than an apartment or a townhouse will.
Conversely though, an off-the-plan apartment in an attractive suburb may be a smarter pick than a freestanding home on land in an undesirable neighbourhood. So future value growth isn’t always just about property type – you need to keep additional factors in mind like location, room count and floor plan. But more important than picking a property that will grow in value, is picking a property that won’t decrease in value over the long term. Because then you do start to get into some fairly dangerous territory – your LVR can skyrocket, you can even end up with what we call ‘negative equity’, which means you own less than 0% of your house and owe your lender more than the property is actually worth!
So while you don’t need to be a market genius targeting 10% growth year on year for your property, I do encourage you to take a long, hard look at any properties of interest to you and ask yourself ‘do I think this property will be worth more or less by the time I sell it?’. If the answer is ‘less’, it might be time to take that property off your shortlist. Another C done and only one more to go! I’ll see you next time for part 5 and the final C – Conditions.
Hello! I’m Andrew Winter, host of Selling Houses Australia, and welcome back to the fifth and final part of Compare the Market’s Mortgages Made Simples. Today we will be discussing the last of the five Cs, which is Conditions – more specifically, the conditions of the home loan you’re applying for, and your current personal condition. Let’s get stuck in!
First of all, the loan conditions. The initial step here is figuring out what kind of home loan you want – variable, fixed, or maybe split rate? If you’re borrowing to invest, perhaps you’d prefer an interest-only repayment structure to keep your repayment costs lower for the first few years. Once you’ve figured out the type of loan you’re after, it’s time to think about your desired loan term.
Most borrowers will opt for a 30-year term, to stretch out their repayments over the longest period possible and subsequently keep them as low as possible. This is an absolutely fine way of thinking for first home buyers and for new home loans in general. But if you’re refinancing, you may find that refinancing from one 30-year term to another could really dramatically inflate your long-term overall costs. With that in mind, you might want to think about refinancing to a term that’s similar to what’s left on your current mortgage.
And as we mentioned previously, if your desired loan term would take you past the age of 67, the bank will want a fairly detailed explanation of how you plan on repaying your home loan past retirement age.
Let’s talk home loan features shall we? The first thing to flag is that, while features can be a huge driver of value in a home loan, they’re not always free. Take offset accounts for example!
It’s an account linked to your home loan and the balance of the offset account is subtracted from your home loan balance when the lender is calculating how much interest to charge you. They’re fantastic, and it can be tempting to sign up for an offset account thinking ‘this’ll save me so much interest!’ but the reality is that offset accounts usually come with a higher annual cost. That means that an offset account may be a great idea later on in your life when you’ve got more cash floating around that you can stick straight in a new offset account, but if you’re a first home buyer an offset account could cost you more money than it’s saving you.
A redraw facility on the other hand, will usually be free, but doesn’t offer quite the same utility for saving money. Redraw is an easy way to access the extra money you’ve put into your home loan. The value you get out of a redraw facility will obviously vary depending on your personal financial circumstances though, and that’s what makes genuinely thinking about this stuff so important. Maybe you’re less concerned with fees and keen on a wide feature offering.
Maybe you’re budget-conscious and want a no-frills home loan that gets the job done and not much else. Either way, you can’t just tick the boxes and sign up for whatever sounds good. You need to think about where you stand and decide what’s appropriate for you based on your wants and needs.
I mentioned extra repayments a few moments ago, and that’s another big one to consider, along with repayment frequency.
If you do suspect you’ll be able to make additional repayments on your home loan, a fixed rate home loan may not be for you. They usually have an annual limit on how much extra you can repay on your home loan, and may even charge you a fee for making an additional or larger repayment. Variable rate home loans on the other hand, typically let you make as many extra payments as you like! With no fees for making extra repayments, and no limits on how many you can make either.
So that’s an important distinction to keep in mind. The only thing I’ll say about repayment frequency is that not all home loans let you choose between weekly, fortnightly or monthly payments. Not only is flexibility valuable, but the more frequent your scheduled repayments are, the more you’ll save on interest over the life of the loan. It’s not hard to find a home loan that lets you choose your repayment frequency, which makes it more important to keep an eye out for the ones that don’t!
Now, onto your personal conditions – by that we mean things like your life stage, and what you might have planned for your future. For example, a lender may want to know if you and your partner are planning any changes that will impact your future income or expenses. For example, planning on having a child in the future or changing jobs. Seems a bit personal I know, but having a child typically means more expenses and less income, so the lender will want to, with your input, develop a contingency plan and discuss options for keeping you financially secure during that lower-income period.
That goes for any major future changes really – whatever it’s about, you’ll want to flag any significant planned changes with your lender.
The stability of your employment will also play a part. We touched on this in the second C when we were talking about capacity, but it’s relevant here too in terms of your personal conditions. As we’ve covered, lenders will look for evidence that you are established and embedded in your industry and role, so that they can rest assured knowing there’s not much of a chance you’ll be out of work any time soon.
However, they may also ask about your future plans regarding your employment, wanting to hear you say something along the lines of ‘I am not planning on quitting my job any time soon’. It won’t do anything to materially change the logistics of your home loan application, but it will help the lender feel more confident in handing you a great big wad of cash.
And if you are applying for a home loan with a term that would take it past your 67th birthday, the lender will want to talk about something called an ‘exit strategy’. This basically means they will want evidence that you’ll be able to continue paying off the home loan beyond the point at which you retire.
Lenders use 67 because that’s ostensibly retirement age, but you might be planning on retiring early or working a little later in life, so don’t get too hung up on it. BUT; you’ll need a plan either way. Maybe you plan on selling off assets to fund your home loan repayments going forth, you could have plenty of superannuation built up and ready to go – maybe you make ten figures a year and simply don’t have to worry about it. In any case your lender will definitely want to talk it through with you and get a grip on how you plan on continuing to service your loan, so be prepared for that.
That’s all five C’s covered, and the end of Mortgages Made Simples. Hopefully you’re feeling confident about the knowledge you’ve gained from these videos, and ready to give Compare the Market’s new home loans service a go! It has everything a prospective homebuyer could ask for, including real-time property reports, a borrowing power calculator, a credit score fetcher, and the ability to model countless different home loan scenarios, that you can even base off the exact property you want to buy! And, once you’re ready to apply for a home loan, you’ll be guided through the process from start to finish, with Compare the Market’s Home Loan Specialists on hand to answer any questions you have.
Once you’ve finished filling out your initial application, they’ll handle the rest – from identifying home loans you might be eligible for, to filling out and submitting all the necessary documentation on your behalf once you’ve chosen the home loan you want to apply for. So if you’re ready to compare, apply and settle then Compare the Market’s ready to help you.