Home loan

What you need to know before applying for your first home loan


My partner and I just got pre-approved for our first home loan, and I feel like I could spit at any moment.

This is partly due to my enthusiasm: it’s a privilege to be in this position and the thought of hanging a picture on a wall without asking permission brings me really deep (and a bit depressing) joy. But, above all, I feel sick because of the stress.

I don’t come from a wealthy family and both my parents are tenants. No one has ever taught me how this process works and for a total beginner it is really confusing. Here’s everything I’ve learned so far.

You need more money than you think

I thought I should save 20% of the price of the house as a deposit. That’s what people say, right? Then a nice round (but downright terrifying) number formed in my mind: $100,000.

I settled on it while browsing the $500,000 “comfortable” and “unique” two-bedroom units in North Melbourne. (Tip: always look at how much places are selling for, not what they’re advertised for.)

Over time, there were fewer and fewer of these places available. The market was exploding and suddenly the same two-beds were selling for $550,000. Then $600,000. Then $650,000.

When I finally got a deposit, I was so proud. I had saved more than I ever thought I could. But when I sat down with a mortgage broker, he told me that wasn’t enough.

If I wanted to avoid paying mortgage insurance from lenders, I had to add $11,000 up front to cover stamp duty, plus a few hundred more for extras like mortgage registration and land transfer fee.

Banks really have an “ideal” customer in mind

Lenders don’t just want to know how much money you have, they also want to know how do you earn it and what do you spend it on.

You have to provide payslips, which is very difficult as a casual or self-employed worker, as well as recent bank statements.

The first made me nervous because, although I work full time, I am under contract. And the latter got me thinking every time I went out for a big night out or ordered clothes online.

In the end, it was fine. But that was partly because my mortgage broker had found a lender who didn’t care so much about contract work. It turns out that some banks vibe differently on certain things.

Pre-approval doesn’t mean what you think it means

My partner and I now have a letter from a bank that says we are “conditionally pre-approved” for a loan.

Instead, they will make a decision once they confirm that all of your information has not changed and that the property you are interested in is truly worth the investment.

That’s why I have to make sure that any deals I make are “subject to funding” – in case something goes wrong and I can’t get a loan.

And here’s the kicker: all auction bids are unconditional. It doesn’t matter if you can’t get the loan or if you have questions about the building inspection. If you call out a number on the street on a Saturday morning, you have to follow through.

Finally, once you’ve done all that work of registering the bond, inspecting homes, checking lenders, deciding on a loan, and filing paperwork for pre-approval, it only takes three months.

There is enormous pressure to buy something quickly. Cross! Why not spend more than half a million dollars that I don’t have for a house that I walked through 10 minutes once?

Pre-approval can make you feel enormous pressure to buy something quickly. And the booming real estate market is not helping.(ABC Gold Coast: Dominic Cansdale)

It pays to turn on your “bullshit detector”

Craig Morgan, an independent mortgage broker, knows how disempowering the process can be.

But he has some helpful tips:

  • Set your absolute maximum price (and be firm on it): Morgan suggests discussing this number with your mortgage broker, so they can tell you how realistic it is, but never share it with a real estate agent.
  • Find a lender: Something that is a deal breaker at one bank (i.e. your credit profile or income type) may not matter as much elsewhere.
  • Shop for a loan: He suggests going the extra mile to find not only a low interest rate, but also the type that suits your needs (is it fixed or variable?)
  • Be prepared for prices to rise: “Pull out your online calculator, type it in at 5.2% and see what you think of that reimbursement figure,” he says. “You might think that’s ridiculous. But 5.2% is still well below the 10-year average.”
  • Set your “bullshit detector” to maximum: The real estate agent works for the people selling the house; a lender only has to find you a loan that is “not unsuitable” (ie not necessarily the best); and mortgage brokers receive a commission paid by banks.

“There’s a big sales industry out there that wants you to believe everything is easy. But it’s a confusing world,” Morgan says.

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