The “Great Australian Dream” is all about the belief that owning your own property leads to a better life. Many people subscribe to this dream, however in these increasingly pressing economic times it is becoming harder to make this dream come true – particular for those with a low income.
In today’s guide we shall look at what options you have when it comes to low income home loans.
Home Loans are for Everyone
No matter what your income, it is likely there is a home loan solution for you. Typically the only thing affected by your income is how much you can borrow. Try our borrowing power calculator to get an idea of how much you can afford to borrow for your home loan.
When you meet with a mortgage broker or bank manager they will ask you a range of questions so that they can assess your ability to be able to pay back the loan. This is important not only for their security – but for yours. Obviously it is not a good idea to take on a home loan that you will struggle to pay back each month, it won’t work for you and it wont work for the lending institution! You can find a Mortgage Broker near you using our handy tool.
Best Home Loans for Low Income Earners
Home Loan products vary across a range of parameters, so if you’re a low income earner it is important to understand these parameters to help establish which type of home loan is most suited to your needs.
One of the parameters you have control over when selecting a home loan product is whether you go with a fixed-rate and variable-rate home loan. Fixed rate home loans generally charge higher interest rates than variable-rate loans, however the rate never changes throughout the period of your loan, which provide increased certainty and comfort to many borrowers.
Variable-rate home loans usually charge lower interest rates however it varies throughout your loan either to your advantage or disadvantage. Variable interest rate loans may be cheaper option at some points, and higher at others – some view it as being a riskier option, whilst others view fixed-rate loans as being more expensive and less flexible. It’s up to you to decide which one best suits your needs and the risk profile you are willing to accept.
Some financial advisors would tell you that as a low income earner, it may be wise to take out a fixed-rate loan – particularly if you have very little in savings to cover the potential extra monthly costs of a variable-rate loan. Fixed-rate loans are a much safer choice and although they can potentially cost you more over time, you do not have that uncertainty every month of how much your home loan repayments will be.
Low Documentation or “Low Doc” Home Loans
Many people struggle to secure a home loan because they do not have the required documentation – pay slips, bank account statements etc. - that standard home loans require. Fortunately there is an alternative – a low documentation home loan.
While this is may be the right solution for those who have an irregular income, poor credit rating or who are self-employed there are several disadvantages and there is a commonly held view that they should be approached with caution and as a last resort.
The banks take a much larger risk when they lend money to those that can’t provide adequate documentation, therefore you can expect to pay a lot more to cover that risk. Interest rates are higher on low document home loans and you often have to offer additional security such as your car to secure the loan.
In many cases low document home loans are only offered for short periods of time – sometimes 12 months – meaning you will need to pay it off or refinance the loan at the end of that term at your own expense.
Longer-Term Home Loans
Another thing to consider when looking for a low income loan is to increase the term of your home loan allowing you to pay off the loan in smaller, more manageable amounts.
While the majority of people choose to take out home loans between 10 and 20 years in length, 30, 40 and even 50 year loans are also possible.
Bear in mind that the longer your loan term the more you will be paying overall as you will continue to be charged interest throughout the length of your loan. However, for those with low incomes it can be a perfect way to more easily manage monthly repayments.
Improve your Home Loan Application
One of the first steps you can take to ensuring that you are granted your home loan, no matter how low your income is to improve your home loan application.
Bank managers and other lenders take into account a wide range of factors when deciding whether or not to grant you a home loan – so make sure that you tick all the right boxes.
The first thing any potential lender will consider is your overall financial situation – including your income and any assets and liabilities. The more documentation and evidence you can provide them the better your case will be. Try to get hold of as many bank statements and pay slips as possible to demonstrate your financial situation.
One problem that many low income home loan seekers may find is that their credit rating is preventing them from getting a home loan. If you have a poor history when it comes to borrowing money or paying bills then you may find that your home loan is declined – or you may be offered a very high interest rate.
There are ways in which you can improve your credit rating to assist you in getting a home loan. These methods will usually cost you money; however will save you money in the long run as your home loan interest rates will be lower.
You might like to discuss these options with a Mortgage Broker.
How to Find a Low Income Home Loan
Finding a lender that offers low-income earners home loans is probably easier today than ever. These days many banks and lenders are giving you the option to apply for a home loan online. Almost all major Australian banks offer this service and it allows you to fill out the form in your own time in the comfort of your home. You will generally be contacted within just a few days to find out if you have been accepted.
A mortgage broker will also be able to work with you on identifying lenders that may be compatible with your financial situation. You might like to use our tool to find a mortgage broker here.