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Financing Your Home

The average house in Australia is about eight times the average annual salary, so most people will need to borrow money. We’ll take you through the financial process and how best to avoid the many pitfalls on your way to having your own home in Australia.

Mortages

Very few people are fortunate enough to have the money to buy a house outright. The price of an average house in Australia is about equal to 8 years average income, so, most people have to borrow money to buy a home of their own.

A mortgage is a long-term loan specifically designed for the purchase of property. You may take out a mortgage from a bank or other lending organisation.

Broadly speaking, there are two types of mortgage:
  • Interest-only Mortgages
  • Repayment Mortgages
As the term implies, an interest-only mortgage means that each month you only pay back the interest on the principle (the amount borrowed). Effectively, this means you never pay off any of the borrowed money. The upside to this is that house prices always increase over a long period (such as the 30-year term of an average mortgage). This means you will see the value of your home grow over the years and be able to realise a profit (or equity) in the property at a future date. So interest-only mortgages are not so bad as they might seem at first. They are also the cheapest type of mortgage. A repayment mortgage is one in which the borrower pays the monthly interest plus a pre-determined amount towards lowering the principle.

Getting Finance

The first step to buying your home is to contact a mortgage broker or a financial advisor. This is a good idea because obtaining a suitable mortgage is a tricky and time-consuming process. If you have just arrived, you can pass the job onto a professional who will guide you through the maze of lenders, banks, interest rates and types of borrowing.

Mortgage Brokers and Financial Advisors

Mortgage brokers work with a collection of lenders. The biggest lenders are the four major Australian banks (known colloquially as the Big Four). These banks are regulated by a government body called the Australian Prudential Regulation Authority (APRA).

The majority of Australian mortgages come through these banks, but there are many smaller banks and lending institutions, and a good broker will find the best deal for you.

Visit our Daily Life: Banks and Finance page from more information about the banks and banking in Australia.

Usually, you don’t pay a mortgage broker - they work on a commission from the institution who eventually gets your business. A broker should shop around for you and obtain the best deal and a mortgage to fit your requirements.

A mortgage broker will need to have complete access to all your financial details. They are bound by their professional code of conduct and practice to keep all this information strictly confidential. Armed with this data, they will be able to tell you quite quickly what your borrowing potential will be and what approach would be most suited to you.

Credit Ratings and Checks

As a new arrival in Australia, you will need to prove your credibility with a lending institution. The key factor in obtaining a mortgage is your proof of income. A lender will want to see a minimum of three months of bank statements, pay slips and other related documents.

Ways to Smooth the Borrowing Process

  • Before you leave your country of origin make sure you have all your financial papers in order and take these on the plane with you to Australia.
  • Try to contact Australian lending institutions and mortgage brokers before you leave.
  • If you are able, find a mortgage broker or financial advisor through personal recommendation.
You will have to agree to a credit rating test to establish that you are a reliable borrower. This credit rating is crucial to your chances.

Here are a few tips on how to maintain a good credit rating (or credit score).
  • Pay your monthly bills on time
  • Never attempt to miss any payment
  • Don’t breach financial contracts
  • Don’t make purchases you can’t afford to repay
  • Don’t exceed your credit card limits
  • Keep your credit card active

Full Doc and Low Doc Mortgages

There are two main routes to getting a mortgage. You can go Full-Doc or Low-Doc
A Full-Doc mortgage application is where all your assets and liabilities have to be fully documented. At a minimum, you will need to give the lender:
  • Income verification or proof of earnings. For employed people, this will be pay slips and/or tax returns. For self-employed people it is based on Profit and Loss Statements drawn up by a qualified accountant.
  • Bank account numbers
  • At least six months of bank statements
  • All credit card liabilities and limits
  • Credit card statements for six months
  • Details of all store cards
  • Details of all other debts or loans, including car leases and student loans
  • Your Rental Agreement to show the cost of your existing rental accommodation
  • Evidence of mortgage and/or rental payments
  • Copies of mortgage payments if you already own a home
  • A breakdown of monthly expenses
  • A complete list of assets - personal possessions, any property you own, cars, home contents
  • Documents describing the value of your pensions
  • A valuation of the property you are planning to purchase
A Low-Doc loan is common for self-employed people or those in unconventional jobs where they may not be able to show a regular monthly income. Some lenders will only need proof of income from your accountant and a brief run-down of your monthly outgoings. In general Low-Doc loans provide a lower percentage of the overall cost of a property (often around 60-70%), whereas lenders insisting upon Full-Doc applications often provide 80-85% of the cost of the house. As a result, Low-Doc loans require a larger down payment or deposit.

Deposits

It is extremely hard to obtain a 100% mortgage, and a virtual impossibility for a new arrival in Australia. Most home loans are limited to 80% of the purchase price, although 85% loans are available (for Full-Doc loans). Anyone applying for a Low-Doc loan cannot expect to borrow more than 60-70% of the purchase price.

The amount the bank lends will depend on how well you fit the requirements listed above, and the value of the house you want to buy based on a certified valuation. This will be conducted by a professional valuer. The bank will instruct the valuer, but you will have to pay for the service. Valuation costs range from about $400 to $1,000 depending on the approximate value of the property.

The Term of a Mortgage

This refers to the length of the mortgage. It is most common for a mortgage to be a period of 25-30 years.

Interest Rates

The Reserve Bank of Australia (RBA) is the national central bank and it operates under a charter from the government. The RBA controls the cash rate, which is the underlying interest rate used as a baseline or a gauge for bank mortgage rates. It’s important to know that mortgage rates set by the banks and other lenders are always at least two percentage points higher than the cash rate.

Some lenders offer what they call ‘honeymoon rates’. These are lowered rates for a short period - typically 12 months. With these schemes, the borrower is given a mortgage of 25 years. The first 12 months will be at a low rate, perhaps 2-3 percentage points below the regular rate. After 12 months, the interest rate reverts to the standard rate. The advantage of this is that the borrower has a year at a lower rate of interest. The disadvantage is that there are heavy penalties to pay if you withdraw the mortgage shortly after the honeymoon period is up.

Fixed and Variable Interest Rates

There are two ways to pay interest on a mortgage.
  1. Fixed rate mortgages. This comes with an interest rate that is agreed between lender and borrower at the time of taking it on. It will then be fixed for a period of time, typically 5 years. The rate set at the time of getting the mortgage will almost always be higher than the current lending rates or variable rates at the time.
    1. It’s really a game of chance: On the one hand it is an attractive option because it gives you peace of mind. The downside is in a volatile world, you can’t predict where interest rates will go. The cash rate may rise above the rate you fixed and stay that way for a long time - in which case you win because your rate is fixed. But then again, rates could fall far below your fixed rate, in which case, you lose.
  2. Variable rate: As the name implies, this is a rate that will vary over the term of the mortgage. Every three months, the RBA announced the interest rate for the coming quarter. Like many countries, Australia goes through periods of stable interest rates and times when the rate varies, sometimes dramatically. Because a mortgage is often for a large sum of money, home owners may be greatly affected by changes in interest rates. This is one of the most serious disadvantages of having a mortgage.
An online mortgage calculator is useful for calculating the monthly cost of a mortgage.

Visit our Life in Australia section for more articles related to the subject Moving to Australia.
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