The A-Z of the home loan approval process (and what it takes to get approved)

Thinking about buying a house? Before you apply for a loan - listen to this. Laura Osti from Tic:Toc home loans walks us through the home loan approval process. When to apply, what the banks check for and how to give yourself the best shot at getting approved.

The following is a transcript taken from episode 32 of the We Talk Cents podcast. The transcript is created by AI software so it might not be perfect - please forgive any imperfections or grammatical errors.

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Blaize Pengilly  00:09

Personal Finance, budgeting cash flow and investing don't have to be scary words. The We Talk Cents podcast is here to help you learn more about money and take control of your personal finances.

Blaize Pengilly  00:26

We Talk Cents podcast is not a financial advisor. This podcast is made for entertainment and educational purposes only. All information shared is of a general nature and does not take into account your personal situation. You should consider whether the information is appropriate for your needs and where appropriate seek professional advice from a financial advisor.

Dan Jovevski  00:45

For more information, please check out wemoney.com au slash disclaimer.

Dan Jovevski  00:51

Hi, everyone, it's Episode 32 of the We Talk Cents podcast. I'm Dan.

Blaize Pengilly  00:55

And I'm Blaize a millennial that knows very little about money. How are you going today, Dan?

Dan Jovevski  01:01

I'm doing wonderful. How about you?

Blaize Pengilly  01:03

Look, I'm doing well doing well. It's a new month new new times to set my budgets and targets. And I didn't really quite meet my financial goals last month. So looking forward to a new month where I can track my spending and hopefully spend less than I earn. Jen. today. We we had a little chat to Laura osti from Tic:Toc comyns the other day, asking about all things ADC in the home loan approval process and what it takes to get a home loan approved. But before you press play in that interview, there's got to be some headlines that have been taking your attention this week.

Dan Jovevski  01:37

Well Blaize, there was a pretty seminal piece of research conducted by the Commonwealth Bank that looked into the savings plans or maybe even the lack thereof of millennials in Australia. And they found out that one in two millennials wish they could have more open discussions about money. And they really wanted to understand how many had savings rates, they uncovered that a whopping 58% of people didn't have a savings plan in place, which I think is a pretty pretty stark statistic. And when you really think about where we are now that post COVID. And thinking about your financial future, it seems like there is a lot of work to do in terms of education pace around the importance of saving. The other piece of information that really stood out to me in this research, Blaze was this concept of being financially open or talking about money. And they found that only 31% of people were not comfortable with talking about money. But when I flipped that stat on its head, it's sort of equal. If we turn that around, you know, it really means that a majority of millennials are quite comfortable talking about their money to their friends or their family, which is a definite change in generations. We look at our parents generation, for example, who'd never ever talked about money who was like, religion, politics and money was never ever talked about at the dinner table or anywhere else. So I'm glad to say that that change in that research, what did you think?

Blaize Pengilly  03:00

I saw this research as well. And I found it not at all surprising because until a year ago, I was one of these millennials that did not have a savings plan. So it doesn't shock me, especially given that we are in a still I guess I want to say post COVID. But we're not post COVID we're still in a COVID environment, really. So I'm thinking about the amount of peers that I know that work casually are in hospitality that are constantly having work and not having work. Given that we are in such a sort of temperamental work environment at the moment with with lockdowns and everything. It doesn't surprise me that people don't have a regular savings plan. Because it's really hard to plan for something regularly, when there's so much unpredictable stuff happening in the world at the moment. This article actually inspired me I did, I did see this one, and it inspired me to hit up her Instagram. So on our Instagram at Gateway money, I did a couple of polls, just to see if our followers came back with some different data to come back. And so I asked our followers, do you have a savings plan? And I was nicely impressed. 68% of our followers do which is awesome. And 32% don't amazing. Yeah, I thought that was really great. I mean, if you're following gateway money, you're probably hoping to be better with your money or wanting to learn about money. So I thought that was really awesome. Good job to the 68% of you into the 32%. You could totally get there one day, I believe in you. The other question I asked was, do you invest? And this one shocked me. Do you invest? Dan, what do you think? What what percentages? What do you think the split was of the people that invest or the ones that don't yet? Hmm,

Dan Jovevski  04:39

I'm gonna go 60/40 I think that a lot of our members or people that follow us on Instagram would be quite savvy when it comes to savings. So I certainly used to be higher than the general population. But what are the numbers wise?

Blaize Pengilly  04:53

Well, shockingly 51% invest and 49% said not yet. Which I thought was pretty interesting. But I realized investing is a very well for me, I'm sure. And for some other people out there, it seems really complex, it seems like there's a there's a lot involved, and there's a bit of risk. So I can understand why people might be hesitant for investing. Or maybe that's not what, maybe that's not what these people want to do. So, anyway, yeah, I thought that was really interesting. And we did have a lot of feedback, saying people would love to learn more about investing. So we are planning a investment podcast series. So you'll, we'll have some special guests in and we'll learn all about the different types of investing. And that will be in just a few episodes time. So stay tuned for that one, really excited

Dan Jovevski  05:40

about our next guest, Laura, who's going to talk all about the home loan, application approval process, basically, everything that you want to know about getting a home loan, including things like the approval criteria, what we think about being full time employed versus self employed, and all those ins and outs. I'm really excited to have her on. We did experience a little bit of technical issues with Laura's audio, but I still think it's worthwhile. Listen.

Blaize Pengilly  06:04

Alright, let's press play, then.

Dan Jovevski  06:06

Let's do it.

Blaize Pengilly  06:13

Did I tell you what I did I tell you about my little secret sneaky research meeting that I did the other day.

Dan Jovevski  06:20

Well, the fact that was sneaky and secretive? No, I haven't. If you've had done replies, what have you done?

Blaize Pengilly  06:27

Well, I thought, you know, one day one day, I would like to buy a house. I don't know if that day is soon because I still got a lot of savings to do. But it's something that I want to do in the future. So I trotted along to one of those first homebuyers meetings, which I'm super aware, it's just a massive sales pitch. But I thought I'd you know, give it a give it a try and see what I could do. I got given a whole bunch of paperwork, and then sat down and talk through what is literally the most complicated process. The bit that confused me the most was about the finance. So you have to apply for a loan, and then you have to put this deposit and then you get the get money at some point. And then when the slab goes down, you get some other I honestly, absolutely could not keep up. And to be honest, it kind of put me off the whole process because it sounds super involved. And I have no idea what I'm doing. Now, I thought, Dan, you are you've got many, many years experience in banking, you are the finance expert, but I thought today would be a really great opportunity to bring someone who actually knows what they're talking about everything related to home loans, and I thought I could pick both of your brains about the home loan approval process.

Dan Jovevski  07:37

Well, sounds great. Plus, I'm looking forward to it. I'm just wondering the back of my mind to do the body Pet Expo allow for houseboats to be used as collateral. For those who are listening to the show. blazes, right is to buy a house, but one day and crucifer down the Swan River and change location every single day. So I'm really looking forward to today's guest and learning more about the approval process. Likewise, it's a bit of a mess of a shambles. And I think a lot of people find it really confusing and tedious on okay to learn more.

Blaize Pengilly  08:08

Yes, well, I've invited a very special guest today, she is joining us to talk through the process of exactly what happens in the home loan approval process. She's got over six years of experience in the arena of homelands. And she began her foray into the industry at homestart. Finance and now works at the tech driven lender. Tick Tock. She joins us now via the World Wide Web straight out of Adelaide. Welcome Laura st from Tick Tock home loans. How are you, Laura?

Laura Osti  08:32

Thanks, Blaize. Good. I think you might have trouble getting a loan for a house boat, if that's your property you're applying for. But yeah, we can work on that.

Blaize Pengilly  08:41

No? Well, perhaps I'll have to, I'll have to let those dreams go. Now, Laura, I have such little knowledge about getting a home loan, I understand that, I'll probably need to get one because I don't have hundreds of 1000s of dollars to splash. So unless I come into a Big Lottery win, I don't see how it would be possible. But for me and other people out there that are looking to get a home loan, will you will you grab a hand and walk us through it all? How How does the process work? When do you apply? Is it before or after you start looking or if you want to build? What What is the process?

Laura Osti  09:20

Okay, so there are plenty of different ways to get a home loan, there are people that still walking into their bank, or going into a broker and getting that kind of help. But I think particularly given the year we've had last year, more and more people are realizing that they can do it online and be self directed. It's actually not as hard as as banks try and make it out to be So I don't know in that seminar that you went to they probably were actually trying to make it sound really confusing on purpose.

Blaize Pengilly  09:49

So that you are 100%

Laura Osti  09:52

which is it's just it's mean really because it's not it doesn't have to be that hard and you can absolutely Just jump online and look and look for the best deal for you. So probably the first thing you need to do if you're thinking about getting a home loan, is start asking yourself some some key questions. The first one being how much savings Do you have to put towards a deposit? That's obviously, the biggest barrier to getting a home loan, it's, it's really hard. But that's kind of the first one. The second thing that people often forget is that you're gonna need more savings to cover government charges, like stamp duty. So getting an understanding of that, too, is really important. And then the third one is how much you can borrow based on your income and expenses. So they're kind of the three key things you need to ask yourself first. And they'll often pull yourself out of that dreaming phase where you're, you know, scrolling through realestate.com, and imagining all the places you can own, you kind of need to jump on an online calculator, most lenders have their own version of the same thing and start to get familiar with those numbers. I certainly remember doing that for the first time when I was thinking about buying a house and it's unnecessary, but uncomfortable reality check. And then once you see those numbers, you can start to build a plan around how much you need to save, and where to go from there. Once those numbers look doable, and you're getting serious about a property, that's the time to get a home loan approval or conditional approval. So at the stage where you're like, I know, I've got the savings, I think I can borrow the amount I need. That's when you go to a lender.

Blaize Pengilly  11:26

When I had my meeting, he mentioned pre approval, is this what you're talking about? And what exactly is pre approval? Is it like the green light? Go ahead, you will be able to get this money, or is it something else completely?

Laura Osti  11:39

Yeah, so there's a pretty big difference between pre approval and full approval. Pre approval is pretty much a lender giving you an idea of how much they might be willing to lend you, it gives you a rough estimate of the maximum you can spend on a house. But that's actually it. So you almost can get that same indication by jumping on using a online calculator. Pre approval is often conditional on a credit check, and property assessment. And sometimes lenders don't even do the full financial assessment. So I've definitely heard of cases where people have gotten pre approval and then make an offer. And they've realized when they got back to the lender, that they're not eligible, or they've been declined on a home loan. So it's not, it's not necessarily a guarantee that you're going to get home loan finance. So I'd recommend getting full approval, which is actually going through the full assessment process, you can jump online with many online lenders, and do a full personal financial assessment. If you're not sure of what property you're going to be getting, you can leave that part out. And basically, you'll get conditional approval on whether the property is eligible. So it's a full financial personal assessment, just leaving out that property check.

Dan Jovevski  12:55

Amazing, Lauren, just to step back just a little bit and the phase, the exciting phase, and people walking in homeownership, because I've imagined people in their early 20s, you know, thinking about, you know, homeownership as being an attainable goal. But what's not it's people to be more later in life. Now you have people that are late 20s and early 30s. Just talk to us about some of the prices and some of the timeframes that you're seeing in terms of people thinking about, hey, I want to buy a home, but I've got to save some money and get a deposit. Because to some people, that all sounds very easy. But for people it could take years and years and years, right? What's the typical time for that people go into when they when they make this decision to buy a home and and ultimately then decide to apply for a mortgage?

Laura Osti  13:35

It's It's so variable. I mean, it obviously depends on the person situation. But it Yeah, like you said, typically, it's more than a year to get that those savings in line. But some people have the benefit of getting some Family Assistance, or, you know, other ways to kind of get that deposit saved up. But it's pretty variable on Yeah, it can take years and years. The good part is that now the actual homelite process can be really fast. So even though the waiting and the saving can take years now at least because of all these amazing online lenders, you can jump online and actually get approval really quickly.

Dan Jovevski  14:12

What's amazing orders things myself, if I was living in Sydney or Melbourne for that matter and looking to buy something inside the inner city and spending upwards of $750,000 to buy maybe a one by one, you know, our partners. I might be saving up for a pretty long time. And we'll get into the deposit part in just a little bit. But one of the thing that's really come up quite a lot is we are living in a world right now where a lot of people do work for an employer, but they also have side gigs side hustles and this this concept of being a salaried employee versus someone who's self employed. Talk to us about what you're seeing at the moment in terms of people who are generating income, but maybe for the younger people listening is that's getting quite varied right now. Right, with more people taking more alternative sources of employment and yeah, what's your take on that?

Laura Osti  14:59

You Yeah, it's pretty crazy because the like you said that Australian workforce has been changing so rapidly over the last 10 years, and more and more people are working for themselves, I think it's over 2.5 million people away with themselves. And then that doesn't even include all the people with the side hustles. Unfortunately, the way we assess a home loan has not changed in line with that changing workforce. So it is a pain in the ass. But for self employed people, or people relying on those side hustles for their income, it's going to be harder to get a home loan. And that's just an unfortunate truth of the way we give home finance at the moment. And hopefully that will change. So, if you are self employed, as a general rule, to get that kind of typical home loan with a good interest rate and low fees, you need to have a minimum of two years experience. So that means you have to have an ABN that's been registered for two years. And then you'll also need to supply your completed tax returns both your personal and business and notice of assessment. And then all of the other required financials that are normally needed for the homeowner assessments such as your bank statements, that kind of thing. So it is it is a pain. If you haven't been self employed for two years, and you want to get a home loan. There are some other options out there. But it's likely you're going to be paying a higher interest rate, and there's going to be some fees involved.

Blaize Pengilly  16:20

That's really interesting. So it's not completely impossible, but it is a little bit harder. And it's better to have the two years under your belt for working for yourself.

Laura Osti  16:29

Yeah, once you've got those two years, and you've got a good income history, then it's actually not too bad. It's just that extra paperwork. The other challenge, of course, for self employed people is that normally they're trying to keep their taxable income down for obvious reasons. And then that makes it harder to borrow the the amount that they need, because we're looking at that income to see whether they can

Blaize Pengilly  16:51

service the loan. It reminds me Dan, if he cast your mind back. And if you're listening back to Episode Six, when we had Helen Hodgson dropped by she talked about superannuation and how the superannuation system is essentially outdated because it doesn't account for how many of the how many people in the workforce are part of the gig economy now, and it sounds like homelands are sort of, they're also on the brink of needing to be updated, like super res to account for the new style of working that we currently have is so becoming so prominent. So yeah, it'll be interesting to see how things develop. And if it becomes easier for people that are self employed or working freelance over over the coming years, hopefully, fingers crossed, that is the case,

Laura Osti  17:34

I think it will develop and change. It's just how we look at risk is is needing to be updated. So banks are still very risk adverse. As more digital lenders come around, I think we'll see a shift away from that.

Blaize Pengilly  17:48

Speaking of risk, when it comes to assessing someone, what are you looking for? Like? Are you going through with a fine tooth comb through people's bank statements going up? Blaze had pizza five times last week, she clearly spends way too much on eating out? Or you know, you looking and saying so and so had bought spent half of their pay on afterpay last year? Or what is it that you're looking for? And are you actually going through in detail? Is it someone there with a you know, a monocle sitting there? checking every say everything on your income statement? Or how does it actually work? What are you checking?

18:30

Yeah, so when a lender is looking at your bank statements, and these days with many lenders like Tick tock, you don't actually need to supply a bank bank statements, you can just link your accounts, and we can just see digitally what's going in and out. They're getting an understanding of a few things. So the first thing is that you have a regular income that can support your loan amount. So by looking at your statements or your accounts, I can see that regular income going in. The second thing that they're looking at is your non discretionary expenses and how much they are. So non discretionary is essentially the stuff that you can't just stop spending if you're going to get a home loan. So it's things like your food, your childcare, transport, and that gives them an ability to understand a baseline of what you can afford. Yep, they're also looking at the discretionary expenses, which is the things like you know, entertainment, going to the movies, big shopping sprees, but that stuff can be scaled back. So they're not necessarily using that to determine whether you can afford the loan or not. And then the last thing that they're looking at is any flagged activity that might signal that you're a risk to being able to repay your loan. So they're looking for things like undisclosed accounts or liabilities. If you've in your home loan application said, you know, I've only got one credit card, and that's it. And then when we look at your accounts, we can see you're making payments to a personal loan or some other stuff that kind of is highlighted as a flag and that will be factored in to your assessment.

Dan Jovevski  20:00

It's pretty, pretty amazing floor in terms of the amount of data that was available, right, because the comprehensive credit reporting reforms, which we talked about on the show before, basically, where you apply for a loan these days mean, banks can really understand all your liabilities, right, in terms of where you've got credit from before. So there's another, there's a place to hide, but you know, you can't really not disclose something. And I'm what application these days is that right?

Laura Osti  20:27

Pretty much. Yeah, it, it'll come out soon, as soon we'll be linking out social media accounts and our social behaviors will factor into loneliness. So maybe, but yeah, it's pretty hard to trick your way through online assessment.

Blaize Pengilly  20:43

There goes that idea for me. But you know, that's nice to know before I try.

Blaize Pengilly  20:55

Just a quick interruption here to let you know about the way money app if you'd like to track your spending, or check your credit score, and you're in the home loan application process. Or if you just want to get better at managing your money, download the free way money app to see a full 360 degree view of your money, and getting monthly updates of your credit score. If you use the code word podcast, you'll earn $5 when you connect an eligible account on sign up. Alright, back to the show. I have a basic understanding of lmia Lenders Mortgage Insurance, can you please explain how the how lmia works? Who needs to get lmia? Does everyone need lmia? How does it How does it actually work in the in the process? And when do you pay it.

Laura Osti  21:37

So like I said lmia stands for Lenders Mortgage Insurance. And it's an insurance that protects the lender from financial loss, if you can't afford to make your payments, or you default on your loan. So even though it's an insurance for them, they pass the cost of that on to the customer. So you're gonna have to pay it when you need lmia is essentially when you're borrowing more than 80% of the property's value, or you have less than a 20% deposit. So if you don't have enough of a deposit, the lender goes all day might be a little bit more risky, therefore, we need to take some insurance out in case they can't make their repayments, and then they pass that cost on to you. What happens is it's it's not normally paid up front, they will add it to your loan amount. And that means that you're actually paying interest on the cost of lmia as well. So it can be quite expensive 1000s of dollars, particularly, you know, over the over the life of the loan as you're paying it off. But it actually can be a handy way to get a property sooner. So, you know, you have to weigh up the balance of is it worth buying now with only a 10% deposit and having to pay lmia? Or do I wait another three years until I've saved up, you know, an additional 10%. But maybe that property price is going to go up. So it can be a good tool just to get to get into that property market sooner?

Blaize Pengilly  23:01

Yeah, awesome. So I've heard of the first home loan deposit scheme, which is where the government is they've got the 10,000 places we've discussed on the show before where they act as guarantor on the loan, so you don't have to pay lmia Is there another way to avoid paying lmia if you're not using that scheme, and you wanted to get a home loan for, and you only had like less than 20% of the property price as a deposit?

Laura Osti  23:27

Yep. So there's just a traditional guarantor loan, which is when a family member or someone like a family member, signs up to repay the home loan if you can't, so they're using their own property as security against the loan. And that means the bank has that additional confidence. It means if you can't pay your home loan repayments, your parent or whoever that guarantor is has that responsibility. And then when you reach the point in your loan where your loan amount is less than 80% of the property value, that guaranteed take and switch off and you become responsible for the loan yourself. That's probably the most common way that people are avoiding LMR. It's, you know, if you're lucky enough to have a family member that can do that for you, that's great. But we all don't have that luxury. So, you know, most people do have to save that 20% themselves, or get lmia there are some other ways around lmia some lenders do deals with people in certain professions. If you're a doctor, an accountant, I think there are a number of professions where sometimes they have deals where lenders can waive lmia

Dan Jovevski  24:35

and or just the move. Last question all Lenders Mortgage Insurance is for all the first time buyers that will be home buyers who are listening. You know, if I'm going to look at a property, you know, $500,000, let's say what's going to be my what's going to be the traditional fee for pay mortgage insurance water. What are some numbers that we can give the audience

Laura Osti  24:58

it will depend on The lender, the type of mortgage insurance they use, but typically will be around 15. Grand

Blaize Pengilly  25:05

15 grand Yeah, far out? Well, that's another that's another cost. I didn't consider our costs. I mean, of course, the insurance would be expensive, but I wasn't expecting 15 grand Nellore when you when you are applying, what is it that you should do before you start the process of applying? Do you need to get your accounts in order Do you need to cut back on your spending do you need to do you need to show consistent saving? Is there a way that you can set yourself up for success in the process of applying for a home loan, before you even start?

Laura Osti  25:40

So I think the first thing that I'd suggest is to just get real with those numbers, that's probably I think, the first thing to do jump online and understand how much it's gonna cost you, you don't really need to show a savings history, I think that's a bit of a myth. As long as you have the savings, that's fine. In terms of spending habits, the probably the biggest thing you can do that will have an impact on your assessment is getting rid of credit cards. So every time you have a credit card, that will be factored into how much you can borrow, even if you're paying it off regularly, the lender will include that credit limit as part of the assessment. So if you can't get rid of them, you could at least lower the amounts on the credit cards. And that will have a really positive impact on how much you can borrow, in terms of spending habits just Don't be crazy. So like I said, there are things discretionary and non discretionary. So the non discretionary things, you won't be able to change anyway. And that's the they're the guts of what the assessments made on is the real cost that you you can't avoid anyway. And then if you're, you know, two months leading into your home loan application, don't just go on massive shopping sprees or things like that, because the length of might factor in a portion of that into your assessment.

Dan Jovevski  26:51

That makes sense, Laura? And what about the people who are using afterpay or binary paladar? Or is this a new emerging category of demand pay products, like you know, before pay, and my pay now and people like that, what what's what's the deal there,

Laura Osti  27:05

I think there's a bit of scare mongering going around about afterpay having a negative impact on your home loan application. But if you're meeting those four repayments, it's not going to have really any impact at all. And if it's within that threshold of affordability, you're going to be fine. I just suggest don't have too many loans that you're paying off, because that could be a red flag. It's more things like personal loans, that are a bit more of a worry to a lender that things like afterpay were bad

Dan Jovevski  27:33

credit schools. So critical is a topic that we often discuss on on the show. And the importance of 90 credit score is really up there and latest stats are that only 26% of Australians know their credit score. What's What's your thoughts on credit scores, your home modification process? Is there for lenders have like a bit of a threshold? What are the what are the common common factors with credit scores and apply for a home loan?

Laura Osti  27:57

Yeah, there's, there's just some standard checks. Essentially, if if you're above a certain threshold, if you're in that good to great range, then you're going to be fine. And actually most young people are I think, if you know, if you had a bad credit, bread credit, sorry, you would know if you had a bad credit score, if you weren't, if you're getting notices about your phone bills, and you weren't making your payments, and you're getting calls about it, that's when your credit scores impacted. But most of us who are just paying their bills regularly on on time, you're going to be fine. But if in doubt, they're really easy ways to check your score by going online and just Google free credit score check and

Blaize Pengilly  28:41

actually just check my credit score as you were speaking, then, Laura, because I've got it in the WeMoney app on my phone. And yeah, it's great to see. No,

Laura Osti  28:50

I mean, I haven't got any credit cards or personal loans. So it's looking pretty good. Is the credit score affect your right or your ability to get a loan? Or does it affect both, it can affect both. So like I said, normally, if you're in that good threshold, you're going to be fine. And you can apply for for a competitive vanilla home loan that has a good rate attached to it. If you don't have a good credit score, you either won't be eligible for those kinds of loans. And then the loans that you can apply for will probably have a much higher interest rate in some phase. So there are some kind of alternative finance options out there for people who might not have a great credit history, and you normally have to pay a bit more for it. Another question is,

Blaize Pengilly  29:33

is there any difference at all in the when it comes to loans, if you intend to live in the house yourself, or if you intend to rent it out?

Laura Osti  29:41

Yes. So the major difference between if you're going to live in their house, or if you're going to rent it out is you need a different type of loan, you get an owner occupied loan if you're living in it, or you need to get an investment loan if you're going to rent it out. And the major difference is that the investment loan will have a slightly higher interest rate. lenders have a little bit more risk associated with investment properties. And they actually have to keep tabs on how many investment loans they're giving out, they can only have a certain proportion of loans that are investment. So they keep a kind of tab on it by having a slightly high interest rate. The other major difference is that a lot of investment loans have an interest only repayment. So when you get a home loan, you can choose to have the principal and interest repayment, which means you're paying down the loan as well as the interest on that loan. And interest only loan means you're only paying the interest over that set interest only period. So the reason you do that is if you're an investor, you're using the tax benefit that you receive from the current government, which kind of they can use as the cost of their investment to reduce their taxable income.

Dan Jovevski  30:49

Wow. Moreover, some of the common reasons of him getting locked back for for one is the most

Laura Osti  30:55

The ommon reason loans aren't approved, it's not a kind of cool mystery reason. It's just the fact that you can't service the loan. So 90% of declines are just based on the fact that based on your income and expenses, the lenders saying that you can't service the loan, or they're saying that it's not affordable for you. It can be really frustrating for people, because sometimes you go, Oh, boy, I'm paying that much in rent. And that's the same as my home loan repayment. So why, why don't you think I can afford the loan. But lenders have a very specific calculation that's actually unique to the lender, and they call it the net serviceability ratio. And that calculation is determining whether they can have a level of confidence that you can repay the loan, it also includes something that's an interest rate buffer. So they're not just saying if you compare it right now, but they're actually factoring in a potential interest rate increase, to say, Well, if rates were going to rise in the future, would you still be able to repay the loan. So there's a kind of a lot of that goes into that calculation. And that's the main reason people will do it will get declined. Some other less common reasons are property declines. If you're, if your property's not in a capital city, or a major regional Township, it's considered riskier. If you have a small apartment, that square meters is really small, it's higher risk for the lender as well. And similarly, if you're in major apartment complex, there might be some some eligibility issues there as well. It's very interesting to see that there are so many different elements that are all considered in the in the home loan approval process. Something else that I'm curious about Laura, is fixed versus variable loans.

Blaize Pengilly  32:40

What are the sort of pros and cons of each? And if if I get a fixed loan, is that fixed forever? Are they fixed for a certain amount of time? And what are the risks involved with both types of of the loans?

Laura Osti  32:52

Yeah, so a fixed rate is, is essentially saying, you're going to have a fixed interest rate for that period, the fixed period is, so if you get a three year fixed rate, it means your interest rate and your repayment amount won't change for that three year period. Which is awesome, because it gives you assurance that in two years, if something happens, you know, your circumstances change, or whatever, you've got that guarantee, or I know that that's exactly how much my loan repayments gonna be. It also can be a really good option. If you're taking a bit and you're saying, look, I think interest rates are gonna go go up soon. And this is a really great rate. So you're kind of getting to lock it in. Which means you can you can benefit from that rate, as we've seen in the last six months, there have been some seriously low fixed rates. So it's been a great option for the people to go Yeah, I want that assurance. And I'm going to lock that low rate in the cons are that you are locked in. So the first thing is that if rates don't go up and actually drop, you're not going to benefit from from that change in interest rate. And the other the other major downside with a fixed rate is if you if your circumstances change, and say you want to do something, like do a renovation or sell the house, or switch loans, lenders have large brake fees involved with getting a fixed loan, so you'll need to probably pay 1000s of dollars to get out of that fixed loan arrangement. Variable rates are more flexible, so it gives you kind of a bit of the best of both worlds. But again, the the probably downside risk is that if rates go up, your rates definitely gonna go up, and you'll have lots of repayment.

Blaize Pengilly  34:36

Alright, cool. And is there a way Is there like a 50/50 split that you can do or do you have to choose fixed or variable?

Laura Osti  34:43

That's a great question. Some lenders we don't offer it can let you split, fixed and variable and basically fix a portion of your loan. So that kind of, again, gives you a bit of security because it's saying, well, at least don't know this portion of my loan. You If it's fixed, I don't know that that repayments not going to change. And then you have the portion that could benefit from the variable rate changes.

Dan Jovevski  35:07

Excellent, Laura, as we wrap up the show, leave the audience with three tips that you'd recommend to increase the chances of being approved.

Laura Osti  35:17

For one, the first tip is to be real with yourself. So look for properties that are within reach. Also, don't think that you need to get the house that our parents grew up in, like, we've all probably been pretty lucky to have families that have had backyards and that kind of thing. But the world's changing, we don't necessarily need need that same large space, we can live economically and differently. So I think Yeah, being real and change, managing your expectations about what your first home is going to look like is probably the first tip I'd give James and preparing for the home loan, I think getting rid of credit cards is probably the biggest will have the biggest impact. And if you can't get rid of them, just reduce the limit. And then finally, most important tip of all is go online and do your research. Because if you just walk into your bank, you're probably going to end up with a really high interest rate. You're smarter than you think you are, the home loan process actually doesn't have to be that complicated. So if you jump online, there are really great lenders out there that have super competitive rates, and you end up saving 1000s on your loan.

Dan Jovevski  36:23

Wonderful. Thanks, Lauren. That's some amazing insights there.

Blaize Pengilly  36:27

Laura, thank you so much for walking us through that process. I feel like I have an understanding now of how the home loan process works. And it doesn't actually sound too difficult. It does sound like something that I would be able to do myself, like you say with the right research, and of course, starting with a reality check of how much can I actually afford and what do I actually need in a house? Laura, thank you so much for joining us today. If our listeners want to find out more about you or Tic:Toc home loans where should they go?

Laura Osti  36:54

Google Tic toc, but not the video app, tik tok, tic toc on loans. We are an Australian FinTech company that has radically changed the home loan process. So we have created the ability to automate the home loan assessment process from start to finish, which means that you can get home loan approval in minutes instead of waiting 30 days. And because of that efficiency, you also get lower lower rates and no fees. So yeah, jump online and Google tictoc.com.au

Blaize Pengilly  37:25

check the link in the show notes as well. Thanks for joining us learn was a pleasure to have you on the show.

Dan Jovevski  37:30

Thanks, Blaize Thanks, Dan. Thanks, Laura. Thanks for tuning in to another episode of We Talk Cents we'll be back again next week.

Blaize Pengilly  37:40

If you'd like to get in touch you have any questions or feedback about the show? Hit us up on our socials. Instagram is at get WeMoney See you next week. See you later.

Dan Jovevski  37:49

Bye

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Disclaimer:

The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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