How Does an Australian Mortgage Work?
Buying a home is an exciting time in your life. However, getting a home loan can also be intimidating to be faced with complex terms and jargon. Even the most experienced on the property market can be baffled by the home loan process. As a first time home buyer, it can be very confusing. And if you’re an Australian expat, you might be wondering how the rules change for you.
Don’t worry, we are here to offer expert advice for buying property in Australia. From buying property when overseas to whether you are eligible for an offset account or redraw facility, we’ll help you through every step of the home loan process in Australia to ensure you are well prepared for your purchase.
There are many different home loans available for home buyers in Australia. Terms like a fixed-rate loan, Australian credit licence, comparison rate and mortgage insurance might sound complicated. However, we’ll break down what you need to know for buying property in Australia.
It is crucial that you look at your loan options before making your home loan application. Similarly, home buyers need to research mortgage lenders to ensure they are offering you the best deal. Each home loan type offers various loan terms and interest rates to suit different personal circumstances for each home buyer.
Follow our comprehensive guide to the home loan process and investment property in Australia to confidently borrow money for either your new property. We’ll share what all home buyers need to know about Australian mortgages, interest rates, fixed-rate loans, variable-rate loans, interest-only loans, loan to value ratio and Lender’s Mortgage License.
What is a mortgage?
A mortgage is a type of loan used to purchase real estate so you don’t have to pay it as a lump sum upfront. It means you don’t have to spend years saving money before buying your property; you can move into the home before paying the complete lump sum.
Typically, in Australia a borrower will approach a lender or mortgage broker first. With a mortgage, home buyers only need to save enough for a deposit. While deposits can be a large amount, it is easier than saving for the whole lump sum.
For someone residing in Australia, this is usually around 20%. For an Aussie living outside of Australia, like an expat in the UK or Asia, they typically have to pay a 30% deposit for property investment loans. The lender will examine the home buyer’s financial situation and the property value and offer you a loan amount.
To get home loan approval, there might be certain stipulations from the lenders or financial institutions. Home buyers then repay the loan balance over monthly repayments. Plus, you will pay interest on your loan and ongoing fees. Ensure you understand the interest rates of your home loan.
If you are unable to pay back your home loan, or default on your mortgage repayments, the lender might have the power to take the property back. Their name is commonly on the property title until home buyers have repaid all the money.
Don’t worry though, the reserve bank or lender won’t offer you a home loan or mortgage that you aren’t able to pay. You are unlikely to lose your property.
There are often additional fees alongside interest to pay in the home loan process and mortgage application. These might include stamp duty, legal fees and mortgage broker fees. This is especially true of Australian expats, sadly. First-time home buyers may be exempt from certain costs.
Different kinds of home loans include an interest-only repayment home loan, a fixed-rate loan or mortgages with variable rates. Follow our advice on the home loan process to get your home sooner.
Get a free Australian mortgage assessment today.
How do mortgages work in Australia?
A residential property mortgage in Australia works much the same as it does elsewhere in the world. The basic principles of borrowing money from a lender and monthly repayments are inherently the same. However, there are some differences when it comes to investing in Australian property from abroad.
Let’s first cover how mortgages work in Australia. Usually, you (the borrower) will approach the lender to see what they can offer you. They will look at your financial situation, net income and credit history. With this budget in mind, you will be better prepared to start your property hunt in Australia.
Alongside your loan application, lenders might require you to submit the following too:
- Copy of passport
- Proof of address (copy of recent utility bill)
- Credit report
- Recent bank statements
- Recent payslips
- Latest personal tax return
Most lenders will look at your personal circumstances before offering home buyers an Australian mortgage.
The process of applying for a home loan in Australia might take a fair bit of time as lenders conduct thorough background checks on you. If you live outside Australia and are seeking a home loan for a property in Australia, there are usually extra stipulations.
Aussie expats might be liable to pay additional stamp duty and admin fees. Plus, the lender doesn’t always consider your foreign spouse’s income. Therefore, it can be harder to apply for a home loan in Australia if you live overseas.
However, the basic principles of borrowing money for your property remain the same. If you live outside Australia, take extra time to research the best lenders to find the right home loan for your situation.
As with all loans in Australia, you need to pay interest alongside your monthly repayments. The amount of interest home buyers pay depends on the home loan rates set out by the lender in the loan terms. Interest rates vary depending on the market. In the last twenty years, the interest rate averaged between 4-6% in Australia.
The longer you take to repay your loan, the more you will have to pay in interest. Yet, if you repay your loan earlier, then you pay less interest.
Keep in mind that interest rates typically increase over time in Australia. If you have a long term home loan, you are more likely to be paying higher interest rates towards the end of the home loan lifetime with a variable-rate loan.
This is usually one of the reasons people seek to pay off their mortgage early with extra repayments.
When home buyers are considering different loans and lenders, make sure to research different loan rates to avoid high-interest rates. Home loans can come in various kinds, such as interest-only loans, fixed-rate loans or loans with variable rates. Comparison rates can vary from lender to lender.
Compare rates to make sure you get the better deal and pay less interest.
Home buyers can borrow money for their property in several ways in Australia.
One option to get your home sooner is to ask your local broker for interest-only loans. This means that when borrowing money from your lender, you can choose to pay only the interest on the loan or both the interest and the amount borrowed. These are known as interest-only repayments.
In Australia, interest-only loans typically only last for up to five years before home buyers must begin paying the principal amount borrowed. Interest-only repayments might be a good way to get your home sooner if you’re worried about the monthly lump-sum payments of the interest and amount borrowed.
Interest-only repayments are often good ideas for home buyers who will have other expenses in the first few years after buying their own home. For instance, a home buyer might want to free up cash to spend on home renovations. Or, if you are living abroad, you might want the extra money to pay for travel to your new property in Australia
Your lender will thoroughly check your ability to pay back the entire mortgage, including both the interest and the principal amount before lending the money. Expats are also able to apply for interest-only repayments on their home loans. Check with your lender to see if this is an option for you.
Get a free Australian mortgage assessment today.
A fixed-rate loan means that the interest rate stays the same, regardless of market fluctuation, for a fixed period. The interest rates on a fixed-rate loan typically stay fixed for up to five years before converting into variable rates. Although, this fixed period on your home loan can be for as little as one year.
The most significant benefit of a fixed-rate loan is that you know how much your mortgage repayments will cost you each month. If you’re unsure about how much to budget with varying rates and want to ensure a measure of stability in the first few years of your home loan, consider a fixed-rate loan.
The fixed rate will typically be set at the market interest rate at the time of applying for the home loan. This might be higher or lower than average.
However, the downside is that a home buyer might miss out on lowering interest rates. When the market fluctuates, interest rates on your home loan can go down as well as up.
With a fixed-rate loan in Australia, you potentially might miss out on the lower interest rate. However, you will also avoid exceptionally high-interest rates. Talk to your broker or lender before deciding which type of home loan is the best option for your investment property.
Variable-rate home loans
Home loans with variable rates don’t suit everybody’s personal circumstances or investment objectives. However, they offer more flexibility than fixed-rate loans. The interest rates of variable-rates loans fluctuate depending on the market and the current interest rate offered by the lender.
The interest rate can vary throughout the duration of the home loan. Some months a home buyer may pay less interest, other months they may pay more. Variable-rate home loans are the most popular type of mortgage in Australia.
As previously mentioned, a fixed-rate loan and interest-only repayments home loan automatically transfer into a variable-rate loan after the fixed period is up.
Fixed-rate and variable-rate mortgages are available for Australians living abroad too.
Fixed vs variable-rate mortgages
The right mortgage type for you depends on your personal circumstance. A fixed-rate mortgage is ideal for people who want assurance and flexibility in their monthly budget. This might be a good choice for Aussies living abroad and juggling two properties, and perhaps two sets of loan repayments each month.
However, a fixed-rate loan can be limiting. A home buyer usually cannot carry over extra repayments from month to month.
Variable-rate loans, on the other hand, offer more flexibility. For instance, if interest rates lower, your monthly repayment would decrease. However, a home buyer cannot necessarily budget this money, as they cannot know precisely how the interest rate will vary. Similarly, you might have to pay high-interest rates for some months.
A variable-rate mortgage is often good for a first time home buyer to understand how to establish routine repayments and budgeting.
Speak to your lender, bank or Australian mortgage broker to get yourself a better deal for your real estate purchase. As everyone’s situation is different, there is no blanket answer as to which mortgage is best for you as a home buyer.
Get a free Australian mortgage assessment today.
What is the difference between an offset account and a redraw facility?
An offset account is a bank account linked to your home loan. You can treat it much the same as a regular transaction account or savings account, making deposits and withdrawals from it. The main difference between an offset account and a regular bank account is that when money is held in the offset for a long period of time, the interest rate on your home loan is reduced.
The larger the amount of money in the offset account and the longer the period of time, the less interest you paid on your mortgage. This might help you pay your home loan off faster and reduce the overall cost of the mortgage.
In Australia, for example, if you deposit $10,000 into your offset account, and your mortgage is worth $400,000, you will only have to pay interest on $390,000. An offset account is a good way to look after your savings and pay less interest on your home loan.
Typically, an offset account is only available for variable rate loans, although some lenders might offer an offset account on specific fixed-rate home loans in Australia.
A redraw facility, on the other hand, is the option to access extra repayments you have made on your mortgage. Once you have settled into the monthly rhythm of mortgage payments, you might make extra repayments some months to pay off your home loan more quickly.
However, down the line, you might be in need of that money. A redraw facility on your mortgage allows you to take back those extra repayments to use as you wish. Most lenders will let you use your redraw facility easily. For eligible home loans, you can withdraw your extra repayments via a bank or online.
During the home loan process, speak to your lender or bank about whether you can set up an offset account or redraw facility to help you repay your mortgage. Not all bank lenders offer an offset account or redraw facility to Australian expats, so make sure to discuss all your options with the lender before applying for your home loan.
What is the lending decision based on?
Australian mortgage brokers tend to base their decisions about your loan application on several aspects before they let you borrow money for your property investment.
A mortgage lender with an Australian credit licence will look at your credit score and current debts. They will add this to the proposed loan repayments to judge whether you are able to borrow money and repay the loan amount each month.
Lenders will want to thoroughly examine your financial situation before offering real estate home loans.
It is sensible to gather all your financial documents before approaching a lender about a home loan. A reliable and strong financial profile will go a long way to assist your loan application to borrow money.
If you live outside Australia, the lender might ask to see more documents before approving you for a home loan.
A substantial deposit is the most important factor lenders base their decisions on. Therefore, it is a good idea to utilise your savings account to build a healthy deposit. The majority of lenders in Australia will ask for at least 20% of the property value as a deposit, and 30% for those living outside Australia.
Before offering a fixed-rate loan or variable rate loan, lenders will work out your loan to value ratio. If your LVR is not good enough, then they might require you to get Lender’s Mortgage Insurance to protect the reserve bank or lender against missed payments.
Get a free Australian mortgage assessment today.
Loan to value ratio (LVR)
The loan to value ratio (LVR) is the amount of the total property value the borrower can pay out throughout the duration of the loan. The loan to value ratio is one of the main ways lenders assess the risks associated with offering you a loan.
The loan to value ratio is calculated by dividing the amount a home buyer plans to borrow or the current loan amount by the property value. For example, if the property is worth $600,000 and you have a deposit of $180,000, you will need a loan of $420,000. To work out the value ratio, divide $420,000 by $600,000 and multiply by 100. The loan to value ratio is 70%.
Generally speaking, the larger the deposit, the lower the loan to value ratio will be. Lenders typically set a loan to value ratio limit, some have a maximum value ratio of 90%. A home buyer can use this to work out the minimum deposit amount they need.
As a lower loan to value ratio means a home buyer is lower risk, the lender might offer them lower interest rates and other benefits. A high loan to value ratio means that you have to borrow more money, making you vulnerable to fluctuating and increasing interest rates.
Usually, the loan to value ratio is 70% for Aussie expats. This means that Australians living abroad typically need a 30% deposit to secure a home loan.
Often, your loan to value ratio is a common factor as to whether or not you pay Lender’s Mortgage Insurance (LMI). Commonly, if your loan to value ratio is less than the required, the lender might request that you pay Lenders Mortgage Insurance.
Lender's Mortgage Insurance (LMI)
Lender’s Mortgage Insurance is a one-off, non-refundable premium payment added to your mortgage repayments. The Lender’s Mortgage Insurance amount depends on the size of your deposit and the loan amount. As mentioned above, if your deposit is less than 30%, you might be asked to pay Lender’s Mortgage Insurance.
A higher deposit demonstrates that a home buyer has strong saving skills and is relatively low risk for the mortgage broker.
The Lender’s Mortgage Insurance isn’t unique to Australian mortgage lenders. The Lender’s Mortgage Insurance protects banks and lenders from borrowers who default on their loan repayments. The Lender’s Mortgage Insurance can add quite a costly fee to your mortgage repayments.
The cost of the Lender’s Mortgage Insurance depends on your loan to value ratio. Therefore, before trying to borrow money from a lender, it is a good idea to save at least 20-30% for your deposit.
How long does my mortgage last?
The life of your mortgage depends on your monthly mortgage repayments and the loan amount you borrow. A shorter-term loan will see higher monthly loan repayments but with less interest. Therefore, if a home buyer can afford the monthly outgoings, a short-term loan is typically better as it reduces the total cost of the mortgage.
Plus, interest rates generally rise over time. Therefore, the faster home buyers pay off your home loan, the sooner you avoid rising interest rates.
On the other hand, a longer-term mortgage means that each instalment is lower so a home buyer is better able to add to their savings or invest their money elsewhere. This means that you suffer more from variable interest rates as you pay your mortgage repayments over a longer period of time. Yet, a home buyer also benefits from increased cash during the loan repayment period to spend on other assets.
The limit for every Australian, whether a home buyer lives abroad or in Australia, is thirty years. No matter how old you are, home buyers can still get the maximum loan length if it suits their needs.
How does it differ if I live abroad?
For a home buyer living abroad, borrowing money from an Australian lender differs slightly. While the home loan process is largely the same, there are certain details you should be aware of.
Firstly, there are no interest rate margins or overseas penalties for living abroad. As an Aussie expat, you are eligible to pay the same competitive interest rates as Australians living within the country. Similarly, there are no early loan repayment penalties. Instead, expats often have to pay a one-off payment of around $300 as an admin fee.
Secondly, expats are eligible for many different loan options, including both variable rate and fixed-rate loans. The fixed period of the fixed-rate loan is similarly up to five years for Australians living abroad. Interest-only repayments are also available for expats. Interest-only repayments are useful for freeing up cash flow and minimising monthly mortgage repayments.
Thirdly, you are also able to use the equity on existing properties in Australia to finance your new home loan. This enables you to borrow more money from the lender in Australia to renovate or buy a second property.
However, there are some differences for a home buyer purchasing property in Australia while living abroad. Banks in Australia only offer loans in Australian dollars. While this might be an advantage as, since 2011, the Australian dollar has been depreciating, you don’t get a say as to which currency you borrow money in.
Furthermore, lenders and Australian mortgage brokers are more scrupulous about the financial situation of those living outside Australia. Most lenders in Australia might relax the rules for loyal customers, however, the lender has to be extra policy-driven for expats. This might make it more challenging to get your loan application approved.
Similarly, most lenders look at all of your gross income when considering your loan application. However, for those living outside Australia, the bank typically looks at only 80% of your total income, and this can lower to as little as only 50%. The reason for this is because lenders have to account for currency rates.
If you live in the US, the UK or Singapore, then most lenders will look at about 80% of your net income. You should be fine. Currencies from these countries are considered safe and reliable. However, if you’re living in parts of Asia or the UEA, then lenders might look at less of your income as these currencies are far more likely to fluctuate throughout the duration of loan repayment.
Plus, most lenders in Australia will apply Australian tax rates, which are widely known to be some of the highest globally. This can make it quite challenging to get your loan application approved.
The biggest issue many Australians living abroad face is the increased stamp duty. If you are jointly purchasing your real estate with a foreign spouse, you might be required to pay double stamp duty. If you need your spouse’s income to buy your property in Australia, some lenders will allow you to add them as a co-borrower rather than co-buyer.
You can use a stamp duty calculator to work out how much you might be required to pay in addition to your home loan repayments.
Get a free Australian mortgage assessment today.
At what stage should I apply for a mortgage - before or after I've found the property I want?
You can begin looking at mortgages at any time. Most importantly, you should know how much you can afford and the loan amount a lender might let you borrow. Even if you have not yet begun to look at real estate and properties, exploring your home loan options will help you budget.
It will also help you structure your property search around a price range, to make your search more efficient and get you your home sooner. Plus, knowing the potential loan amount, you will come across as a more serious buyer to sellers and able to negotiate the price to pay.
It is also sensible to begin looking at comparison rates of different loans. Being organised in your mortgage will help you avoid high-interest rates. Start thinking about what kind of mortgage is the best option for you to purchase your property. There’s no harm in contacting a lender or broker before finding the property you want in Australia.
Similarly, you should take the time to find a reputable reserve bank or lender, and make sure they have an Australian credit licence before applying for a home loan with them.
Should I go directly to a bank to get the mortgage?
Yes, you can go directly to the bank or lender in Australia. However, bear in mind that each has different loan options and criteria. Ensure you research different lenders to find the best possible deal to suit your situation. Compare loan application requirements and interest rates. Also, ensure you check if there are any restrictions or administrative requirements to get your home loan.
Proper and thorough research and comparison will save you a lot of time, hassle and money. Discuss the different options, including a fixed-rate loan, variable rate loan, offset account and redraw facility to find the best loan for you.
Whether you’re looking for a mortgage from overseas or for your first home, here at Odin Mortgage, we understand how challenging it can be to find the best interest rates for your home loan. That’s why we’re here to help you every step of the way in your real estate investment.
Home loan guides and resources
Mortgages are essential for almost everyone who wants to invest in property. Very few people can afford to pay a full lump sum upfront. Even if you can, loan repayments each month free up your capital and allow you to spend and put money aside in a savings account on other assets while getting your Australian home sooner.
If you need to work out how much you can borrow, Odin Mortgage is here to help.
Odin Mortgage provides everything a home buyer needs to know about their home loan options in Australia. Whether you’re looking to buy your home from abroad or to get the best interest rate, we’re here to help you through every step of your loan application in Australia and help you get your home sooner.
Frequently Asked Questions
How much is a mortgage in Australia?
According to the Australian Bureau of Statistics (ABS), a home loan in Australia is on average about $728,500 as of the end of 2020. This, of course, varies per state. In New South Wales, the highest home loan in 2020 was around $939,700, whereas it is only $429,400 in the Northern Territory. Remember, this figure is paid over a fixed period of up to thirty years.
What is the average monthly mortgage payment in Australia?
The answer to this question depends largely on the size of the property investment. The average monthly mortgage repayment in Australia is $2,489. The home loan amount depends on the state and suburb you live in. You can estimate the cost of your monthly repayments by using an online calculator.
How many years do I have to work to get a mortgage?
To apply for a home loan as an Aussie expat, you need about 30% of the property value as a deposit. It depends on your net income and the property value. Most lenders ask for a minimum of three to six months working a full-time job before offering you a home loan.
Is it hard to get a mortgage in Australia?
It’s not impossible to get a home loan in Australia, however, it isn’t always easy if you live outside Australia. Watch out for stamp duty, interest rates and how much of your net income is considered in your home loan application. People living in the UK and the US will typically have 80% of their net income considered, while those living in parts of Asia might only have 50% considered.