Important loan features to understand

Redraw

After making payments for a time, you can take back (re-draw) some of the money you have paid off your loan. The balance of the loan increases again, and either your term extends or your repayments increase, but you have access to cash. This is helpful if you encounter unexpected major expenses, or want to extend or improve your home.

Offset

Some lenders will offset the interest on your savings account against your loan interest. For example, you have a $250,000 loan at 8%, and $50,000 in a savings account. Instead of earning less than 5% interest on your savings (taxed at 30%), you pay loan interest on only $200,000.

The application process

To apply for your loan you will need to prove your income and expenses and the deposit you have saved. Pay slips, a letter from your employer, tax returns, or business profit and loss statements supplied by your accountant are all acceptable proof. A mortgage broker or lender will provide you with a checklist of the exact documentation you require.

Your lender will want to know about your living expenses. Be truthful! Document what you spend on everything. This includes memberships in professional associations, tools for work, electricity, telephone, motor vehicle expenses, insurances, food and clothing, entertainment, school fees, child care costs etc.

The lender will want to know who you owe money to, how much you repay each month, the interest rate that applies, and how much you currently owe. List all your financial obligations, including loans, leases, hire purchase agreements, time payment agreements with creditors, court ordered payments to a former spouse or children or to a creditor.

It is a good idea to document all this before you apply for a loan or start looking for a property. When you have added all income you (and your partner if you are buying together) receive and deducted all expenses (except rent if you are moving to your own home), the balance, less a 'contingency' allowance, is the amount you can afford to pay off your home loan. Don't commit to more! Lenders will often limit your borrowing so that your repayments, including interest, are no more than one third of your income. While that is a good rule, you should examine your income and expenses carefully to determine how much you are comfortable repaying.

A mortgage broker can help you assemble all this information with minimal imposition on your time, and will prepare your application so the lender can process it quickly and approval is assured. The approval process may take several days, sometimes weeks. Once the loan is approved, a contract is drawn up and presented to you.

The lender should instruct you to take your loan contract to an independent adviser who will make sure you understand it correctly before you sign it. This is a legal requirement, for your protection. Make sure you understand the terms and conditions fully. Don't be afraid to ask questions!