How do you borrow money to buy a home?

Unless you’re part of the lucky few, you’ll likely have to borrow money from a financial institution to fund a property purchase.

Borrowing to buy a house or unit is one of the biggest financial commitments you’ll make; after all most home loan terms are 25 or 30 years! 

The decision doesn’t have to be a scary one, though. If you’ve done your research, borrowing to buy doesn’t have to seem stressful.

When providing home loans, most banks and mortgage lenders prefer to lend a maximum of 80 per cent of a property’s value, and have you pay the remaining 20 per cent as an upfront deposit. But thanks to the high price of housing in many of Australia’s popular areas, saving up this 20 per cent deposit can be a challenge. 

There are also options available to get a home loan with a smaller deposit, such as 10 per cent or 5 per cent of a property’s value, provided you also cover the cost of Lenders Mortgage Insurance (LMI). And if you get a little help from a guarantor, you may even be able to borrow 100 per cent of the property value, for a no-deposit home loan with no LMI!

Of course, there are plenty of risks with taking out a larger loan. Over-extending yourself with a huge loan can put you on a fast track to mortgage stress. One common benchmark is that if more than 30 per cent of your take-home pay is going towards your home loan repayments, you may be in mortgage stress. You can use a mortgage calculator to estimate the repayments and the loan size you may be able to afford. 

Borrowing more money creates more risk when interest rates rise compared to if you took out a smaller home loan. You’re also more susceptible to reductions in your income, such as if you’re injured or lose your job. Mortgage lenders often factor a buffer into their calculations when assessing home loan applications to help account for future changes. RateCity’s How Much Can I Borrow Calculator also uses a buffer to help give you an idea of how much a lender may be willing to lend you to buy a home, based on your income and expenses. 

Just like properties themselves, all home loans are quite different and have features that will suit some borrowers but not others. So just as you would shop around for the perfect home, borrowers are advised to shop around for a home loan that is a good fit for your financial situation.

When comparing home loans, consider more than just the interest rate. A home loan’s other fees, features and benefits can affect its overall value. You could look at each home loan’s comparison rate, which combines interest with standard fees and charges, or compare their Real Time Ratings™ on RateCity, to find the cost and flexibility of each loan combined into a single simple star rating.  

Starting a home loan application can be as simple as filling in a form online, or in a local branch of the bank or lender.

For your application to be approved, you’ll need to provide proof that you can afford the mortgage repayments. Lenders will ask for details of your income and expenses, such as payslips and bank statements, as well as details of any other assets or liabilities you have, such as vehicles, other properties, personal loans and credit cards.

If your application is successful, you may be offered mortgage preapproval, giving you an approximate budget to help you shop for a property. Once you’ve found a property, the lender will conduct a valuation before it will offer final or unconditional approval.

If you’re not confident about managing the home loan search and application process on your own, you may be able to contact a mortgage broker for help. These home loan experts can help you work out which mortgage deals may best suit your financial situation, and can negotiate with mortgage lenders on your behalf to help you get a better deal.