Article summary

• A home loan is when a lender, usually a bank, lends you the money you need to cover a home purchase.
• Every month you pay back a portion of the loan along with interest, over the course of the bond duration (which is usually 20 or 30 years).
• Factors such as your credit score and the size of your deposit determine whether the bank is likely to grant you a home loan, and how high your interest rates will be.

Home loans - the means by which home ownership becomes a realistic option for those who may have otherwise perceived it as a distant dream. So how do home loans work, and how do you go about acquiring one?

What is a home loan?

Simply put, a home loan is when a lender, usually a bank, lends you the money you need to cover a home purchase.

It's good to know that, if you find your dream home, you have a way of obtaining ownership of it without having to pay the full price of the home up front. A home loan means you pay the price of the home back in monthly instalments, usually over the course of 20 or 30 years.

How does a home loan work in terms of repayments?

Every month you pay back a portion of the loan along with interest. The amount of interest you pay depends on the prime interest rate, the interest rate of the home loan, and other factors such as whether you opted for the 20 or 30 year bond (the 30 year bond means you'll pay more in interest on the loan).

Basically your home loan interest rate is determined by how much of a risk the bank considers you to be. There are ways to mitigate this, such as paying a larger deposit, or improving your credit record, which will result in lower interest rates, saving you money in the long-term.

You can use ooba Home Loans' Bond Repayment Calculator to determine what your monthly repayments are likely to be, as well as the total amount you'll pay over the course of the bond term (which will be higher than the value of the home loan because of interest).

Applying for a home loan

You apply for a home loan after you and the home seller have signed the offer to purchase, a deal which dictates terms that you and the seller have to fulfill.

So what criteria does the bank use when deciding whether to grant your home loan application? The lending criteria varies from one bank to another, but one critical aspect that they all investigate is your credit record.

What is your credit record?

Your credit record is a three-digit number ranging from 000 to 999. The higher it is, the better your chances of home loan approval, and the better the interest rate you are offered. Factors such as your debt repayment history, amounts owed, and types of credit applied for, are taken into account when calculating your credit score. Basically, your credit score reflects your financial health.

Scores below 600 are considered poor, and reduce your chances of home loan approval. A score above 670 is considered excellent, and would likely earn you a home loan with favourable interest rates.

You can find out your credit score by using ooba Home Loans' free, online tool, the Bond Indicator.

The deposit

Home purchases often require you to pay 10% of the home value up front. This is referred to as the deposit.

Banks are trying to attract more first-time buyers by offering a 100% home loan; a home loan that doesn't require a deposit, since younger home buyers are less likely to have the required funds for a deposit.

However, if you do have the funds for a deposit, it's recommended to pay even more than 10% if you can. The higher your deposit, the better your chances of home loan approval and the lower your interest rates will be. Higher deposits take away some of the risk for the bank, making them more likely to grant you a favourable package.

Why you should apply through a bond originator

A bond originator, also known as a home loan comparison service, such as ooba Home Loans, can be a powerful ally when applying for a home loan. They submit your home loan application to up to nine banks, including your own, and liaise with the banks on your behalf. They provide you with quotes from each bank so you can see which ones are offering the best deal.

This can save you significant resources in the long-term, as you may find that one of the banks is willing to offer you lower interest rates than your own.

ooba Home Loans also offers a range of tools that can make the home buying process easier. Start with their Bond Calculator, then use the ooba Home Loans Bond Indicator to determine what you can afford. Finally, when you're ready, you can apply for a home loan.