How to Get a Mortgage in Australia

To obtain a mortgage in Australia, prospective homeowners navigate a structured process involving specific eligibility criteria and thorough preparation. Understanding these requirements helps streamline the application and provides clarity on lender expectations.

Eligibility and Preparation

Residency status influences mortgage eligibility in Australia. Australian citizens and permanent residents face fewer restrictions and access a broader range of lending products. Temporary residents on certain visas can apply for a mortgage but may encounter stricter conditions, including higher interest rates and larger deposit requirements, potentially up to 30% of the property’s value. Non-residents, or foreign buyers, must secure approval from the Foreign Investment Review Board (FIRB) before purchasing property, especially established dwellings. FIRB approval is mandatory for foreign nationals buying residential property, with fees varying based on the property’s value.

Lenders assess income and employment stability to determine a borrower’s capacity to repay a loan. For Pay As You Go (PAYG) employees, proof of income involves providing recent payslips, and potentially an employment contract or employer letter. Lenders may request bank statements for the last three to six months to verify consistent salary credits, especially for casual or temporary employment. Self-employed individuals face a more rigorous verification process, often requiring personal and business tax returns for the last two years, along with Australian Taxation Office (ATO) Notices of Assessment. Alternative income verification methods for self-employed borrowers can include Business Activity Statements (BAS), business bank statements for six to twelve months, or an accountant’s declaration confirming income and trading history.

Credit history and score play a significant role in a lender’s assessment of creditworthiness. In Australia, credit scores typically range from 0 to 1,200, or 0 to 1,000, depending on the credit reporting agency. A score of 700 or above increases the likelihood of loan approval and access to competitive interest rates. Lenders use these scores to evaluate lending risk, considering repayment history, existing debts, and past credit inquiries. Borrowers can obtain a free copy of their credit report every three months from each major credit reporting body to monitor their financial standing.

Deposit requirements are a primary consideration for home loan applicants. Most lenders require a minimum deposit of 5% of the property’s value, though a 20% deposit is advised to avoid Lenders Mortgage Insurance (LMI). Many first-home buyers save at least 20% to achieve a lower loan-to-value ratio (LVR) and more favorable interest rates. Lenders emphasize “genuine savings,” which are funds accumulated by the borrower over time, usually a minimum of three months. Acceptable sources of genuine savings include:
Regular savings deposits
Term deposits
Shares held for at least three months
A gift or inheritance held in an account for a similar period

Some lenders may also consider a consistent rental payment history as an indication of genuine savings, especially for those with less than a 20% deposit.

To support a mortgage application, documents are required to verify identity, income, assets, and liabilities. Identification documents include:
Australian Driver’s License or passport
Medicare card
Birth certificate
Australian citizenship certificate

For income verification, PAYG applicants provide recent payslips and bank statements, while self-employed individuals submit tax returns and financial statements. Lenders also require statements for all existing:
Bank accounts
Investment portfolios
Loan accounts (e.g., car loans, personal loans, credit cards)

These statements usually cover the last three to six months. Proof of savings and details of other assets, like vehicles or valuable collectibles, are also assessed.

Understanding Mortgage Options

Australian borrowers have various mortgage products, each designed to suit different financial situations. Selecting the appropriate loan type involves understanding how interest rates are applied and how repayments are structured, impacting the overall cost and flexibility.

Variable rate mortgages feature interest rates that can fluctuate based on market conditions, including Reserve Bank of Australia decisions. This loan type offers flexibility, often allowing borrowers to make extra repayments without penalty, which can reduce the loan term and total interest paid. Repayments may decrease if interest rates fall, but they can also increase, impacting household budgets. Many variable rate loans include features such as offset accounts and redraw facilities.

Fixed rate mortgages maintain a constant interest rate for a predetermined period, typically one to five years. This predictability provides certainty regarding repayment amounts, beneficial for budgeting and financial planning. While fixed rates offer stability, they come with less flexibility, and borrowers will not benefit from market-wide interest rate drops during the fixed term. Breaking a fixed-rate contract early may incur significant break fees, limiting options for refinancing or making large extra repayments.

Principal and Interest (P&I) loans are the most common type, where each repayment covers a portion of the original loan amount (principal) and the interest accrued. Over the loan term, typically 25 to 30 years, the principal balance gradually reduces, leading to full repayment. This structure ensures the loan is paid off by the end of the term, building equity in the property.

Interest-Only (IO) loans involve repayments that cover only the interest charged on the loan for a set period, commonly up to five years. During this phase, the principal loan amount does not decrease, and the total debt remains unchanged. These loans are often favored by investors aiming to maximize cash flow or by homeowners anticipating future income increases, as repayments are lower than P&I loans initially. After the interest-only term concludes, the loan converts to a principal and interest structure, with higher repayments required to pay down the remaining principal.

Many Australian home loans offer supplementary features. Offset accounts are transactional accounts linked to a mortgage, where the balance is deducted from the outstanding loan balance before interest is calculated, potentially reducing interest paid. Redraw facilities allow borrowers to access any additional repayments made on their loan, providing a flexible source of funds. The option to make extra repayments allows borrowers to pay down their loan faster, reducing overall interest cost and shortening the loan term.

The Application and Approval Process

Securing a mortgage in Australia involves a series of steps, from initial consultation to final settlement. Each stage requires careful attention to detail and timely information.

Mortgage Broker vs. Direct Lender

The first step involves deciding whether to engage a mortgage broker or apply directly to a lender. Mortgage brokers act as intermediaries, comparing loan products from various banks and financial institutions to help borrowers find suitable options. They offer guidance through the application process and assist with documentation. Alternatively, borrowers can approach individual banks or lenders directly, which may suit those who prefer to manage the process themselves or have an existing relationship.

Pre-Approval

Once a lender or broker is chosen, obtaining pre-approval is a recommended step. Pre-approval indicates how much a borrower can potentially borrow, based on an initial financial assessment. This stage involves a preliminary credit check and review of income and expenses, allowing borrowers to understand their borrowing capacity before actively searching for a property. Pre-approval is usually valid for three to six months and provides confidence when making an offer on a property.

Full Application Submission

After pre-approval and property identification, the full mortgage application is submitted. This application includes detailed documentation gathered during preparation, such as identification, proof of income, asset and liability statements, and genuine savings evidence. Lenders conduct a thorough assessment of the borrower’s financial position, including income stability, spending habits, and credit history, to ensure the loan is serviceable and meets responsible lending obligations.

Property Valuation

As part of the assessment, the lender arranges a valuation of the property being purchased. This valuation confirms the property’s market value, ensuring it provides adequate security for the loan amount. Lenders appoint an independent valuer to conduct this assessment, a standard part of the approval process to mitigate risk. The valuation helps the lender determine the loan-to-value ratio (LVR) and confirm the property’s suitability as collateral.

Conditional and Formal Approval

The approval process progresses through stages, beginning with conditional approval. This means the loan is approved subject to certain conditions being met, such as a satisfactory property valuation, final document verification, or removal of preliminary conditions. Once all conditions are satisfied, formal approval is granted, signifying the lender’s final commitment to providing the loan. This allows the borrower to proceed confidently towards settlement.

Settlement

The final stage is settlement, where property ownership is legally transferred, and loan funds are disbursed. This process is managed by a conveyancer or solicitor, who handles the legal aspects of the property transfer, including preparing and lodging necessary documents and coordinating with the seller’s legal representative. On the settlement date, the lender provides the loan funds, the balance of the purchase price is paid, and the property title is transferred to the buyer’s name.

Associated Costs and Fees

Obtaining a mortgage and purchasing property in Australia involves several additional costs and fees that borrowers need to budget for. Understanding these expenses is crucial for accurate financial planning.

Stamp Duty

Stamp duty is a state-based tax levied on property purchases, representing a significant upfront cost. The amount varies by state or territory and is calculated based on the property’s value and buyer type. First-home buyers may be eligible for stamp duty concessions or exemptions, which can substantially reduce this expense, depending on the property’s value and whether it is a new or established home.

Lenders Mortgage Insurance (LMI)

Lenders Mortgage Insurance (LMI) is a cost required when a borrower’s deposit is less than 20% of the property’s purchase price, resulting in a loan-to-value ratio (LVR) exceeding 80%. LMI protects the lender, not the borrower, against losses if the borrower defaults on the loan. The premium is typically a one-off payment that can be paid upfront or added to the total loan amount, increasing the overall debt. Certain professions or first-home buyers may qualify for an LMI waiver, subject to specific eligibility criteria.

Legal Fees (Conveyancing)

Legal fees, known as conveyancing fees, are incurred for the services of a conveyancer or solicitor who manages the legal transfer of property ownership. These professionals conduct necessary searches, prepare legal documents, and ensure all statutory requirements are met during settlement. The cost of conveyancing varies but ensures the property transfer is legally sound.

Lender Fees

Lenders impose various fees associated with the mortgage. These include application fees for processing the loan, and valuation fees covering the property appraisal. Some loans may also have ongoing service fees or annual fees. Borrowers should inquire about all potential lender fees when comparing mortgage products, as these can add to the total loan cost over time.

Other Potential Costs

Other costs include building and pest inspection fees, recommended before purchasing a property to identify structural issues or pest infestations. Adjustments for council rates, water rates, and strata fees (for apartments or units) are made at settlement, where the buyer reimburses the seller for prepaid amounts. Utility connection fees for electricity, gas, and internet services are also expenses once the property is acquired.