Most people buy a house with money from:
- personal savings;
- proceeds from the sale of a house;
- a mortgage;
- vendor finance;
- a loan or gift from a family member; and/or
- government assistance.
A sensible place to keep your savings is with the financial institution that you intend to apply to for a home loan.
Proceeds from a house sale
Selling first and buying second is more sensible: your financial position is clearer, and you can take as long as you like to find a new home, even if you have to rent in the meantime. The proceeds of the sale should be kept in an accessible, interest-earning investment in the buy–sell interim.
Alternatively, you can have the sale and purchase settlements occur simultaneously. In this case, the sale proceeds can be used immediately for the purchase settlement. However, if the sale settlement is delayed, the purchase settlement will also be delayed.
If you buy before you sell, or the sale and purchase settlement dates are close to each other (i.e. within a month of each other), it is a good idea for the buyer to investigate the availability and terms of bridging finance to ensure they are not significantly out of pocket during both settlements. However, buyers should be aware that a lender may not be willing to approve bridging finance without an unconditional sale contract. Bridging finance may also not be approved due to the borrower’s personal circumstances/ability to service the bridging finance.
Overview of home loans
Loans for houses are available from first-tier and second-tier banks, building societies, mortgage providers, credit unions, life insurance companies, and finance companies. Less common sources of credit include the vendor, trustee companies, and solicitors’ trust funds.
When comparing loans, obtain information about:
- the cost of establishing the loan, including the valuation fee, the lender’s solicitor’s fee, mortgage establishment fee, and any up-front charges;
- when and how repayments are to be made;
- any administration charges, including the fee for debiting an account or sending a periodic bill;
- the rate of interest;
- whether the interest rate is fixed, variable or mixed and, if variable, the past practice and future intentions of the lender for varying the rate;
- whether interest payments are in advance or in arrears;
- whether the loan can be fully repaid at any time and the penalty for early repayment;
- whether instalments of the principal can be paid without penalty during the loan;
- the lender’s policy about late instalment payments;
- other services available with the loan; and
- whether mortgage loan insurance is required based on the borrower’s equity share in the property, and the premium payable.
You should get detailed information about home loans from three lenders and compare the costs, especially the amount of interest and hidden charges. One way to do this is through a mortgage broker.
Many lenders use a very low interest rate for a short initial period of the loan to attract borrowers. However, make sure a loan is cost-effective for the whole term. Use the average annual percentage rate over five to seven years to compare the real cost of each loan. The lender can quote this rate.
The lender usually calculates interest on home loans daily or on a particular day in each month (monthly rests) or, rarely, each quarter (quarterly rests). Usually, the borrower repays the principal loan amount and the interest in corresponding monthly or fortnightly instalments. Usually, the more frequent the rests and the instalments, the cheaper the loan. Repaying the loan by fortnightly instalments in advance (not in arrears) can significantly reduce the cost of the loan. Interest savings can be considerable if you accelerate your repayments.
Lenders decide how much to lend by considering:
- the property’s value, position and condition;
- the proportion of the price that the borrower pays (the borrower’s equity);
- the type of title;
- the borrower’s financial position, age and credit history; and
- any additional security that the borrower can offer.
The amount lent is based on a valuation, not the purchase price, of the property. If a buyer needs to borrow money to complete settlement, it is in their best interests to sign a real estate contract that has a finance clause. This clause generally ensures the return of all the buyer’s deposit if the buyer can prove that they promptly applied for a loan but were refused by a stated date.
You should make sure that this finance clause gives your bank long enough to complete a valuation of the property and to process your applications, as the clause only allows you to get out of the contract if you produce a letter within the specified time frame from the specified lender stating that they refuse to lend you the amount.
A finance clause can only be negotiated where the sale is by private treaty, not by auction. Auction contracts do not contain finance clauses, or any other extra clauses that protect the buyer. A successful sale at auction results in an unconditional contract.
Mortgages provide finance for a borrower in exchange for security over a property for the lender. If the borrower defaults in repaying the mortgage, the lender can sell the property. If the proceeds of the sale are less than the debt and expenses, the borrower must pay the difference. The terms of home loans vary considerably.
Variable rate mortgage
This is the typical home loan. With a variable rate mortgage, the lender can change the interest rate (and repayments) as the market rates change. Instalments are calculated to pay off the loan in an agreed period (usually 15 to 30 years).
Fixed rate mortgage
With a fixed rate mortgage, the lender charges a fixed interest rate for a set period (usually one to five years). If a borrower wants the loan to continue, they must renegotiate the terms of the loan. If a borrower wants to repay the loan in full during the loan period, the lender negotiates the terms of the payout and charges a penalty.
Second mortgages are available from lenders such as finance companies and credit unions. They are short term with very high interest rates. The first mortgage lender must facilitate the lodgment of the second mortgage by making the certificate of title available for lodgement. This may incur additional legal and administration fees to allow the first mortgagee to complete their due diligence.
A reverse mortgage is where a lender advances money to a person who is retired or elderly. A reverse mortgage allows a home owner to borrow a limited percentage of their property’s value (15–25 per cent). Repayment of the mortgage is deferred until the house is sold, the home owner dies or goes into care. This can significantly reduce the owner’s equity in the property by the time the loan is repaid. Home owners should seek legal advice before entering into a reverse mortgage.
Legislation governing lenders
Home loan mortgages and guarantees are covered by the National Consumer Credit Protection Act 2009 (Cth). For more information about national credit laws, see ‘Consumer protections under Australian Credit Law’ in ‘Introduction to credit and finance and key legislation‘.
The different lenders
Lenders include banks, mortgage brokers, credit unions, finance companies and solicitors’ trust funds.
Banks usually lend up to 80 per cent (and more, if the borrower pays for lenders mortgage insurance) of the bank’s valuation of the property.
Mortgage brokers are not lenders but they consider your situation and recommend a lender. You do not pay a broker to do this as they are paid a commission by the bank you take out a loan with.
Credit unions provide home loans to their members at competitive rates.
Finance companies lend first and second mortgages. A borrower pays a higher interest rate and the loan period is shorter than for home loans from banks.
Solicitors’ trust funds
Very rarely, solicitors’ trust funds are available from some specialist law firms. They are usually available on a short, fixed term at fixed interest, and require only payments of interest for the loan period. The capital must be repaid at the end of the loan or the loan must be renewed. Borrowers must pay their own and the lender’s solicitor’s costs, as well as a valuation fee.
Lenders and settlement
The lender attends the settlement of the contract (which usually occurs via an electronic conveyancing platform; however, there are a small number of complex transactions that cannot be settled electronically) and uploads the loan money into the electronic workspace.
That money, and any funds contributed directly by the buyer, is used to pay the vendor, as well as all the expenses of the loan, any mortgage loan insurance premium, stamp duty, any expenses involved in clearing the vendor’s title, the lender’s solicitor’s fees, and the registration fees on the transfer and mortgage. The stamp duty is paid automatically to the State Revenue Office. The discharge of mortgage and transfer of title is registered automatically with Land Use Victoria. The sale proceeds are automatically transferred to the vendor’s account.
A mortgage contract is contained in the loan terms and conditions document, the registered mortgage and a memorandum of common provisions, which is a complex document. Mortgages give lenders extensive powers when borrowers default. Be careful to note all the requirements about payments.
Early repayment: Most mortgages entitle the lender to charge the borrower a fee if a loan is repaid early.
Lender’s mortgage insurance:This insurance protects the lender from loss if the borrower defaults on the loan and the sale of the property returns less than the amount needed to repay the loan and all the lender’s expenses.
Lenders mortgage insurance does not protect borrowers, but it assists people who have very little money to buy a home and eliminates the need for a second mortgage or a large deposit. If a loan is over 80 per cent of the value of the property, the lender usually requires the borrower to take out lenders mortgage insurance.
A borrower can obtain personal mortgage insurance from an insurance broker, which protects the borrower by paying the instalments if they lose their income.
The Equal Opportunity Act 2010 (Vic) covers banking and credit. Lenders are not allowed to use a person’s sex or marital status as reasons for refusing or reducing a loan. For more information, see Chapter 11.1: Discrimination and human rights.
Vendor terms contracts
A vendor terms contract of sale allows the buyer to pay the price of the property over a longer period than usual, usually three to five years. Ownership of the property remains with the vendor until the final payment is made. Usually, the buyer pays a deposit of 10 per cent when the vendor terms contract is signed, and about one-third of the price when they take possession. The balance is paid off on terms agreed in the contract of sale. Vendor terms contracts are regulated by the Sale of Land Act 1962 (Vic) (‘SL Act’).
Recent changes to the SL Act prohibit selling, arranging or brokering land under a vendor terms contract for residential land where the price is less than $750 000. Vendors should be wary of entering a vendor terms contract as the contract could be void if it’s not in the correct form. Vendors should seek legal advice before entering into a vendor terms contract.
As soon as the contract of sale is made, the buyer’s conveyancer should lodge a caveat on the vendor’s title with Land Use Victoria to prevent another person claiming the property, and to give notice of the buyer’s interest in the property.
For buyers, there are three disadvantages to vendor terms contracts of sale:
- the property is difficult to resell without completing the terms of the contract;
- the buyer who defaults loses their investment, because the seller keeps the deposit and resells the property; and
- the terms generally require the buyer to pay a large amount at the end of the contract. Funds are often difficult to obtain without mortgaging the property (what the buyer wanted to avoid).
The SL Act allows vendor terms buyers to convert their contract into ownership with a mortgage. This requires paying stamp duty, the fees to register the mortgage and transfer the property, and the conveyancing fees. However, a buyer who converts a vendor terms contract becomes the registered owner, and the protection of their investment is increased. Vendor terms buyers should always convert their contracts to ownership with a mortgage.
Help for home owners who cannot pay
If a borrower is late making a repayment on a home loan, the lender can charge default interest. Any costs and expenses incurred by the lender because of the default are added to the debt and incur interest. Defaults can be very expensive to correct since lenders can charge interest on unpaid interest. If you cannot pay your loan instalments, contact your lender and explain the problem.
Lenders provide advice for borrowers who find themselves in difficulties. You and your lender can develop a strategy that keeps losses to a minimum.
First Home Owner Grant
The First Home Owner Grant (FHOG) is $10 000 for new homes purchased in Victoria.
The FHOG scheme initially applied to the purchase of existing homes. However, for contracts entered into on or after 1 July 2013, eligibility is limited to buyers who are purchasing or building new houses.
The grant is only payable where the price of the home, or the price of building the home, does not exceed $750 000.
Eligibility for the FHOG is also based on an applicant or the applicant’s spouse or partner:
- being a natural person, not a company, and over 18 years of age;
- being an Australian citizen or permanent resident;
- not having owned a home in Australia, either jointly or separately;
- living in the home as a principal place of residence for at least 12 continuous months, commencing within 12 months of settlement or the completion of construction;* and
- not having previously received the FHOG.
* Since 27 June 2017, Australian Defence Force (ADF) personnel have been exempt from this residency requirement. This includes current members of the Australian army, air force or navy who are enrolled to vote in Victorian elections and who are on duty or on leave. This exemption does not apply to reservists or to Australian public service staff.
The FHOG is administered in Victoria by the State Revenue Office (SRO). For the most recent updates on the FHOG, visit the SRO’s website.
Usually, a purchaser’s lender will apply for the FHOG for them. However, if the purchaser is financing a purchase themself, they can apply for the FHOG via the form available at www.sro.vic.gov.au/fhogapply and supply the required supporting evidence. Where the purchaser or their conveyancer are applying for the FHOG, this will be paid as a refund after settlement, which may affect what funds are available.
First-home buyers may also be eligible for other duty exemptions or concessions.
Stamp duty concessions
The purchase of property in Victoria triggers a land transfer duty (also known as stamp duty) liability that is payable to the SRO. The amount of duty payable depends on the property’s ‘total dutiable value’, which is usually the purchase price.
Depending on the buyer’s circumstances, there may be exemptions and concessions available on the amount of stamp duty payable (or surcharges for trusts, foreign buyers, etc.).
For a full list of stamp duty concessions and exemptions, visit www.sro.vic.gov.au/land-transfer-duty.
The most common stamp duty concessions and exemptions are the:
- principal place of residence concession;
- first-home buyer duty exemption or concession;
- off-the-plan sales concession; and
- pensioner exemption or concession.
COVID-19 related concessions
In the 2021–2022 Victorian state budget, temporary concessions were introduced to stimulate new apartment sales in inner-city Melbourne.
Principal place of residence concession
A principal place of residence (PPR) stamp duty concession is available if all the below criteria are met:
- the property value is less than $550 000;
- the buyer intends to move into the property within 12 months of settlement; and
- the buyer intends to live at the property as a primary home for at least 12 months.
The concession rate depends on the property’s value.
First-home buyer duty exemption or concession
The first-home buyer duty exemption or concession is available for a first-home buyer if all the below criteria are met:
- the property was purchased on or after 1 July 2017; and
- the buyer and their spouse or partner satisfy the eligibility requirements for the FHOG (see ‘First Home Owner Grant’, above).
If the buyer meets the above criteria:
- and the total dutiable value of the property is $600 000 or less, the duty exemption applies;
- and the total dutiable value of the property is more than $600 000 but not more than $750 000, the duty concession applies.
Off-the-plan sales concession
The off-the-plan sales concession only applies to purchases of land and building packages.
This concession allows a buyer to deduct the land transfer duty assessable on the cost of constructing their home from the total assessable land transfer duty on the contract purchase price. This means that the land transfer duty is only paid on the improved value of the land that occurred on or after the contract date, and not on the buildings previously constructed on that land.
It is this ‘dutiable value’ that is then used to calculate whether the first-home duty exemption or concession applies (however, confusingly, it is the contract price that determines whether the FHOG is available).
Since 1 July 2017, this concession has only been available to buyers who intend to use the property as their principal place of residence. Buyers must also be eligible for either the PPR or the first-home buyer duty concession once the reduced dutiable value of the property is taken into account. The complexity of these calculations – which rely on information that isn’t available until shortly before settlement – means that a buyer’s eligibility for this concession and the exact stamp duty payable can’t be reliably estimated at the time of signing the contract, which adds risk to the purchase.
Pensioner exemption or concession
A buyer who has an eligible pension card can receive a one-off duty exemption or concession when they purchase a new or established home, with a maximum value for each pensioner’s share of $750 000.
A buyer is eligible for this exemption or concession if they:
- hold a relevant concession card* on the property settlement date; and
- have never before received a pensioner exemption or concession in Victoria; and
- are buying the property for market value; and
- intend to use the property as their principal place of residence.
* For a list of eligible concession cards, visit www.sro.vic.gov.au/node/1398.
To calculate the pensioner concession, use the SRO’s calculator.
Note that if a pensioner buyer is eligible for the first home duty concession, they must choose to receive either that concession or the pensioner concession.
This exemption or concession is also available where there are multiple buyers who are purchasing a property together and only one buyer has an eligible pension card. In this instance, the concession only applies to the pensioner’s share.
HomesVic Shared Equity Initiative
The HomesVic Shared Equity Initiative (‘HomesVic’) allows first-home buyers to purchase a home and qualify for a home loan with a deposit of five per cent or more.
HomesVic opened on 19 February 2018 and up to 400 applications are available; at the time of writing (1 July 2021), spots were still available.
Buyers need to apply directly to eligible lenders. An income and debt threshold applies, and the property must be an eligible property type in a ‘priority area’.
Full details of HomesVic, including the eligibility criteria and which areas are ‘priority areas’, are available at www.vic.gov.au/homesvic-shared-equity-initiative.
First Home Super Saver Scheme
The First Home Super Saver Scheme (FHSSS) allows you to save money for your first home inside your super fund. The FHSSS helps first-home buyers save for a home faster with the concessional tax treatment of superannuation.
You can apply to have a maximum of $15 000 of your voluntary contributions from any one financial year released, and up to a total of $30 000 across all years. You will also receive an amount of earnings that relate to the contributions.
You must apply for and receive a FHSSS determination before signing a contract for your first home and before applying for contributions to be released.
More information about the FHSSS is available on the ATO’s website.
First Home Loan Deposit Scheme
The First Home Loan Deposit Scheme allows first-home buyers to purchase a property with a five per cent deposit without needing to pay lenders mortgage insurance.
The scheme works by the government guaranteeing the enders mortgage insurance that would usually be payable when borrowing 80 per cent or more of the value of the property from a lender.
Purchasers must meet the FHOG eligibility criteria. The scheme has strict requirements dictating, for example, what can be purchased and when settlement must take place.
For more information about this scheme, see https://www.nhfic.gov.au/what-we-do/support-to-buy-a-home/first-home-loan-deposit-scheme/.
Family Home Guarantee
The Family Home Guarantee (FHG) allows single parents to purchase an existing home with a deposit as little as two per cent without needing to pay lenders mortgage insurance.
This scheme is available to all single parents — regardless of whether they are a first-home buyer or have owned property previously. Buyers apply for the FHG directly through their lender. Approval is subject to the buyer’s ability to service (i.e. pay off) the loan. For more information about the FHG, see https://www.nhfic.gov.au/media/1686/family-home-guarantee-fact-sheet-19-june-2021.pdf.
Criteria for grants and concessions
The criteria for grants and concessions continue to be varied. Contact the State Revenue Office to confirm your entitlements.