HOME LOAN INFORMATION AND GUIDANCE
Home Loan Questions Answered by an Expert Mortgage Broker
Clear answers to common questions about borrowing power, deposits, refinancing, interest rates, offset accounts and more.
Buying a property or refinancing a home loan can raise a lot of questions. How much can you borrow? How large a deposit do you need? Is the lowest advertised interest rate necessarily the best option?
Below, we answer some of the most common home loan questions Australian borrowers ask. The information is general, because the right answer will depend on your income, expenses, deposit, property, existing debts and future plans.
Borrowing Power and Home Loan Repayments
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Your borrowing power depends on much more than your income. Lenders also consider your living expenses, existing loans, credit-card limits, dependants, proposed loan term and the repayments they believe you could manage if interest rates increased.
Two lenders can assess the same borrower quite differently because their credit policies, assessment rates and treatment of income and expenses are not identical. Online calculators can provide a useful starting point, but a properly assessed borrowing-power calculation is more reliable before you begin making offers on property.
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Banks compare the income they are prepared to use with your existing commitments and estimated living expenses. They then test the proposed home loan at an assessment rate above the actual product rate to allow for potential changes in interest rates or circumstances.
The treatment of overtime, bonuses, commission, allowances, rental income, self-employed income and existing investment-property expenses can vary considerably between lenders. Selecting the right lender policy can therefore be just as important as selecting the interest rate.
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Depending on your circumstances, borrowing power may improve by reducing unused credit-card limits, paying out personal debts, reviewing discretionary expenses, extending the proposed loan term or selecting a lender that treats your particular income more favourably.
It is important not to close facilities or restructure debts without first understanding the overall effect. A mortgage broker can model different approaches and identify which changes are likely to make a meaningful difference.
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Repayments are determined by the loan amount, interest rate, repayment type and remaining loan term. Principal-and-interest repayments reduce the balance over time, while interest-only repayments generally cover interest for an approved period without reducing the principal.
When budgeting, it is sensible to consider more than the minimum repayment at today’s rate. Testing the repayments at a higher rate can help you understand whether the proposed loan remains comfortable if circumstances change.
Deposits and First Home Buyers
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Many borrowers aim for a deposit of 20% of the property value, plus enough money to meet purchase costs. This generally keeps the loan at or below 80% of the property value and may avoid Lenders Mortgage Insurance.
However, some eligible borrowers may be able to purchase with a smaller deposit through a participating lender, a government-supported scheme, a professional LMI waiver or by paying Lenders Mortgage Insurance. The minimum suitable deposit depends on the borrower, lender, property and loan structure.
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It may be possible. Some lenders offer loans above 90% of the property value, and eligible buyers may have access to an Australian Government home-buyer support scheme. Lending criteria, property limits and eligibility requirements apply and can change over time.
A smaller deposit can help you purchase sooner, but it may also increase the loan, repayments and total interest payable. You should compare the cost of purchasing sooner with the benefits of continuing to save.
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Lenders Mortgage Insurance, commonly called LMI, protects the lender rather than the borrower if the loan cannot be repaid and the sale of the property does not cover the outstanding debt and costs.
LMI is commonly associated with loans above 80% of a property’s value, although the rules and cost differ between lenders. It may be paid upfront or added to the loan where permitted. Some eligible professionals can access higher-LVR lending without paying LMI.
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In addition to the deposit, buyers may need to budget for stamp duty, transfer and mortgage-registration fees, conveyancing or legal fees, building and pest inspections, lender fees, insurance and adjustments at settlement.
First-home-buyer concessions can reduce some of these costs, depending on the property, purchase price and state or territory. Before making an offer, it is worth preparing a full funds-to-complete estimate rather than considering the deposit alone. -
Pre-approval is a lender’s preliminary indication that it may lend up to a certain amount, subject to its conditions. The lender will generally review your income, expenses, debts, credit history and available deposit before issuing it.
Pre-approval is not the same as unconditional approval. The selected property must still be acceptable to the lender, and your position may need to be reassessed if your circumstances or the lender’s policy changes. A useful pre-approval should be based on accurate, verified information rather than a quick automated estimate.em
Refinancing Your Home Loan
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Refinancing may be worthwhile if it produces a meaningful interest saving, provides better loan features, improves the loan structure or allows you to achieve another financial objective. The advertised rate difference alone does not tell the whole story.
You should also consider discharge costs, government fees, application or package fees, the remaining loan term and the time required to recover the switching costs. In some cases, negotiating with the existing lender is the better outcome.
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The potential saving depends on your loan balance, current and proposed rates, offset balance, fees and remaining term. Even a modest rate reduction can be valuable on a large balance, but the saving should be measured against all costs of changing lenders.
A proper refinance comparison should show the monthly and annual interest difference, upfront costs and estimated break-even period. It should also avoid presenting lower repayments created merely by restarting the loan over a longer term as a true saving.
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Reviewing your home loan at least annually is a sensible starting point. You should also review it when your fixed rate is ending, your property value has increased, your income has changed, you are planning another purchase or your lender is offering new customers a materially better rate.
A review does not always lead to a refinance. Sometimes the best result is a pricing reduction with the current lender or a change to the way your existing loan and offset accounts are being used.
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Depending on available equity and serviceability, refinancing may allow credit cards, personal loans, car finance or certain tax debts to be consolidated into the home loan. This can reduce required monthly repayments, but it may extend short-term debt over a much longer period.
The loan should be structured carefully, often using separate loan splits and an appropriate repayment plan. Some lenders place restrictions on the type or amount of debt they will consolidate, particularly ATO debt or business-related liabilities.
Interest Rates and Home Loan Features
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There is no single lender with the best rate for every borrower. Pricing can depend on loan size, loan-to-value ratio, occupancy type, repayment type, property, profession and the lender’s appetite at the time of application.
The lowest advertised rate may also come with limited features or eligibility restrictions. A useful comparison considers the interest rate, comparison rate, fees, offset facilities, redraw conditions, policy and likelihood of approval.
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A fixed rate provides repayment certainty during the fixed period, while a variable rate can move and usually offers greater flexibility. Variable loans commonly allow unrestricted additional repayments and offset accounts, although features vary between lenders.
The decision should be based on your need for certainty, cash-flow position, expected changes and comfort with rate movements—not simply a prediction about what interest rates will do next. Some borrowers choose to split their loan between fixed and variable portions.
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An offset account is a transaction account linked to an eligible home loan. The balance held in the account is generally offset against the loan balance when interest is calculated.
For example, if your home loan balance is $600,000 and you hold $50,000 in a 100% offset account, interest would generally be calculated on $550,000 while those balances remain unchanged. Offset features and account fees differ, so the benefit should be compared with the cost of the loan package.
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An offset account holds your money in a separate transaction account, whereas redraw allows you to access eligible additional repayments previously made directly into the loan. Both can reduce the interest charged, but access, tax implications and lender rules can differ.
The distinction can be particularly important if a property may later become an investment. Borrowers should obtain tax advice before withdrawing or restructuring funds where future tax deductibility is a consideration.
Self-Employed Home Loans
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Yes. Self-employed borrowers can access competitive home loans, although lenders usually require additional evidence to confirm sustainable income. This may include personal and business tax returns, financial statements, notices of assessment, BAS, business bank statements or an accountant’s letter.
The main challenge is often finding the lender whose policy best reflects how the business actually earns income. A strong business can still produce very different borrowing-power results across different lenders.
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Many lenders request the most recent two years of personal and business financial information, but some can assess an application using one recent financial year where their criteria are satisfied. Alternative-documentation loans may also be available for suitable borrowers who cannot provide standard financial statements.
The appropriate option depends on the age and structure of the business, recent income trends, industry, loan-to-value ratio and quality of the supporting documents.
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Lenders may begin with taxable profit and then consider certain allowable adjustments, such as depreciation, interest expenses, one-off costs or additional superannuation contributions. Treatment varies, and not every accounting expense can automatically be added back.
They may average two years, use the lower year, rely on the latest year or apply restrictions where income has changed significantly. Company, trust, partnership and sole-trader income can also require different assessment methods.
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It may be possible to use salary, director’s fees, dividends, trust distributions or retained business profits, depending on the ownership structure and lender policy. The lender may need to establish that the applicant controls the business or has an ongoing entitlement to the income.
Existing business debts, related entities and distributions to other beneficiaries may also affect the assessment. This is an area where presenting the structure clearly and selecting an appropriate lender can materially change the result.
Investment and Complex Lending
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If your property has sufficient usable equity and you can service the additional debt, you may be able to release funds for an investment-property deposit and purchase costs. The equity release and investment loan are generally kept separate from private home-loan debt.
Using equity reduces the cash deposit required, but it does not remove the debt. Both loans, total repayments and the risks of property investment should be considered before proceeding.
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Interest-only repayments can improve short-term cash flow but do not reduce the principal during the interest-only period. Principal-and-interest repayments are higher initially but progressively reduce the debt.
The right structure depends on cash flow, investment objectives, overall debts and tax advice. Interest-only periods are limited and the repayments usually increase when the loan converts to principal and interest over the remaining term.
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Yes, some Australian lenders accept foreign income for property purchases and refinancing. The outcome depends on citizenship or residency, country of residence, currency, employment type, tax position and the lender’s treatment of foreign income.
Lenders commonly convert income to Australian dollars and then use only a percentage of it. Maximum loan-to-value ratios and documentation requirements also vary, so lender selection is particularly important for expat applications.
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A decline from one bank does not necessarily mean that finance is unavailable. Another lender may assess the income, credit history, property or loan purpose differently. Specialist, non-bank, low-documentation, bridging and private-lending solutions may also be available in appropriate circumstances.
The first step should be understanding why the application was declined. Repeated applications can create further complications, so it is generally better to assess the position and determine a suitable lender or improvement strategy before applying again.
