Author: Amanda Horswill
Unless you’re Richie Rich, if you want to buy a home, you’ll need to apply for a home loan. And if you’re new to the property-buying game, it can seem overwhelming. However, if you know what you’re doing, and understand the steps involved, applying for a mortgage need not be complicated. Canstar’s easy guide has all you need to know about how to apply for a home loan:
In this article:
- What is a home loan?
- When do you apply for a home loan?
- How do you apply for a home loan?
- How hard is it to get approved for a home loan?
- What documents are needed when applying for a home loan?
- What happens after you apply for a home loan?
What is a home loan?
When someone wants to buy property, they usually need extra finance from a bank or other lender. This makes up the difference between the deposit the buyer has saved, and the purchase price of the property. A home loan, also called a mortgage, is the financial agreement a bank or other lender enters into with you that enables you to obtain the extra funds.
A home loan is typically for a set amount of money, which the borrower has to pay back to the bank over a certain amount of time (for example, 25 or 30 years). The bank charges the borrower interest, which is a percentage of the funds the borrower has to pay back in addition to the principal (the borrowed amount). It also typically costs money to apply for a loan (in the form of upfront fees and sometimes insurance or a levy, if you’ve a smaller deposit).
It’s important to note that applying for a home loan is different to making an enquiry about a loan. The formal mortgage approval process involves supplying your chosen lender with documents and receiving an official notification of either conditional or final approval (discussed in more detail, below).
When do you apply for a home loan?
There are two main points during the home-buying process when people apply for a home loan:
Before finding a home:
Some people choose to apply for a home loan before they’ve found a property to buy. This is called conditional approval or pre-approval, and can help a potential buyer understand how much they can borrow.
While pre-approval is not the same thing as formal approval, it can still be a useful first step for borrowers. By knowing your price limit upfront, it can narrow your search to properties you can afford. This can affect the types of dwellings you consider and their locations.
Pre-approval is essential when buying a home at auction. Winning bids at auction are usually unconditional and legally binding, and require a deposit to be paid immediately. So, before bidding, it’s crucial to have the necessary finance in place.
Typically, a bank will issue a pre-approved applicant with an official letter or statement that sets out how much they can borrow, and the conditions of the pre-approval, such as how long they have before it expires.
After finding a home to buy:
Some people wait until they’ve found a property to buy before approaching a lender for a loan. A real estate contract will typically include a “finance clause” (except for most properties bought via auctions). This clause allows the seller and buyer to negotiate an agreement about how long the buyer has to obtain a home loan, and for the bank to settle it (give an assurance that the funds are available for the purchase).
If the buyer is unable to find a bank that’s willing to finance the purchase, the contract conditions will not be satisfied, so the contract will be cancelled. The risk here is that the buyer will typically lose any deposit they paid to the seller upon entering into the contract.
When considering purchasing a property, it’s a good idea to obtain advice from a suitably qualified professional, such as a trusted solicitor, before signing any contract.
How do you apply for a home loan?
There are two main ways that borrowers can apply for a home loan:
- Directly to a bank – at a branch, online or via a comparison site, such as Canstar
- Via a mortgage broker
However, before doing either, it’s a wise idea to research what home loans are available on the market and what type of loan could suit your circumstances. There are many factors to consider when selecting the right home loan to apply for, including:
- Interest rates – questions to ask could include how much interest the bank will charge, whether the rate will change (variable rate) or be fixed for a period of time and whether the rate is competitive with other rates on the market
- Features of the loan – considerations include whether the loan gives you the option of setting up an offset account or redraw facility, whether you can vary payments easily and whether the balance is accessible online
- Duration (term) of the loan – how long will it take to pay it off, and what happens if you decide to pay extra
One way to investigate the home loan market is to use a comparison site, such as Canstar. As you can see in the table, below, Canstar’s database of lenders records a wide variance in the interest rates on offer. The lowest rate is 2.25%, while the highest rate is 4.59%. (Data correct as of 11/12/2020)
|Owner-occupier Home Loans | Rate Statistics|
|1 Year||2 Year||3 Year||4 Year||5 Year|
|Source: www.canstar.co.nz. Based on owner occupier loans available for $500,000 and 80% LVR in Canstar’s database.|
Our home loan comparison tool allows you to enter in some basic information about the type of loan you think you’d like, and then compare rates and other product information. You can also filter these results to include or exclude certain features. This can help you to narrow down your options and make a shortlist of lenders you’d like to approach about a loan.
How to approach a bank to apply for a home loan
- Start with your own bank: after researching the market to learn what’s on offer, it could be a wise idea to contact banks that you already have a relationship with to ask them about their loans. Sometimes, lenders will offer special rates, deals or packages to existing customers. It’s also a good idea to ask them about deals that they offer to new customers, to see how they stack up against what you have been offered. Often, your bank’s online banking portal will have information on how to apply for a home loan, and typically will have a special team that deals with home loans. It could also be possible to apply online, or receive pre-approval online. If in doubt, try ringing your bank directly and asking for the home loans department.
- Contact shortlist of banks: after researching the market via Canstar’s comparison tool and making your shortlist, contact each lender you’re considering to find out about their application processes. It’s a good idea to start by enquiring online, so that you can receive greater detail about the application process and the loan’s conditions. Then, compare each one.
It’s important to note that each time you apply for a loan, it’s recorded on your credit history. This could, in turn, impact your credit score, which can have an impact on your ability to borrow money in the future. Think carefully before making a formal application for a loan or for pre-approval. Enquiries – just asking a lender for information – is typically not recorded on a credit report. If in doubt, ask the lender.
How to use a mortgage broker to apply for a home loan
Mortgage brokers are service providers that sit in-between lenders and borrowers. They can negotiate a loan on behalf of a borrower, and organise paperwork and other requirements for the borrower. There are a large number of companies and individuals operating in this space. Educational qualifications and industry experience can differ widely between brokers, so make sure to enquire about this before you engage the services of any mortgage broker. All mortgage brokers must be Authorised Financial Advisers. You can check their credentials at the Financial Market Authority’s website
It’s important to note that not all mortgage brokers will offer the full range of home loans to you. Some are bound to a certain set of lenders. Mortgage brokers make their fees in a number of ways during the home loan process. Always ask what fees and charges apply, including any commissions or trail fees that a broker may earn from a bank.
Typically, a mortgage broker will talk to you about your needs and your financial circumstances, and help you to determine what loan or loans could suit you. The broker then goes to the lenders (typically the ones on their books) and creates a list of options for you to consider. Once you choose a loan, the broker generally handles the application process (although you will most likely have to complete a number of forms and supply all necessary information). The broker will then also co-ordinate the financial settlement of your purchase.
How hard is it to get approved for a home loan?
How hard it is to get a home loan can depend on many factors, including how much you need to borrow, your repayment capacity and the economic environment. For example, recently, due to the red-hot housing market, there’s been increased focus on bank lending and the Reserve Bank is exploring the reintroduction of the LVR restrictions, which could curtail lending to those with smaller deposits.
What documents are needed when you apply for a home loan?
Canstar’s research into a number of lenders’ application requirements found that different lenders require different documents. However, it appeared that most banks typically require some or all of the following:
Home loan document checklist
- Proof of identification – this will include a number of different types of ID – usually separated into primary and secondary ID. Primary ID usually includes a photo, such as a driver’s licence, or a passport. Secondary ID typically includes documents such as a birth certificate or marriage certificate. Some lenders’ online identity verification systems also require you to take a photograph of yourself holding a specific form of ID. It could be a good idea to make sure you have:
- at least one form of photographic ID, and
- two or three secondary ID documents
- Proof of employment – this typically involves providing:
- recent payslips,
- and/or supplying bank statements of the account that your wage is paid into,
- and/or a letter from your employer (especially if you are a casual employee, have an irregular income or are paid for piecework)
- a lender can also ask to see tax returns (particularly if you are self-employed)
- Extra income and assets – this could include:
- bank statements
- share earnings reports
- and any other proof of how your extra income is earned
- a list of assets, which could include a car or house that you own outright. If you are a landlord, you may also be asked to provide a copy of any lease agreements you have in place
- Expenses – most lenders will also want to see what you spend, such as:
- your household bills
- what you pay in rent,
- and to see your transaction account and credit card statements. If you are applying for a loan with a bank you use for most of your financial matters (such as transaction and savings accounts), they could source this information from your banking history
- if you are renting, your lender may also ask for the contact details of your property manager or estate agent
- Debts – the lender will most likely do a credit check,
- but will also require you to provide details of any loans you already have, such as car or personal loans
- What you want to buy or build – unless you are applying for pre-approval, the bank will need details of what you intend to buy or build. This is so the lender can perform a bank valuation (have its specialists take a look at the property to see if the amount you are paying is an acceptable risk to it).
- if purchasing, they need a copy of the signed contract of sale
- if building, they will need a copy of the construction contract and details of the land’s location and price.
- Insurance – some lenders may also require that you send them details of
- any insurance policies you may hold, such as life insurance or home and contents insurance.
- Deposit or grant help – if you’re getting help with your mortgage, the lender could also ask for details:
- of your grant or KiwiSaver funds
- if someone is giving you money to boost your deposit. For example, if a relative is gifting you funds for a deposit, a lender may require a letter from that relative detailing the conditions of that gift or loan (such as if you have to pay it back)
- Conveyancer’s or solicitor’s details – the bank or broker will also need to know
- who is doing your conveyancing – the legal work involved when buying a property. It could be a good idea to talk to your conveyancer about what level of involvement you need to have in the process, such as if you need to chase the bank or broker to find out if you have been approved, or if they will do that for you
As most loan approval processes are now handled online, it’s a good idea to have access to a document scanner or a smartphone with a high-resolution camera, to allow you to send all documents to your lender or broker via email or their online application portals. It may be necessary, in some circumstances, to have a witness to your signature or copies of documents, such as a Justice of the Peace (the lender will likely have rules around this).
Usually, a lender will require documents presented in PDF format and photos in JPG (but they will let you know during the application process). Bank, share and KiwiSaver statements can typically be downloaded in PDF format from the organisations’ online portals.