Owner Occupier Loan Guide for Australian Buyers

Buying a home to live in involves more than choosing a property and finding a competitive interest rate. The loan structure, repayment requirements, available features, lender policy and your broader financial circumstances may all influence how suitable a particular home loan is for your needs.

This owner occupier loan guide explains how home loans for a primary residence generally work, what lenders may consider when assessing an application and the factors worth reviewing when comparing different loan options.

What is an owner occupier loan?

An owner occupier loan is finance used to purchase, build or refinance a property that you intend to occupy as your main residence.

Owner occupier lending and investment lending may be subject to different pricing, credit policies and assessment requirements. The applicable treatment will depend on the lender, product and borrower circumstances.

Owner occupier interest rates may sometimes differ from investment loan rates, but the advertised interest rate should not be considered in isolation. Fees, repayment structure, loan features, applicable conditions and lender policy may all affect the overall lending arrangement.

The purpose of the property is also important. If you later move out of your home and begin renting it to tenants, notify your lender or broker. Different pricing, products or lender requirements may apply where the property changes from owner occupied to investment use.

How much deposit may be required for an owner occupier loan?

A 20% deposit is commonly used as a benchmark because Lenders Mortgage Insurance may not be required where the loan-to-value ratio is 80% or below, subject to the lender, product and borrower circumstances. For example, on a $700,000 property purchase, a 20% deposit would be $140,000, before allowing for other purchasing costs.

A deposit below 20% may still be considered by some lenders. The amount available to borrow and any applicable LMI will depend on the lender, property, loan structure and borrower circumstances. Some borrowers may also qualify for lender-specific LMI waivers or government-supported home buyer programs, subject to eligibility requirements.

LMI generally protects the lender rather than the borrower if the home loan is not repaid and the lender suffers a loss after enforcing its security.

The deposit is only one part of the amount required to purchase a property. Buyers may also need to allow for land transfer duty, commonly referred to as stamp duty, conveyancing or legal costs, building and pest inspections, lender fees, registration costs, insurance and moving expenses.

Eligible first home buyers may have access to government assistance, concessions or exemptions depending on their state or territory, property value and individual circumstances. Eligibility requirements and property price limits vary and may change over time, so current rules should be confirmed before relying on any particular program.

The deposit level that is appropriate will depend on your available savings, purchasing costs, borrowing position and relevant lender requirements.

What do lenders assess for an owner occupier home loan?

A lender generally assesses more than the property's purchase price and the amount of deposit available. The lender considers your capacity to meet the proposed repayments alongside your existing commitments, living expenses and other relevant financial circumstances.

Income is an important part of this assessment. Depending on the applicant and lender, income considered may include salary and wages, overtime, allowances, commissions, bonuses, rental income and self-employed income.

The amount and type of income recognised for servicing purposes varies between lenders and may depend on the supporting evidence available. Self-employed borrowers may be subject to different income-verification requirements depending on the lender and their circumstances. Existing financial commitments are also relevant. Credit card limits, personal loans, car finance, HELP or other study-loan debt, childcare costs, dependants and household living expenses may form part of the lender's assessment.

Even where a credit card has little or no outstanding balance, the available credit limit may still be considered as an existing commitment, depending on the lender's serviceability methodology.

Home loan serviceability is generally assessed using a rate above the actual loan rate or another lender-specific assessment rate. This allows lenders to assess whether the proposed loan may remain serviceable if interest rates or financial circumstances change. Different lenders may apply different serviceability policies and assessment methods.

Your credit history, employment circumstances, savings and the property being purchased may also be relevant. Property type, size, location and condition may affect valuation requirements, acceptable loan-to-value ratios or lender policy.

A home loan pre-approval may provide an indication of the amount a lender is prepared to consider, but it is not unconditional approval. Final approval remains subject to the lender's requirements, which may include verification of documents, valuation of the property and confirmation that the applicant's circumstances have not materially changed.

Choosing between variable, fixed and split owner occupier loans

Interest rate is an important consideration because changes in the rate may affect both repayments and the overall interest charged over time. However, the loan structure should also be considered in the context of how you expect to manage the loan.

A variable interest rate may rise or fall over time as the lender changes its applicable rates. Depending on the lender and product, variable-rate loans may include features such as an offset account, redraw facility or additional repayment options.

An eligible offset account is generally linked to the home loan, with funds held in the account reducing the loan balance on which interest is calculated while those funds remain in the account, subject to the loan terms. The relevance of an offset facility will depend on factors such as the balance you expect to maintain, applicable fees, loan pricing and how you intend to use the account.

A fixed-rate loan has an agreed interest rate for a specified period, which may provide greater repayment certainty during that period. Fixed-rate products may also involve restrictions on additional repayments, redraw or changes made during the fixed period. Break costs may apply in some circumstances if the loan is repaid, refinanced or otherwise changed before the fixed term ends.

Some borrowers choose to divide their loan between fixed and variable portions. A split loan combines these two structures, with different rates, features and conditions potentially applying to each portion. Whether a split structure is appropriate will depend on the borrower's circumstances, repayment requirements, product terms and preferences.

Principal and interest repayments for owner occupiers

Principal and interest repayments are common for owner occupier home loans.

With this repayment structure, each scheduled repayment generally includes interest charged on the loan as well as an amount that reduces the outstanding principal.

Under an interest-only repayment arrangement, scheduled repayments generally do not reduce the loan principal during the agreed interest-only period, subject to the loan terms. When the interest-only period ends, repayments will generally increase, as principal is repaid over the remaining term. Interest-only arrangements may also result in more interest being paid over the life of the loan.

The repayment type available and appropriate for a borrower will depend on the loan purpose, lender policy, product terms and individual circumstances.

Compare more than the advertised home loan rate

A lower advertised interest rate does not necessarily provide a complete picture of a home loan.

When comparing owner occupier loans, consider the interest rate together with applicable fees, the loan term, repayment structure, product conditions and features you expect to use.

Where a loan includes an offset account or another paid feature, the applicable fee and pricing should be considered alongside how you expect to use that feature. Features that appear attractive on paper may have limited relevance if they do not align with the way you intend to manage the loan.

Redraw facilities also vary between lenders. Access requirements, minimum withdrawal amounts, fees and other restrictions may apply. Additional repayment rules may also differ, particularly between variable and fixed-rate products.

The loan term deserves consideration as well. For the same loan amount and interest rate, a longer term will generally result in lower required repayments than a shorter term, but may result in more interest being paid over the life of the loan.

Where permitted under the loan terms, additional repayments may reduce the outstanding principal sooner and may reduce total interest over time. Any limits or conditions should be checked before relying on this feature.

Preparing before making an offer

Understanding your financial position before signing a property contract may help identify relevant lender requirements and potential issues earlier in the process.

Review your income, household expenses, existing debts, available deposit and expected purchasing costs before determining a property budget. Existing credit facilities and liabilities may also be relevant to the lender's serviceability assessment.

New credit applications or liabilities may affect a subsequent home loan assessment, so changes to your financial position before or during the application process should be considered carefully.

Depending on the lender and application, bank statements, repayment conduct and existing credit facilities may be reviewed. Significant or unusual transactions may require additional explanation or supporting documentation.

Applicants will generally need to provide identification, evidence of income, details of liabilities and evidence of the funds being contributed towards the purchase. Self-employed applicants may require additional business and taxation documentation depending on the lender's verification requirements.

Contract conditions, including any finance, building or pest inspection clauses, should be discussed with a suitably qualified conveyancer or solicitor before signing. Your broker or lender may help explain relevant finance timeframes and lender requirements, while legal advice regarding the property contract should come from your conveyancer or solicitor.

Refinancing an owner occupier loan

Refinancing may be considered where your existing fixed-rate period is ending, your current pricing or loan features no longer meet your requirements, or you are considering a different loan structure.

Depending on the circumstances, refinancing may also involve restructuring existing debt or accessing available equity for an acceptable purpose, subject to lender assessment.

A lower interest rate should not be the only consideration. Discharge costs, new loan establishment fees, valuation outcomes, fixed-rate break costs, loan features and the proposed loan term may all affect whether the new arrangement is appropriate.

A new lender will assess your application under its current credit policy and serviceability requirements. Approval is therefore not guaranteed simply because you have previously managed your existing home loan successfully.

How a mortgage broker may assist

Comparing owner occupier loans may involve considering interest rates, fees, loan structures, features, lender policies and eligibility requirements.

A mortgage broker may help assess your borrowing requirements, explain relevant lending options from their available lender panel and assist with the application process through to settlement.

At Inspiration Lending, we focus on understanding your circumstances, borrowing requirements and property plans before considering relevant lending options from our lender panel. This may include explaining differences in interest rates, loan features, repayment structures and lender policies that may be relevant to your situation. Our lender panel includes a broad range of lenders but does not represent every lender or loan product available in the market.

Understanding the overall owner occupier loan structure

When considering an owner occupier home loan, it may be helpful to look at the overall lending arrangement rather than focusing on a single feature or advertised rate.

Interest rate, fees, loan term, repayment structure, available features, lender policy and your individual circumstances may all be relevant when considering available home loan options.

Considering these factors before committing to a loan may provide a clearer understanding of the lending arrangement and the ongoing repayment requirements associated with the home purchase.

Disclaimer

General information only and does not constitute credit or legal advice. Your full financial situation and requirements need to be considered prior to any offer and acceptance of a loan product. Lending is subject to lender approval. Contract conditions and legal matters should be discussed with a suitably qualified conveyancer or solicitor.

Inspiration Lending Pty Ltd Credit Representative 569537 is authorised under Australian Credit Licence Number: 389328 | ABN 20687381737.