Important numbers to check when applying for a home loan

There’s a lot that goes into a home loan application. Lenders will assess not only your current financial situation but your credit history, as well. 

Key points:

Ready to start saving on your home loan?

Find out in under 2 minutes if you qualify for one of our home loans.

Do I Qualify?

As a borrower, it’s important to think about the different factors that could affect your chances of approval, such as your credit and loan amount. We’ve outlined a few key areas you should consider before applying for a home loan. 

Your borrowing power 

Your borrowing power, also known as borrowing capacity, is the maximum amount that you can reasonably afford to borrow. The borrowing capacity is based on the following: 

• Number of borrowers 
• Loan type 
• Number of dependents 
• Income 
• Monthly expenses 

You can get an idea of your borrowing power by using an online calculator. Simply input the needed information, and you’ll have a ballpark figure of what your borrowing power could be. You can change the information on the online calculator to see how it can affect your estimated borrowing capacity. 

Your loan amount 

This goes hand in hand with your borrowing power. It’s unlikely for a lender to approve your home loan application if you’re borrowing way out of your means.  

Once you know the limits of your borrowing capacity, it’s best to stay within those limits to improve the chances of home loan approval and avoid additional stress on your finances. 

If you’re still unsure about how much to borrow from a lender, you could apply for a pre-approved home loan. A pre-approved mortgage is not a guarantee of home loan approval, but it gives borrowers a better idea of how much they’re able to borrow from a lender.  

Your loan-to-value ratio 

Your loan-to-value ratio (LVR) refers to how much of the property’s value you’re borrowing. For example, if you have a $100,000 deposit for a $500,000 home, that’s a 20% deposit, which is an LVR of 80%. The smaller the LVR, the less of the property value you’re borrowing.  

Many lenders prefer home loans with an LVR of 80% or lower (this means a deposit of 20% or higher). However, there are some, such as loans.com.au, that allow up to 90% LVR, often with a requirement to pay for Lenders Mortgage Insurance (LMI), which may easily cost over $10,000 to $20,000 depending on several factors. 

Your credit score 

A credit score is essentially a numerical representation of your trustworthiness as a borrower. It’s a quick way for lenders to see whether a potential borrower can pay back the loan. Your credit score is based on the following: 

• Payment history 
• Active and previous loans 
• Credit limits 
• Defaults on history or debts 
• Credit applications 
• Credit report requests 
• Record of bankruptcies 

A credit report will include all the information above, as well as your personal details and other pertinent financial information. You can get a free credit report once every three months with one of the major credit reporting agencies in Australia, which are Equifax, illion, and Experian. 

Each credit reporting agency has its own way of scoring borrowers. It’s best to check directly with individual credit reporting bodies to see where your credit lies, keeping in mind that credit ratings may change over time. Equifax and Experian categorise their credit ratings similarly: 

Meanwhile, illion divides its credit rating categories as follows:

Check your credit score before applying for a home loan, as it has a significant effect on your chances of getting approved. The higher your credit score is, the better. Take note, a healthy credit score can help you get a home loan with better rates and loan terms.  

Interest rates and comparison  

These two rates are one of the most important factors to consider before taking out a home loan. The interest rate is the rate applicable for the home loan, expressed as a percentage per annum (p.a.). This represents how much interest you’ll be charged in a year. You can calculate potential interest costs for your loan using an online home loan repayment calculator. 

The comparison rate, meanwhile, is meant to express a true cost of the loan, as it includes several fees as well as the interest rate. When looking at home loans, it’s best to look at both the interest rate and comparison rate to know the true cost of the loan. 

Other things to consider when taking out a home loan 

When applying for a home loan, you should also think about the following: 

Loan term

Commonly around 25 to 30 years. This is important to know, as a longer loan term generally means you’ll pay more overall, as the principal and interest on your loan is stretched out over a longer period. 

Repayment frequency

With most home loans, you’ll have the option of making your mortgage repayments either weekly, fortnightly or monthly. Generally, the more frequent the payments you make, the more you will save in interest over the term of your mortgage. 

Extra repayments

Some lenders allow you to make unlimited additional repayments without fees, meaning you can put as much of your spare cash into your mortgage repayments as you like. In some cases, this may help you save some money in interest; however, it’s best to check with your lender to confirm if this is an option.

Ready to get started on your home loan journey? Apply online today! If you want to learn more about your loan finance options, check out loans.com.au’s range of home loans. Or you can speak with our friendly lending specialists by calling 1300 475 648. 

Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek professional advice tailored to your circumstances before making any financial decisions.