Pre-approval shows you how much a lender may be willing to lend before you make an offer on a house. It lets you set a realistic budget, and it gives you time to compare home loan options with a clear head.
For buyers in Truganina, in Melbourne's west and within the City of Wyndham, and across Victoria, the decision usually comes down to three questions. How much can I borrow, what will the repayments be, and which loan structure suits my plans? This article answers each in turn.
What Does Home Loan Pre-Approval Actually Do?
Home loan pre-approval is a lender's conditional indication of the loan amount it may provide, based on your income, expenses, debts and savings. It is not a final approval, and the lender can still decline the loan if your circumstances or the property change.
A lender will assess your financial position in detail before issuing it, so you start house hunting with a figure grounded in your own numbers. Pre-approvals expire after a set period, and the length differs between lenders. Our borrowing capacity page explains the factors that shape the amount a lender is prepared to offer.
The main trade-off is that a pre-approval involves a credit enquiry on your file. For that reason, we usually discuss your plan first and only lodge with a lender once we are confident the structure fits.
How Are Home Loan Repayments Calculated on a House Purchase?
Repayments depend on the loan amount, the interest rate, the loan term and whether you pay principal and interest or interest only. A calculator gives the quickest answer, and ours is on the mortgage repayment page.
As an illustration, consider a buyer with a $600,000 loan over 30 years at an example rate of 6.75% p.a. This is not a current offer, only a rate used for the arithmetic. On principal and interest, the repayment is roughly $3,892 a month. Paying interest only at the same rate would cost $3,375 a month, which looks appealing.
The interest-only period does not reduce the debt, though. If the buyer takes five years of interest only, the remaining $600,000 must then be repaid over 25 years. At the same 6.75% example rate, the repayment becomes about $4,145 a month. That is $253 a month more than the original principal and interest figure, and the buyer has not built any equity in the meantime. Interest only can suit a specific short-term goal, but it usually costs more over the full term and the later jump in repayments needs planning for.
Fixed Rate, Variable Rate or Split Rate: Which Suits a Home Buyer?
A variable rate moves with the lender's decisions, a fixed rate stays set for an agreed period, and a split rate divides the loan between the two. The right choice depends on how much certainty you need and how much flexibility you want.
Each has a cost. A fixed rate gives predictable repayments, but it can limit extra repayments and may involve break costs if you refinance or sell during the fixed term. A variable rate generally allows extra repayments and linked features, but your repayments can rise if rates move up. A split loan spreads that risk, although it also means managing two balances.
When the fixed period ends, the loan typically reverts to a variable rate unless you act. Our fixed rate expiry page covers what to review before that date arrives.
How Does an Offset Account Work on an Owner Occupied Home Loan?
An offset account is a transaction account linked to your home loan, and its balance is subtracted from the loan balance when interest is calculated. The more you hold in it, the less interest you pay, while the money stays accessible.
As an example, take the same $600,000 loan at the 6.75% illustrative rate, with $40,000 held in a linked offset account. Interest is calculated on $560,000 rather than $600,000. If that balance is held across a full year, the interest reduction is about $2,700. A buyer who keeps savings in the account for emergencies still sees the benefit, and can withdraw the funds if needed.
The trade-off is that loans with an offset account may carry a higher rate or an annual package fee. The saving only outweighs that cost if you hold a meaningful balance in the account consistently, so we compare both sides before recommending it.
What Should You Compare Beyond the Home Loan Interest Rate?
A home loan rates comparison should include fees, features, the lender's assessment approach and the loan to value ratio (LVR) it will accept. The advertised rate alone does not show the full cost of a loan.
LVR is the loan amount as a percentage of the property's value. A smaller deposit means a higher LVR, and at higher LVRs lenders may charge Lenders Mortgage Insurance (LMI). This is a cost that varies by lender and by deposit size, and it can sometimes be added to the loan, which then increases the interest you pay over time.
Other points worth weighing include ongoing fees, redraw access, the ability to make extra repayments and whether a loan is portable if you move. If this is your first purchase, our first home buyers page outlines how we approach that process. For a broader look at the loans we arrange, see our home loans overview.
As a family-run business, we take the time to explain each option in plain terms. You should feel confident in the structure you sign, not only in the rate attached to it.
Frequently Asked Questions
What is home loan pre-approval?
It is a lender's conditional indication of how much it may lend you, based on your income, expenses and debts. It is not a final approval, and it expires after a set period that varies by lender.
Is interest only cheaper than principal and interest?
Interest-only repayments are lower during the interest-only period, but the debt does not reduce. At an illustrative 6.75% p.a. on $600,000, repayments rise from $3,375 to about $4,145 a month once principal and interest begins over 25 years.
How does an offset account reduce interest?
The balance in a linked offset account is subtracted from your loan balance when interest is calculated. It may come with a higher rate or a package fee, so the balance you hold needs to justify the cost.
What does LVR mean for a home buyer?
LVR is the loan amount as a percentage of the property's value. A higher LVR can mean Lenders Mortgage Insurance applies, which is an added cost that varies by lender.
