How Much Can You Afford?
Before you buy or build a home, find out about your financing options. Ask banks and
other financial institutions:
• if you are eligible for a loan
• how much you need for a deposit
• how much you can borrow.
The amount you can borrow will normally depend on:
• your income
• the interest rate
• the term of the loan
• your other commitments, such as credit cards and personal loans.
You may be eligible for a loan if you:
• have enough to pay a deposit on a property and sufficient funds for additional costs
• are in regular employment and receive sufficient income to service the loan and
• meet the requirements of the lender.
Consumer Credit Code
The Consumer Credit Code is a set of rules to ensure borrowers are aware of their
obligations in credit transactions. Institutions providing home loans are required to
truthfully divulge all relevant information about the loan in a written contract. The contract
should include information on interest rates, credit fees and charges, and commissions.
For further information on the Consumer Credit Code, contact the Office of Fair Trading.
Other loan commitments
A housing loan is a long-term commitment and the home it provides will be important to
your health and wellbeing. You should not jeopardise this by over-committing yourself
with other credit. Other credit reduces the amount you can borrow and whether you are
able to make your home loan repayments. The most common reason borrowers get into
difficulties repaying their mortgage is over commitment to other credit.
The larger your deposit, the easier it will be to buy a home. You will not need to borrow as much. Generally, you will need between 5% and 20% of the purchase price of the
property as a deposit. However, some lenders will lend 100% of the value of the property
provided the borrower meets certain strict conditions. You will also need to budget for
other costs, such as stamp duty, legal expenses, lender’s fees, government charges and
Interest is charged to the borrower by the lender for the use of the lender’s money. The
interest rate is the annual percentage of a loan amount that is charged as interest. The
interest rate can and will fluctuate with changes in economic conditions.
Rates of interest may be fixed or capped for a period of time, or alternatively may vary
during the term of the loan in line with general interest rates.
What is a mortgage?
The mortgage is the legal document for the loan on a property, with the terms and
conditions. Generally, if repayments are not maintained or the borrower otherwise
breaches the mortgage conditions, the lender has the right to sell the property to recover
the outstanding debt.
Second mortgages may be obtained if additional funds are needed to complete the
purchase of a home, or for other reasons. The first lender has to agree. Generally, lenders
prefer to lend all of the money and hold first and second mortgages.
This is needed if you borrow more than a set proportion of the valuation. The mortgage
insurance premium is a once only payment. Mortgage insurance protects the lender if you
default on the loan and the property is sold for less than the outstanding loan amount.
You, as the borrower, can take additional insurance such as income protection insurance
to cover the mortgage repayment in the event of illness, accident, unemployment or
Types of Lenders
There are many different types of home lenders. Each has different interest rates, terms,
conditions and lending criteria. The most common types of lenders are banks, building
societies, credit unions and mortgage brokers.
Types of Loans
Standard variable interest rate loan
This is the usual loan offered by home loan lenders and the most popular type of home
loan. The interest rate can go up or down throughout the term of the loan.
Repayments, usually monthly, are the same throughout the term of the loan, changing
only with the rise and fall of interest rates. Normally, in the early years of the loan, each
repayment is mostly paying interest charges and less of the loan principal. In later years,
the opposite occurs.
Features, such as added flexibility in making repayments and a redraw facility, are often
included in this type of loan.
Basic variable interest rate loan
This type of loan offers a lower interest rate and repayment than a standard variable
interest rate loan but has fewer or none of the features of standard variable loans.
Fixed interest rate loan
This type of loan offers a fixed interest rate for a specific period (eg. six months to five
years). At the end of the fixed rate period, the loan is renegotiated for a further fixed term
or reverts to the variable interest rate current at that time. It may not be possible to pay
extra amounts off the principal without paying a penalty. A penalty usually applies if the
borrower wishes to refinance the loan during the fixed interest rate period.
Part variable/part fixed interest rate loan
Often referred to as split or combination loans, this loan allows the borrower to pay a
fixed interest rate on a portion of the loan while paying interest on the remaining portion
at the standard variable interest rate. This gives the borrower flexibility and interest rate
Capped or introductory interest rate loan
Under this type of loan, the interest rate is fixed for the capped period, which is usually
six to 12 months. During this period, the interest rate cannot go higher but it may go
lower if the lender’s standard variable interest rate falls below the capped rate. These
loans are commonly referred to as honeymoon rate loans. Often, these loans offer the
lowest interest rates and this can assist a new borrower to adjust to mortgage
repayments. However, the borrower also needs to be prepared for an increase in loan
repayments once the capped period ends.
An all-in-one loan is usually a variable interest rate loan, which permits the borrower to
place all their income into the one account, reducing the loan balance and the interest
paid. The borrower can access the account to meet day-to-day expenses. Additional
payments are permitted without attracting penalties. Due to its flexibility, there may be
greater costs (eg. higher interest rate and/or higher monthly fees).
Home equity loan
A home equity loan allows a borrower to use the equity in the home (the portion of the
property the borrower owns) to gain access to an immediate source of funds. There are
two types of home equity loans. Under the first type of home equity loan
a borrower may borrow an additional lump sum amount which acts like a second
The second type is an equity overdraft or line of credit. A line of credit is like an overdraft secured by the equity in the borrower’s home. The interest rate on a line of credit is usually higher than for other home loans but less than the interest rate on a personal loan or credit card.
A consolidated loan permits the borrower to combine several loans, such as a home loan, credit card debt and personal loan into a single variable or fixed rate loan. This can result in a lower overall repayment and interest rate for the borrower.
Interest only loan – an interest only loan requires the interest to be paid during the loan term with the amount borrowed becoming due at the end of the loan. These loans are usually for one to five years and are often used by people buying investment properties.
Bridging loan – a bridging loan is often used to buy a property while waiting for the sale of your existing property. A bridging loan is a short-term housing loan where repayments meet the interest only. The amount borrowed becomes due at the end of the loan term. As higher interest rates are usually charged for bridging loans, it is best to keep the term as short as possible.
Other Loan Features
Fortnightly repayments - You can save money by making fortnightly rather than monthly repayments. This is done by dividing your monthly repayments in half and making these once a fortnight. This means that you will make one extra repayment a year. This is because there are 26 fortnights (or 13 sets of four weeks) in a year, and only 12 months. Making repayments fortnightly can reduce the term of your loan and save you a lot of money on interest repayments.
Extra repayments - Most variable and some fixed rate loans allow the borrower to make additional or lump sum repayments without penalty. If you can afford it, regularly adding a little bit extra to your repayments can significantly reduce the amount you end up paying over the term of the loan. If you can make a lump sum payment into your home loan account, this will also reduce the term of the loan and the total amount you repay.
Mortgage offset account - A mortgage offset account is a savings account combined with a home loan but as two separate accounts. Any interest earned on the savings account is applied to reduce the interest payable on the home loan.
Redraw facility - A redraw facility allows you to withdraw additional repayments, which have previously been made.