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Shedding light on home loans

Getting a home loan can seem like a complex process.

Whether you’re planning to get your foot on the property ladder, have not applied for a home loan in a while or want to know the latest developments in the mortgage and finance industry, All About You Finance Director Michael Papadopoff answers some of your common questions.

How fast is finance being approved?

Mr Papadopoff said some finance approvals for residential properties were coming through quickly while others were taking significantly more time.

“The turnaround time on an application can range anywhere from a few days to six weeks for an approval on a self-employed client, so it’s certainly a very wide spectrum, depending on the lender,” he said.

How much deposit is needed for a home loan?

Mr Papadopoff said the minimum for a lender was a five per cent deposit, plus some lenders mortgage insurance, which could vary with the maximum loan-to-value ratio of each lender.

“The First Home Loan Deposit Scheme, which is the government guarantee for first homeowners, also requires the minimum five per cent deposit,” he said. “Places for this are subject to availability at the time.

“The bank of mum and dad can also offer a guarantee that does not necessarily require a deposit.

“The government authority here in Western Australia, Keystart, offers home loans with a two per cent deposit but has more strict criteria and thresholds.”

What are your thoughts on fixed versus variable rates?

Two major banks had increased their fixed rates three times and the other two had raised theirs four times – all in less than two months.

But there was better news when it came to variable interest rates, many of which were recently decreased by lenders.

“Up until recently, fixed rates were around half a per cent lower than variable,” Mr Papadopoff said. “With recently sharp increases in fixed rates, that’s now changed and variable rates are currently better.

“Where interest rates go from here may depend on whether inflation in the economy is temporary or more permanent.

“That’s where the crystal ball becomes a bit unclear.”

What is the difference between being pre-qualified and pre-approved for a home loan?

Mr Papadopoff said pre-qualified usually meant you had given your minimum basic details, such as income, other loans and ongoing expenses, to a lender who calculated how much you could borrow.

A pre-approval was a formal application to a lender, with the property being bought the only unknown.

The Australian Prudential Regulation Authority (APRA) recently wrote to all banks, building societies and credit unions and asked for a change to curb mortgage borrowing capacities across Australia. What has happened as a result?

Mr Papadopoff said APRA suggested residential home loan applicants should have their repayment ability tested at three per cent above the actual rate they would be paying today. Previously, the test was 2.5 per cent above.

“That change came into effect at the end of October, so we’re finding it equates to at least a five per cent reduction in home loan borrowing capacities for prospective applicants,” he said.

What is your outlook for 2022?

Mr Papadopoff said we would probably start to see variable rates move up some time in 2022.

“If the east coast property market continues to grow above expectations, there might be more macroeconomic sanctions put in place by APRA, which is likely to be a maximum debt-to-income ratio of six times,” he said. “This means if you earn the average wage of $70,000 per annum, you can borrow up to $420,000.

“The WA property market is also currently strong, which should continue in 2022.

“That’s as clear as my crystal ball gets.”

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