Borrowing to buy a home

Borrowing to buy a home

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.

Think ahead

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.

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Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

Mortgage Calculator, Loan Amount

How much you intend to borrow. 

Does each product always have the same rating?

No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:

  • Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
  • You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
  • You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.

What is the ratings scale?

The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

Mortgage Calculator, Loan Results

These are the loans that may be suitable, based on your pre-selected criteria. 

Mortgage Calculator, Repayment Frequency

How often you wish to pay back your lender. 

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

What factors does Real Time Ratings consider?

Real Time RatingsTM uses a range of information to provide personalised results:

  • Your loan amount
  • Your borrowing status (whether you are an owner-occupier or an investor)
  • Your loan-to-value ratio (LVR)
  • Your personal preferences (such as whether you want an offset account or to be able to make extra repayments)
  • Product information (such as a loan’s interest rate, fees and LVR requirements)
  • Market changes (such as when new loans come on to the market)

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

What is a valuation and valuation fee?

A valuation is an assessment of what your home is worth, calculated by a professional valuer. A valuation report is typically required whenever a property is bought, sold or refinanced. The valuation fee is paid to cover the cost of preparing a valuation report.