Buying a home is not as simple as just popping round the estate agent’s office and signing a piece of paper that shows you’re now the owner of a three-bedroom detached with a massive backyard. For thousands of Australian buyers, it can take weeks or even months to successfully complete the process.
Unless you have enough money to be able to buy the property outright, one of the first steps you will need to take to purchasing your dream residence is securing a home loan. It is imperative that you are aware of your finances and your various options to ensure that the application is successful and goes off without any major hitches along the way.
In this first part of our on-going series aimed at helping you get the best terms on your home loan, we will look at a few basic things Australians homebuyers need to know before applying for a home loan
Do You Have Enough for a Deposit?
Before you even think of looking for a lender, you’ll first need to assess your current financial standing, your savings and the security of your income stream. You will also want to check your credit rating. Why is this all important? Well, the reasons are twofold. First of all, these are the things that any lender will scrutinse before deciding whether you are a viable loanee, and secondly, most lenders will only loan out 80% of the property value. This means that it is up to you to finance the remaining 20% of your property’s value from your savings and from other means, which can be one of the toughest hurdles you will need to overcome, especially if you are a first-home buyer.
What If I Don’t Have the Remaining 20%?
If you don’t feel you can meet the 20% deposit requirement, all is not lost. Some lenders are actually flexible enough to let you borrow as much as 95% of your home’s value, so it’s always worth asking. However, there is a catch: if you plan to take out a loan exceeding your lender’s limit, you will be required to pay lenders mortgage insurance (LMI). This type of insurance gives your lender protection in case you eventually are unable to fulfil your financial duties. Your lender will arrange this for you, so you simply need to pay a one-off premium upfront when the home loan is granted to you. Alternatively, you can ask that the LMI premium is added to your loan, which allows you to pay it off over the course of a few months.
As a general rule of thumb: the higher your deposit, the lower the LMI you will be requested to pay by your lender.
What Type of Interest Best Suits Your Needs?
You’re probably aware that there are several different interest options available on the market, but what makes one more suitable for you over others will depend on your needs and situation.
If you’re the type of person who doesn’t mind taking a few risks for a higher chance of paying lower interest rates, you might want to consider a variable-rate loan. The interest rates on these types of loans are tied to the movements of the economy or the monetary policies of the Reserve Bank of Australia (RBA). This means that the amount you pay each month is likely to change over the term of the loan.
The upsides to this type of arrangement, apart from the chance of paying lower interest rates, is that you are able to make extra repayments, and switching loans is far easier. However, the big downside is the budgeting nightmares that will arise from constantly fluctuating rates.
If you prefer to have everything planned out to the last penny, then you might be better off with a fixed-rate home loan. This allows you to be protected from sudden hikes in interests for a period of time. This is a double-edged sword, however. Fixed-rate interests don’t last for the entire life of the loan, only for a few years at most. Once this time is up, your interest automatically switches to a standard variable rate. Also, you will be limited in the extra repayments you can make, you won’t have access to redraw facilities, and the lender may charge you break fees if you repay the loan within the fixed-rate period.
The last option is the split loan. It works by dividing your loan into two parts — one will have a fixed interest rate while the other gets a variable rate. There is usually no limit as to how you will divide your loan; it will all be up to you.
What Extra Features Will You Need?
To make the most of your home loan, you need to look beyond the basics of interest rates. There are several other features that can make or break a great mortgage deal. For instance, the ability to make extra repayments at no additional cost. Having this feature will allow you to settle your loans faster and cut down the overall interest charge.
Another nifty feature is having the ability to redraw finances. This allows you to use the extra repayments you have made to finance other projects like a home renovation, a car upgrade or any other major life event. You will usually only get this facility with variable-rate home loans.
Some of the other handy home-loan features are repayment holidays, top-ups, offset accounts and line-of-credit facility which we will cover in later parts of this series.
We hope you’ve found the information in this article useful. If you need more details, why not contact the experts at Grange Finance Pty Ltd today?