Unless you’re part of the lucky few, you’ll likely have to borrow money from a financial institution to fund a property purchase.
Borrowing to buy a house or unit is one of the biggest financial commitments you’ll make; after all most home loan terms are 25 or 30 years! So it’s important that you get it right.
The decision doesn’t have to be a scary one, though. If you’ve done your research, borrowing to buy doesn’t have to seem like a ball and chain. Read on for our guide to choosing a home loan and limiting (or avoiding!) mortgage stress.
Don’t overextend yourself
You might be able to borrow up to 100 percent of the value of your chosen property, but it’s not always advisable. Over-extending yourself with a huge loan can put you on a fast-track to mortgage stress.
Borrowing more money creates more risk – you’re at greater risk when interest rates rise compared to if you took out a smaller home loan. You’re also more susceptible to reductions in your income.
A bigger loan also means you will owe a lot more money.
Some experts recommend spending no more than 30 percent of your take-home pay on the mortgage. Anything above that and you may have to compromise elsewhere in your budget. So if your monthly household income (after tax) was $10,000 your monthly mortgage repayments should be capped at $3000.
A good way to work out the cost of repayments is to use a mortgage calculator.
Compare and save
Just like properties themselves, all home loans are quite different and features that will suit some borrowers but not others. So just as you would shop around for the perfect home, borrowers are advised to shop around for a home loan that is a good fit.
Some of the things to look out for include the interest rate – look for the comparison rate rather than the advertised rate, as the former has some fees and charges factored in so it makes comparing home loans more straight forward. In short, using the comparison rate means you’re able to compare apples with apples.
Use a site like RateCity to take the hard work out of comparing home loans, rather than having to visit each lender’s website or calling around for rates.
If you’re borrowing to buy at a time when interest rates are low, it’s important to keep in mind that rates are almost certain to increase down the track and you’ll need to be prepared for that eventuality. Don’t be seduced by low rates to sign up to a big first home loan, instead calculate what your repayments would be if rates were to rise to say, eight percent.
It could mean having to fork out a couple of hundred dollars more than you’d originally budgeted for, which could be financially crippling.
These are just a few things to consider before taking out a home loan and will put you well ahead of the property game. Starting off with some good old-fashioned research never hurt anyone, so settle in and start comparing and calculating your home loan needs now.