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How does mortgage lending work?

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Table of Contents

Understanding mortgage lending: what you need to know

Understanding the market

According to leading industry researcher IBISWorld, the market size of Australia’s mortgage industry (measured by revenue) was $62.8bn in 2022. This equates to around 100 lenders servicing just under 20 million clients around the country.

That’s a lot of mortgage lenders competing for your home loan, although out of the 100 or so lenders about 10 account for approximately 90% of the entire mortgage lending market, dominated by the big four – Commonwealth, NAB, Westpac and ANZ.

It’s interesting to look at the market share breakdown of the top 10 lenders as detailed by Statista in their 2021 findings:

1
25.90%
Commonwealth Bank logo
Commonwealth
2
22.50%
Westpac logo
Westpac
3
14.54%
ANZ logo
ANZ
4
14.44%
NAB logo
NAB
5
3.32%
Macquarie Bank logo
Macquarie Bank
6
2.86%
ING logo
ING
7
2.68%
Bendigo Bank logo
Bendigo Bank
8
2.34%
Suncorp logo
Suncorp-Metway
9
1.61%
Bank of Queensland
10
1.23%
HSBC logo
HSBC
1
25.90%
Commonwealth Bank logo
Commonwealth
2
22.50%
Westpac logo
Westpac
3
14.54%
ANZ logo
ANZ
4
14.44%
NAB logo
NAB
5
3.32%
Macquarie Bank logo
Macquarie Bank
6
2.86%
ING logo
ING
7
2.68%
Bendigo Bank logo
Bendigo Bank
8
2.34%
Suncorp logo
Suncorp-Metway
9
1.61%
Bank of Queensland
10
1.23%
HSBC logo
HSBC

While the big four have the lion’s share of the market, this doesn’t mean that they are necessarily the best choice for your needs. Many factors should come into your consideration when choosing a lender.

Here are a few:

Do you need a branch network? If yes, what tasks do you need branch support for that current technology doesn’t already handle?
Do you feel more comfortable with a traditional bank, or are you happy to look at a purely online lender (without necessarily having a bank licence)? What are the pros and cons of using a smaller bank or online lender?

How important is technology to you? Thing like:
– online and internet banking platform, usability, features and benefits
– Apple and Android Pay
– ATM and access to cash availability (are you happy to pay a fee for this service?)
– online and digital application and loan document process.

What are their product offerings: offset and redraw vs redraw only home loan?
How flexible and easy is it for changes to loans and additional increase requests (e.g. the ability to cash out equity for multiple uses such as school fees or home refurbishments; perhaps the ability to fix the rate on a portion of your home loan?)
What is the total cost of the loan each year and for the life of the loan – not just the headline rate (e.g. is there an annual fee charged and what does it cover? Are there fees for using redraw?)
Is the application process simple and timely? Is the lender likely to make constant requests for more information and put pressure on timelines?

All these factors and more are what you need to weigh up when choosing a lender aligned with your specific circumstance, needs and personality. A mortgage broker can help you navigate through the options open to you, and help you select the lender who best suits your needs.

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Understanding ‘lending speak’

It can be quite confronting and confusing when you set out on your mortgage journey. All of a sudden you’re hit with terms like LVR, LMI, Offset, Redraw.

It certainly helps to have these explained in simple language so you can feel confident and assured when sitting down with your broker or lender. So here’s some of the key terms that are handy to know:

Variable Interest Rate
As the term infers, your interest rate will vary depending on several factors including the Reserve Bank’s current cash rate, your credit score and repayment history, equity in your property, lender and home loan product selection.
Fixed Interest Rate
Here, your interest rate is locked in a fixed rate mortgage for a fixed term (typically 1,2,3, 4 or 5 years) which may provide more comfort knowing the maximum repayment obligation for a period to better meet your household budget.
Principal & Interest and Interest Only Loans

Home loans are made up of two parts: the loan principal and the interest.

The loan principal is the amount you borrow to fund your property purchase. This is the difference between the full cost of the property and your deposit.

The interest is the amount you are charged by the lender for borrowing the principal amount.

Loans can be structured to be either Principal & Interest (you pay both the principal as well as the interest charged on it), or Interest Only repayments (you only pay the interest portion of your loan for a set period, for example the first five years of your loan).

The key benefits of Principal & Interest loans are that they come with lower interest rates and you’ll pay off your loan faster. The key benefits of an Interest Only loan are you will pay lower repayments if required for extra cashflow and tax advantages for investment loans.

Young couple looking at paperwork
Loan to Value Ratio (LVR)
This one is pretty important, as it is one of the key factors lenders apply to determine how much you can borrow. It refers to the percentage of debt you are borrowing against the confirmed value of the asset. The bigger your deposit, the lower your LVR will be. For example, if you borrow $750,000 against a house that a bank values at $1m, you have a 75% LVR.
Lenders Mortgage Insurance (LMI)
This is a once off insurance premium that protects the lender in the event you default on your mortgage repayments. This typically applies where a borrower is seeking to borrow against a property with an LVR higher than 80%. Typically LMI is added to the total loan amount rather than being paid upfront.
Debt Servicing Ratio (DSR)
This is another measure a lender uses to assess whether you can afford the mortgage payments. To calculate the DSR, the lender uses a number of factors to work out the amount of your income that is available to repay the mortgage debt due.
Amortising loan
Sounds complex, but this is simply the formal loan term a lender will use for a standard principal and interest loan.
Bridging finance
This is a temporary loan used as a gap measure between buying your new home and selling the old one.
Conveyancing
Every loan requires conveyancing, which refers to the legal work carried out to transfer ownership of a property. Typically this will be handled by your mortgage broker or you can do this directly with a conveyancer if you are managing the setup of your loan.
Principal & Interest and Interest Only Loans

Home loans are made up of two parts: the loan principal and the interest.

The loan principal is the amount you borrow to fund your property purchase. This is the difference between the full cost of the property and your deposit.

The interest is the amount you are charged by the lender for borrowing the principal amount.

Loans can be structured to be either Principal & Interest (you pay both the principal as well as the interest charged on it), or Interest Only repayments (you only pay the interest portion of your loan for a set period, for example the first five years of your loan).

The key benefits of Principal & Interest loans are that they come with lower interest rates and you’ll pay off your loan faster. The key benefits of an Interest Only loan are you will pay lower repayments if required for extra cashflow and tax advantages for investment loans.

Hand shot of couple looking at paperwork with consultant
Equity
Another important term to get to know, as this is the difference between your mortgage and your property’s value (i.e. the more equity you have in your property the lower your LVR, a low LVR is generally considered a lesser credit risk).
Offset account
This is a transaction account linked to your mortgage. The balance in the account ‘offsets’ the principal of the loan. Overall interest is calculated on the principal less the offset account balance, so as interest is calculated daily and charged monthly, the more money you keep in your offset, the less you pay in interest.
Redraw Account
A redraw facility allows you to make extra repayments in addition to your minimum home loan repayment. These additional funds can be taken out if you need them for planned or unexpected events. The money in your redraw facility also counts against your home loan balance, which lessens the amount of interest you pay.
Valuation
Every property purchase requires a valuation, which is where the lender gains an estimation of the value of the property prepared by an independent professional valuer. It’s important to note that a bank valuation is typically more conservative than a real estate agent because a bank valuation aims to provide the lender an estimate of what they could reasonably (i.e. conservatively) expect to sell a property if it had to be sold urgently in its current state. This is opposed to a real estate valuation which is typically more aggressive as the real estate agent is aiming to secure the sale listing. It will be skewed towards achieving as strong a sale result as possible so their valuation may factor in the seller spending additional marketing dollars and actions to “spruce up” the property’s appearance.
Settlement
For home buyers this is the best term of all. It’s the day on which the process of changing title of a property occurs, including exchanging money and documents, so that you become the legal owner of the property.
Young happy couple entering their new home
Tribeca’s lending partners can decipher the world of mortgage lending for you. You can contact us here.

Understanding what lenders want

When applying for a home loan, it’s good to know what to expect. Again, this is where a broker is worth their weight in gold to guide you through this process.

So here’s a quick rundown of the key items most lenders will be looking at when assessing your loan application:

Credit scores
All borrowers have a credit file and credit score. This is one of the first boxes a lender will look to tick. Your credit score and history can have a large bearing on whether your loan application is accepted or not. The more stable your profile; the more reliable and healthy your credit habits are including ongoing good repayment history; the better your credit score will be and increase your chances of successfully applying. Lenders use various suppliers to obtain your credit score, and you can also go to their sites if you want to check your credit report yourself.

Want to find out your credit score for free? The most popular sites for checking credit scores are: Equifax, Experian, Illion, Get Credit Score and Canstar

Assets and liabilities

Having a significant value of assets won’t be the sole reason a lender will lend you money, however it will form a large part of your overall profile strength. For example, if you’ve been in full time PAYG work for the last 10 years earning $150k, it’s likely you have built up some form of asset pool or equity in assets such as property, shares, term deposit and savings. It would also be expected that you’ve built up an appropriate superannuation pool.

Conversely, a significant list of liabilities won’t necessarily detract from your application provided that your level of liabilities is consistent with the rest of your profile. Confirming your income and ongoing ability to repay those liabilities before retirement (and/or have appropriate exit strategy at retirement) will also be factored into your application.

Employment
Lenders love stability, especially when it comes to employment. They will take a keen note of your employment history, looking at aspects like your length of employment and frequency of changing jobs or careers. It’s why mortgage lenders will request a minimum of three (ideally continuous) years of employment history. This doesn’t mean a change of job within three years will disqualify you. However, a drastic change could make it difficult to assess, such as if you made a recent complete change of industry from two years of white collar self-employment into a casual blue collar role.
Close up of nurse
LVR
As mentioned earlier, mortgage lenders place a large emphasis on the LVR when assessing your mortgage loan application. Generally, the lower the LVR, the lower the risk to the lender on the basis that it reasonably expects that the debt could be fully repaid in the event of an urgent fire sale. Conversely, lenders consider mortgage loans with an LVR over 80% of the property value to be a higher risk. The LVR that banks will allow you to borrow can depend on a variety of factors such as the home loan amount you need, the location, size and type of property, your credit report and history, your income and employment history and the type of loan you’re applying for. If your LVR is greater than 80%, you’ll generally need to get LMI.
LMI

Often a lender will require a First Home Buyer to take their first home loan with LMI. This is because they are not able to contribute enough savings to their purchase to start with a loan at an 80% LVR or less. In some instances it might be appropriate to consider a Parental Guarantee where the parent holds sufficient equity in their property and has the financial means to guarantee their child’s loan by effectively cross-securing their property.

If you’re a First Home Buyer (or are supporting someone who is), a government backed First Home Buyer Scheme could be an option is it can support buyers into the market for the first time under special conditions, possibly up to as high as 95% LVR without attracting LMI.

See what your mortgage repayments could look like by using our handy repayment calculator.

Understanding what lenders want

When applying for a home loan, it’s good to know what to expect. Again, this is where a broker is worth their weight in gold to guide you through this process.

So here’s a quick rundown of the key items most lenders will be looking at when assessing your loan application:

Credit scores
All borrowers have a credit file and credit score. This is one of the first boxes a lender will look to tick. Your credit score and history can have a large bearing on whether your loan application is accepted or not. The more stable your profile; the more reliable and healthy your credit habits are including ongoing good repayment history; the better your credit score will be and increase your chances of successfully applying. Lenders use various suppliers to obtain your credit score, and you can also go to their sites if you want to check your credit report yourself.
Want to find out your credit score for free? The most popular sites for checking credit scores are: Equifax, Experian, Illion, Get Credit Score and Canstar
Assets and liabilities

Having a significant value of assets won’t be the sole reason a lender will lend you money, however it will form a large part of your overall profile strength. For example, if you’ve been in full time PAYG work for the last 10 years earning $150k, it’s likely you have built up some form of asset pool or equity in assets such as property, shares, term deposit and savings. It would also be expected that you’ve built up an appropriate superannuation pool.

Conversely, a significant list of liabilities won’t necessarily detract from your application provided that your level of liabilities is consistent with the rest of your profile. Confirming your income and ongoing ability to repay those liabilities before retirement (and/or have appropriate exit strategy at retirement) will also be factored into your application.

Employment
Lenders love stability, especially when it comes to employment. They will take a keen note of your employment history, looking at aspects like your length of employment and frequency of changing jobs or careers. It’s why mortgage lenders will request a minimum of three (ideally continuous) years of employment history. This doesn’t mean a change of job within three years will disqualify you. However, a drastic change could make it difficult to assess, such as if you made a recent complete change of industry from two years of white collar self-employment into a casual blue collar role.
Close up of nurse
LVR
As mentioned earlier, mortgage lenders place a large emphasis on the LVR when assessing your mortgage loan application. Generally, the lower the LVR, the lower the risk to the lender on the basis that it reasonably expects that the debt could be fully repaid in the event of an urgent fire sale. Conversely, lenders consider mortgage loans with an LVR over 80% of the property value to be a higher risk. The LVR that banks will allow you to borrow can depend on a variety of factors such as the home loan amount you need, the location, size and type of property, your credit report and history, your income and employment history and the type of loan you’re applying for. If your LVR is greater than 80%, you’ll generally need to get LMI.
LMI

Often a lender will require a First Home Buyer to take their first home loan with LMI. This is because they are not able to contribute enough savings to their purchase to start with a loan at an 80% LVR or less. In some instances it might be appropriate to consider a Parental Guarantee where the parent holds sufficient equity in their property and has the financial means to guarantee their child’s loan by effectively cross-securing their property.

If you’re a First Home Buyer (or are supporting someone who is), a government backed First Home Buyer Scheme could be an option is it can support buyers into the market for the first time under special conditions, possibly up to as high as 95% LVR without attracting LMI.

See what your mortgage repayments could look like by using our handy repayment calculator.

Understanding the benefits of a mortgage broker

As you can see, there’s plenty to consider when thinking about preparing for and taking on a mortgage. Understanding how the market works, the terminology you’ll face, and what lenders are looking for is half the battle.

But this knowledge can only take you so far. Your true ally is your mortgage broker.

A mortgage broker can provide you with greater detail and a deeper, more valuable comparison of market offers including recommendations on when, how and why to apply. Here’s just some of the benefits they bring to the whole mortgage application process:

Independence

If you approach a bank directly they’ll only offer you their product. Don’t walk in and assume that the particular interest rate they are offering you is the most competitive on the market. And of course they’re not going to tell you about the benefits of a competitor’s product or service over theirs.

Our lending partners hold a broad view of what the market is offering. Their line of sight stretches over all of the leading and reputable lenders allowing them to source the most competitive rates and fee structures to meet your needs. And there’s no conflict in their recommendations as they’re completely independent and are obliged under their licencing to provide recommendations in the Clients’ Best Interests at all times.

Advice

This is where a broker is invaluable in matching you up with the best provider for your specific needs. And that may not be going with the cheapest loan if that lender isn’t offering certain features you require; from the technology available to how easy it will be to leverage equity for further purchases. Timing could also be a key issue. It’s all about being able to weigh up the optimal mortgage loan amount or lender which will provide the best result for you.

The age-old question about choosing fixed rate loans over variable rate loans (or combination of both) is another critical area of advice. The timing for having a variable or fixed rate loan can have enormous ramifications. A broker can work through with you to answer questions like:

  • how long do you expect to remain in the property itself and therefore in the loan as it is set up today?

  • do you anticipate any life changes in the next year, 2-5 years such as career changes, family planning, upgrading the home itself, moving suburb/state/country?

  • how much surplus income do you have to cover any unexpected rate rises or unforeseen circumstances?

  • do increasing interest rates keep you up at night?

A really good broker will look at your objectives with long (10 years), mid (3 years) and immediate goals in mind (at Tribeca we call this 10/3/now) and leverage their experience to establish a plan to meet your needs.

Young happy couple shaking hands with consultant
Competitiveness

It’s one thing to set up your loan. It’s another to ensure that the deal you’ve got remains competitive and relevant for you if the market and your circumstances change.

Reviewing your mortgage provider and loan amount regularly is one of the best ways of putting some extra money back in your pocket, but for many people it’s one of the hardest things to do. Either because of apathy or the process.

Again, this is where a broker can be an enormous help. Banks and other services such as utilities and insurances rely on their clients’ loyalty. If you don’t check your circumstances every year, you could be missing out on significant savings. As mentioned earlier, a good mortgage broker offers a clear and unbiased line of sight over the market. At Tribeca, our focus is to review your finances and see if we can secure you a better deal by making an introduction to our lending partners, balanced with your overall needs.  

Consider the difference even half a percent can make. On a million dollars, half a percent is a significant amount you’re just giving to the lender in extra interest payments that you could spend on a variety of other things. This doesn’t mean you have to shift lenders every year or when interest rates rise; it’s probably more likely every two or three years. But it certainly pays to check by asking yourself and your broker: Am I making the most of my money and borrowings?

Cost

It costs you nothing to leverage a broker’s expertise. How?

A broker is remunerated by the lender for the introduction to the borrower, but there are strong laws and regulations in place to ensure a broker is not financially incentivised to recommend one lender over another. In this way you know you’re getting the best deal for you – not the lender.

It makes perfect sense to engage the experience of a broker to work in your best interests. There really is nothing to lose but everything to gain from their expertise and advice.

Want to learn more about the benefits of working with our lending partners? Click here.
If you have any questions regarding mortgage lending or need advice on any aspect of your finances, we’re always ready to chat. You can call us on 1300 388 285 or arrange a free 15-minute phone consultation with one of our financial advisors here.

Frequently Asked Questions

Mortgage brokers work with banks and lenders to match you, the borrower, with the right mortgage. Our lending partner’s job is to understand your financial circumstances and put your best case forward.

By utilising our lending partner’s long-standing relationships with lenders throughout the industry, they can compare mortgage products to attract competitive interest rates and maximum loans for each client.

Put simply, their role is to search through every type of loan and actively negotiate the best outcome for you – from the fixed or variable rate for your monthly mortgage payments through to the technology and service you need from the lender.

Your borrowing capacity is calculated based on factors such as your income level, liabilities (loans, credit card etc), living expenses, current interest rate and an assessment rate (usually approximately 3% above the prevailing average rate) aimed at stress testing your ability to service the debt in the event that rates continue to rise.

An experienced mortgage broker can calculate your borrowing capacity and help you devise a plan for your first or next home purchase, or for refinancing.

Our lending partners are independent mortgage brokers. They are not banks, and they’re not associated with a particular bank or financial institution.

They’ll take the time to understand your goals and your current situation, so they can determine the right lender for you.

They can help you access the most competitive lenders on the market, match you with a lender that supports your borrowing capacity and offer you the right interest rate for your mortgage.

Due to current interest rate rises and higher costs of living, banks are tending to lend less for mortgages.

To maximise your borrowing capacity, during a meeting our mortgage broker partners will review the market to provide you with an understanding of your maximum borrowing capacity across a range of lenders. They then narrow down the search, also accounting for your specific needs in a home loan (e.g. variable or fixed rate mortgage, technology, type and location of your property and LVR).

In short, no. Online mortgage payment calculators should be used as a guide only. Each lender has its own mortgage calculation process and these calculators cannot account for your specific circumstances to accurately provide you with the answer you need.

Mortgage brokers use several methods to determine how much a bank will lend to a borrower.

Residential lending can be complex, so it’s best to engage a mortgage specialist for an accurate assessment.

There’s no ‘one size fits all’, when it comes to which bank lends the most money.

The bank that will lend the most money will vary on personal circumstances, such as: the industry you work in, your family arrangement, your mortgage payment history, credit score, age, and many other factors.

It’s important to note that a bank, or lender, will provide a loan based on these considerations, and each situation is different. Mortgage brokers are specialised in ensuring your best case is put forward to attract the best banks to get a mortgage.

The banking industry has recently undergone and continues to face widespread scrutiny, and as a result, regulations and lending standards have become far more stringent.

Investigations, such as the Royal Commission into the Banking, Superannuation and Financial Services industry (established 2017), whilst helpful at shining the spotlight on poor practices by the big banks, has led to greater “red tape” for the consumer.

With such high levels of scrutiny, it’s vital to compare and leverage your options with multiple lenders to secure the best offer.

The lender that will lend you the most will depend on your goals, personal circumstances, and the credit rules at the time of your mortgage application.

Major mortgage lenders tend to be more conservative with their lending criteria. For that reason, lesser-known lenders may be the ones to lend the most.

A bank doesn’t calculate how much they will lend based on income percentages.

However, one of the factors a lender will consider when approving an application is the borrowers Debt-to-Income Ratio.

Usually, mortgage lenders want to see a Debt-to-Income Ratio (DTI) of 5 or less. This means that if you earn $100k per year, some lenders may cap your maximum loan to $500k. DTI ranges between lenders and individual circumstances and should not be used as a sole measure of what a bank might lend.

It’s a misconception that by taking out a mortgage with your current bank you’ll be provided with better offers, bigger discounts, and loyalty bonuses.

It’s unlikely that amongst all the lenders available in the market, your bank will be the one to have the best offer.

A broker can calculate how much your current bank will lend you, and compare their offer against other lenders in the market to help you make an informed decision.

It’s mainly linked to inflation – the rate at which the cost of goods and services goes up. Since the pandemic these costs have surged in Australia and overseas, thanks to a range of issues.

To get the most out of your appointment with us, please ensure you have access to:

  • Drivers Licence
  • Passport
  • Bank statement


Your mortgage specialist will let you know if there’s anything else you need to bring along to your appointment.

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