The process of getting a home loan can feel daunting, especially for first home buyers. This is why it’s so important that you come prepared when you start the home loan process.
Whether you’re working with a mortgage broker, or doing it alone, there are some essential questions you need to ask when choosing a home loan.
1. How much can I borrow?
One of the most important questions to ask when looking for financing for a property is how much you can borrow. After all, without a guide you could find yourself looking at properties well outside of your price range. If you’re not working with a broker, there are borrowing power calculators online that can help give you a good indication of this.
- A home loan lender will determine your borrowing power by looking at a few things:
- Your income and any other applicants’ income;
- Number of dependents;
- Your living expenses; and
- Your current debt - including credit cards, car loans and even your HECS/HELP debt.
It’s important to keep in mind that a lender calculates your borrowing power by looking at any regular spending you make, particularly in the few months leading up to your home loan application. So, if you’re ordering food delivery every week, or addicted to Afterpay, your lender may assume that this expense will continue for the life of a loan and deduct it from your borrowing power.
2. What fees and costs are involved?
There are a range of fees that a home loan lender may charge you that, as mentioned above, can significantly increase the costs of a home loan than first expected. But it’s not just lender fees to look for, with the real estate agent and Government charging their own costs.
The potential fees and costs of a home loan include:
|Type of costs||About|
|Upfront costs||One-off application fees, valuation fees, conveyancing charges, legal costs, government costs, Lenders Mortgage Insurance (LMI) and stamp duty.|
|Ongoing costs||Annual fees, monthly service fees, extra repayment costs, redraw fees, late payment costs, switching fees, portability fee and discharge fees.|
3. What features does the loan offer?
It’s not just how much the loan will cost you that you want to consider, but how the loan can benefit you too. Home loans can also come with a range of features and perks that can help you to pay down your debt faster and meet savings goals, such as:
- Extra repayments. Some lenders will charge you a fee if you make extra repayments, so keep an eye out for loans that allow this feature at no cost.
- Redraw facility. Allows borrowers to ‘draw down’ on any extra repayments made on their home loan.
- Offset account. A linked transaction or savings account connected to your home loan. Any amount you put into this account will ‘offset’ the balance of your home loan. Meaning, if you have a $400,000 home loan and a $50,000 offset account balance, your repayments and interest will be as if you have a $350,000 balance.
- Split rates. Some loans allow you to split the interest rate type between variable and fixed, so you can have the stability of some fixed rate repayments and the flexibility of variable rate repayments. This can come in handy for borrowers who cannot decide between the two interest rate types.
4. What repayment options do I have?
You have more control over your repayments than you think. There are a few repayment ypes and frequencies you may want to choose from, including:
- Interest rate types – lenders offer two main types of loan rates: fixed or variable. The former means you fix, or lock in, an interest rate for a set period of time, typically around 2-3 years. The latter means your interest rate is subject to fluctuation in the market and by the lender. If the Reserve Bank of Australia were to cut the cash rate, or if the lender were to hike rates, your home loan rate would likely move too. As mentioned above, you can also opt to split your rate between the two types instead.
- Repayment types – you may also have the option of choosing between paying principal and interest or interest only on your mortgage. Interest only repayments aren’t as common as they once were, as there is inherit risk in not chipping away at your home loan debt. If you find an interest-only loan, it will generally revert to the lender’s standard variable rate after a fixed period of time.
- Repayment frequency – You may also choose between weekly, fortnightly or monthly repayments. Making more frequent payments can understandably help reduce your principal faster, and therefore potentially cut down on the amount of interest you’ll be charged over the life of the loan. If your budget were to get tighter down the track though, switching to monthly repayments would likely offer much needed breathing room.
5. How big of a deposit do I need?
While saving for a smaller deposit of 10 per cent can be a lot easier and more achievable for many Australians, especially those living in capital cities, often lenders reward borrowers with even bigger deposits.
If you’re hoping to get the most competitive interest rates in the market, when shopping for a home loan ask what the LVR (loan-to-value-ratio) requirements are for the lowest rates on offer. If your ideal home loan lender is offering its lowest rates to borrowers with LVRs of 80 per cent or even 70 per cent, this mean you’ll need a home loan deposit of 20 – 30 per cent to qualify for these rates.
While this may not be within reach for many first home buyers, it is worth keeping in mind for when you’re looking to refinance in a few years. If you’ve managed to build up some equity and get your LVR below 80, you may now qualify for some of the most competitive rates around.
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