Last month we highlighted the three most popular questions received through Ask Aussie for the month. So to continue where we kicked off, here are the top three questions from October:
- What is the difference between pre-approval, conditional pre-approval and unconditional approval for a home loan?
- How much deposit do I need?
- Can the First Home Buyer grant be included in my deposit amount?
What is the difference between pre-approval, conditional pre-approval and unconditional approval for a home loan?
There are different types of approval you can get for a home loan:
- Pre-approval/Online pre-approval – this is usually a very basic indication of your suitability to borrow an amount from a lender. This is in no way a binding agreement from the lender to actually lend you anything.
- Conditional pre-approval – this is a relatively clear indication of a lender’s intention to offer to lend you money for a property. It takes into account your personal financial situation but is not a binding agreement from the lender to lend you anything.
- Unconditional approval – this indicates a lender’s willingness to lend you a specific amount of money for a specific property given your personal situation. It’s usually then up to you to decide whether to go forward.
How much deposit do I need?
The general rule is the bigger deposit you can put down, the better. This sounds pretty obvious but there are some important differences between having 10% and 20% deposit.
Firstly, most lenders now require you to have at least a 5% deposit, which must be made up of savings or cash, rather than a loan. But if you can put down a deposit of 10%-20%, this will often get you a lower interest rate on your loan, because there is less risk involved for the lender.
Ideally you should put down a deposit of 20% or more, so that you can avoid paying what’s known as ‘Lender’s Mortgage Insurance’ (LMI). This is an insurance policy for the lender against you not paying your mortgage. Although you pay the initial premium, it only covers the lender not you, so the faster you can get to a 20% deposit and avoid paying for it the better for you.
Also, the more you can put down as a deposit, the less you’ll have to borrow and therefore the less interest you’ll pay over the lifetime of the loan.
You can use our Repayments Calculator to see the kind of difference it makes when you have different levels of deposit.
Can the First Home Buyer grant be included in my deposit amount?
While the government doesn’t have any rules around how you should use your First Home Owners Grant (FHOG), the grant itself is usually paid to you post settlement, after you’ve bought the property. Some lenders may allow you to use the FHOG as part of your deposit, but this is normally considered on a case by case basis.