How to think like a home owner before you buy

How to think like a home owner before you buy

March 23, 2011

The next two years will likely see a spike in the number of first home buyers entering the market, if new research from lender Mortgage Choice is an indicator.

Fed up with increasing rental prices, more than half of the 1000 prospective home buyers surveyed in the annual Future First Homebuyer Survey were looking to the property market for refuge.

For those of you that are in a position to farewell your landlord and enter the property market, here are a few tips to help you save money before you dive into debt with your first mortgage:

  • Set a goal and save.
  • Devise a budget with room to survive a 2 percent rate rise.
  • Don’t get slack when rates are steady.
  • Consider an offset account.
  • Live like a first home owner before you are one.
  • Keep your options open.

Many future home owners are surprised to discover that borrowing the full purchase price of their dream home is not as easy as it once was. This is because most institutions no longer lend 100 percent of the purchase price, RateCity has found. The best way to realise how much you’ll need to save for your mortgage is by understanding loan-to-value ratio (LVR), which is the percentage set by lenders for each home loan that represents how much of the total purchase price you can actually borrow.

For example, if you’re in the market for a $400,000 property with an LVR of 80 percent then you will be able to apply for a $320,000 loan and you’ll need to save the remaining 20 percent, or $80,000. The higher the LVR the less deposit you will need, and therefore you’ll be able to borrow more, and vice versa.

You’d be wise to save at least 10 percent of the value of your future home allocating at least 5 percent to a deposit, setting aside the remainder for fees and charges. Budgeting is a great way to help you save for a deposit and by putting aside enough money for future repayments before you buy, you’ll be better equipped to afford your future lifestyle as a home owner.

In good times, such as when interest rates drop, accelerate your repayments where possible and you will own your own home sooner than anticipated.

Once you do take the plunge into bricks and mortar, consider a home loan with an offset facility, which can help reduce your loan size and save you thousands of dollars in interest. Offset accounts are linked to your mortgage so all of your income can be deposited into the account and it offsets the balance of the loan.

Finally, keep an eye on the market for the life of the loan and compare home loans online to ensure you have the best deal to suit your needs.

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Mortgage Calculator, Repayment Frequency

How often you wish to pay back your lender. 

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

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 average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

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 is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

Why is it important to get the most up-to-date information?

The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.

Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.

What is a redraw fee?

Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

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.

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

Mortgage Calculator, Deposit

The proportion you have already saved to go towards your home. 

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Mortgage Balance

The amount you currently owe your mortgage lender. If you are not sure, enter your best estimate.