7 Steps to Your First Home Loan

If you're thinking of buying your first home, don't make the mistake of beginning by spending weekends in search of your dream home.

That part of the journey will come soon enough, but it's not where you should start. Instead, you need to focus on securing your finances, or you'll never be sure how much you can afford.

And if you don't like the paperwork that's involved, fear not. There are many people available to  help, including your financial adviser or mortgage broker, solicitor, conveyancer and professional real estate agents. 

For first-timers, organising your finance can seem a confronting process but if you take it one step at a time, you'll have nothing to worry about.

Below is a list of milestones you must reach to obtain your mortgage. 

1. *****Save for your deposit*

This is an essential first step. You'll prove to yourself you have the financial capacity and discipline to meet your mortgage repayments. Lenders are looking for at least 10 percent of your requested loan to be covered by a deposit. Ideally, you'll have 20 per cent, or a lender may insist on you taking out lender's mortgage insurance (LMI). This protects them from you defaulting on the loan but costs you tens of thousands of dollars over the lifetime of a loan. 

Alternatively, you could seek a loan guarantee. Usually banks insist only parents provide this. Lenders will offer up to 105 percent of a property's value in these circumstances. Ask your financial adviser about this option.

2. *****Know your expenses*

Lenders will focus on your earnings, longevity of employment and monthly expenses for the 12 weeks leading up to the loan application. Banks used to be reasonably lenient on this aspect of an application, but have tightened up their criteria after the banking royal commission in 2019 criticised them for their lack of diligence. 

Carefully manage your outgoings and be honest with yourself. Pay off as much debt as possible and don't swap jobs just before seeking a loan or while it is being considered. That could send you back to square one. Don't crush your cash flow by buying a car, as that will drag down the amount of money a lender will give you. Lastly, apply for your credit rating to show the lender when the time comes. 

3. *****Understand what you can afford*

Many banks and lenders have basic online calculators that'll give you an idea of what you might be able to afford based on your income and outgoings. Exclude your current rent (obviously!) in the calculation. The answers from these calculators won't be gospel but they'll give you a decent idea of what you can afford. Their results will be influenced by the term of the loan and interest rate. Be aware, interest rates rise and fall, especially over the normal loan period of 25 or 30 years. 

4. *****Talk to a lender*

With a good idea of what you can afford, it's time to approach a bank, lender or mortgage broker to start firming up the numbers and get a sense of the style and location of property you can afford. They'll all ask you to state your income, outgoings, debts and their repayments, assets and dependents. Mortgage brokers represent a number of lenders, including banks, and provide the widest range of options and can take a lot of the hard work out of it at this point.  

5. *****Shop around*

There are an array of products, interest rates and services to choose from. If you don't use a mortgage broker, then your own research is essential. When you are ready to apply, make sure you have all your documents ready, such as pay slips, credit file, bank and credit card statements, electricity bill and so on. 

6. *****Decide on your loan*

A number of options are available. Two of the basic choices are loans with a fixed or variable interest rate. A fixed rate locks you in to a set repayment schedule. You can lose out if rates go down but win when they go up. A variable rate means you're playing the financial markets. Your repayments will vary over the months and years as the interest rate ebbs and flows. 

Another choice is to take an interest-free period for perhaps five years, which gets you into the market even though it might be a financial stretch right now. Be sure to understand the ramifications of these loans down the track. 

Be honest with yourself. Don't try to borrow more than you can pay back, or a world of pain awaits you down the track.

7. *****Pre-Approval Process*

When a lender pre-approves your loan, which can take around six weeks, they'll issue you with a pre-approval certificate or a home loan guarantee certificate. These mean who may you bid or buy a property knowing the lender will support you up to the limit of the promised loan. 

Conditions come with this. The lender may insist on lender's mortgage insurance, which protects them from you defaulting. They'll also value your prospective purchase to ensure you haven't paid too much. Pre-approvals usually last six months, so that's when it's time to start your property search in earnest.