Your Comprehensive Home Buying List
Before you purchase a house or refinance your home, you should always shop around for available options first. It is not a smart move to settle for the first or even second mortgage lender that you find. Buying a house often means that you are in it for the long term. After all, you will be paying your mortgage off for many years to come.
Therefore, it is wise to look around to search for the right choice for you.
The first step though is to know what you want and need. Finding out as much information as possible about your needs, start withing the how much you can borrow. Then, figure out the required amount for a deposit. With these numbers ready at hand, you can begin comparing the mortgages that are available on the market.
This checklist will help you compare mortgage options and lenders efficiently.
You can then find the best option that fits your lifestyle and requirements.
Before you proceed, you should already be aware that shopping around for a mortgage is more than just looking at the mortgage rates.
Read on and answer the questions below so you can decide which mortgage and features will genuinely help you.
- Is an Interest-only Mortgage Ideal for You or Should You Choose to Make Repayments Instead?
A mortgage can either be repaid the conventional way or by interest-only. If you go for the former, it means that you have to pay off the money you have borrowed. The repayments also include the interest as you proceed. This way, the amount you owe will decrease over time. When you reach the end of the term, the loan will already be fully paid.
In contrast, an interest-only mortgage is exactly what its name suggests. In essence, you will only have to pay back the interest of your loan. When you are at the end of your term, you will have to start paying back the amount you borrowed. Typically, you have to show the lender that you can repay the loan using this method. It helps to have an investment plan or an efficient strategy, so you can pay the mortgage off once it reaches the end of the term.
These two mortgage options do have their advantages and disadvantages. You should choose which one is more suitable for your lifestyle and budget. A standard mortgage loan is typically beneficial since it eliminates the risk of having an investment. Also, there is a lower possibility of negative equity since the loan balance will keep reducing each month.
On the other hand, interest-only mortgages give you the chance to defer large payments. Therefore, you can save up for several months since you do not have to pay the principal loan yet. It is usually a good option for those who may be promoted or are expecting a bigger salary by the end of the loan term.
- Should You Go for a Fixed or Variable Rate Mortgage?
The next step is to figure out if you would prefer a fix or variable rate mortgage. When you choose a fixed-rate mortgage, it means that you have to pay a set fee that will not change every month. A variable rate, however, will see these rates are not set and your monthly payments will change depending on various factors.
- Did You Know That You Should Compare More Than Just the Rate of the Loan?
For many borrowers in Australia, the first thing they look at is the interest rate. They also examine the associated costs of the loan. Then, they leave it at that point. They no longer look at other factors, including those that affect the rate itself.
For instance, paying an upfront arrangement fee can lower the interest rate. Going fee-free may save you some money at the beginning. However, you will end up paying a higher interest rate. Make sure that you consider all the bells and whistles of the loan. Use comparison websites and financial calculators to get a good look at how the mortgage loan options work, not just their costs.
Take note that you need to use various sources. Comparison websites will not provide you with the same results. It is why you should look at several sites before you make your final choice. It also helps if you do your research on the product and features.
- Will Your Mortgage Include All of Your Mortgage Fees or Just Some of Them?
When you borrow money, you may not be able to pay for all the mortgage fees right now. It is often helpful if you can add them to your mortgage. Of course, you will need to pay extra, particularly in the interest rate because of the additional amount.
- Do You Need Flexibility in Repayments?
Some loans allow you to overpay, while others are forgiving when it comes to underpaying or even taking payment breaks. The right feature can make a difference in the convenience of paying your loan. The important thing is that you do not end up sacrificing your lifestyle and other requirements just to pay your mortgage.
Always read the terms and conditions of your loan. At the same time, consider your financial circumstances, as you do not want to end up broke before you even repay your mortgage.
- Do you want the freedom to move from one lender to another?
Remortgaging is when you switch your loan to another lender. It is beneficial, especially if you find a better product that can help you save money. Many lenders, however, will charge you with exit fees. Moving while you are on a fixed-rate deal can lead you to huge early repayment costs.
If you would like this kind of flexibility, you should first speak to your lender. Even better, you should hire a mortgage broker. This professional will help you find mortgage options that will not cost you anything (or at least very little) if ever you choose to switch to another lender.
Guide to Finding the Best Mortgage Lenders in Australia
TThe mortgage loan process is not easy. There are so many choices available, ranging from traditional lenders like banks to other financial sources. Your mortgage is a huge step towards becoming a homeowner. Selecting the right one for you can help you save time and money.
Many people do not realise that they should take the time to learn how things work. They should do their research to find the different types of loans out there, along with the best deals. Finally, consumers should learn how to compare their options.
Current and potential homeowners should all understand what a mortgage loan is. It is a crucial step before they even choose a mortgage and lender.
Taking out a mortgage means that you are aware of your responsibility to repay the amount that you borrowed from the lender. Mortgages come with interest, which will be rolled into the payment that you need to fulfil every month.
Low-interest rates are possible; however, your property will be used as collateral. If you are unable to pay your loan, your property can be seized.
Your goal now is to find the best lender and mortgage product for you.
Here are some guidelines to follow:
- Understand How Mortgages Work
Mortgages are comparable to other types of secured loans, meaning those that have collateral. The important difference is in the allocation of monthly repayments. Applying for a loan means that the lender will assess how risky you are as a borrower. It means that banks and other types of lenders will want to know about your credit score, assets, income and debt. Your risk as a borrower will determine whether or not you will be approved of the loan. Also, it will dictate your interest rate.
The base amount of the loan is the principal in which the lender will charge interest on top of it each month. The payment that you have to provide will depend on an amortisation schedule.
- Understand Some of the Most Important Terms in Mortgage Loans
Most people already know what interest rates are, but there are other terms that you should also be aware of. Amortisation is commonly used, but it may not be very familiar to first-time borrowers. When you take out a mortgage, the agreement is that you pay the principal loan, along with its interest throughout the lifetime of the loan.
The interest will be added to the balance. Therefore, as you pay your remaining loan, the interest will change.
At the beginning of the loan, you will have a hefty percentage to pay, which will be applied to the interest. Every subsequent payment will go towards your balance, which reduces it.
To understand amortisation, let us have this example:
Let us say that you have a 30-year mortgage. The loan amount is $400,000, and your interest rate is at 4.5%. Your amortisation schedule tells you to pay $2,027 for the first payment. Amortisation means that $1,500 will go to the interest while the remaining amount of $527 will go to the principal. During your last payment, you will only have to pay $8 in interest, along with a balance of $2,019.
- Choose the Right Type of Lender to Go for
Mortgages are not only available through banks. You can use wholesale lenders as well, apart from banks and other retail lenders. Many Australians turn to banks for a mortgage because they believe it is their only option. However, there are other means, including third-party lenders.
Sometimes, lenders would fund the loan using their own money. This tactic is known as portfolio loan, in which they are allowed to set their requirements and terms. It is more common to see mortgages that are funded using borrowed money. Then, it will be sold to secondary mortgage market investors. A lender who works with this method is known as a mortgage banker.
- Consider Your Situation
Every person has different needs and financial circumstances that will affect which type of loan they will need. The mortgage that best suits your friend or family may not be ideal for you.
Often, one of the biggest choices to make involves the type of mortgage rate to go for. As explained above, the rate can either be fixed or variable. Choosing a fixed mortgage rate will give you a predictable payment every month. On the other hand, a variable or adjustable rate will change per the market.
Many people choose fixed-rate mortgages because it has a locked rate no matter how long the loan term is. Even if 10 or 20 years have passed, your rate and payments will not change. It provides security for those who need to budget their repayments. A fixed-rate mortgage is best for those with a solid budget. Since your payments will not change over the life of the loan, you do not have to worry about variations in how much you will pay every month.
With an adjustable or variable rate, the interest rate will fluctuate depending on the status of the market. Throughout the life of your loan, the payments will rise or even fall depending on funds rates and other financial indices. There is indeed a chance that you will pay less than you would if you pick a fixed-rate mortgage. However, there is also the possibility that payments could rise to an amount that you may not afford.
Some lenders, however, offer hybrid adjustable-rate mortgage, which is also known as a fixed period adjustable-rate mortgage. It is a combination of these two types of mortgage rates. It has a period of fixed interest for about five to 10 years, meaning your interest will not change. After this time, it will be adjusted depending on the market conditions, which can either be lower or higher than what you used to pay.
Adjustable or variable rates are best for:
- People who plan to sell their house in the next few years.
- Those looking to enjoy a lower rate before they sell their home
- Borrowers who are comfortable with paying higher amounts
- Those who can budget efficiently in case of increased rates
Always compare the rates before settling with one lender. Even if you provide the same credit report and financial background about yourself, you can still receive different rates from lenders.
- Select the Right Type of Mortgage
There are a variety of mortgages available to homebuyers in Australia. The most common options are:
- Variable-rate loans
The Reserve Bank of Australia dictates the cash rates, which in turn affect the interest rates of loans. It may seem risky but many people still choose this option because it has different features, including the ability to repay the loan faster without extra chargers. They can also get a redraw facility, along with an offset account.
Redraw facility refers to the ability to borrow some of the money you already repaid. Meanwhile, an offset account is a backup payment option where a portion of your paycheck is placed into this account. You are allowed to subtract the amount in the account from your loan principal.
- Fixed-rate loans
If your budget isn’t very flexible or perhaps you’re looking for a more reliable monthly payment, this type of loan is suitable for you. You will not have to worry about inclement interest rates, meaning you can afford the monthly payments. However, you may not enjoy extra payments and other facilities available to variable-rate borrowers.
- Interest-only loans
This type offers a quick escape from conventional home loans. You will only have to pay the interest in the meantime. Property investors go for this option, particularly those who want to benefit from negative gearing. This form of financial leverage is when an investor borrows money to buy an investment that will provide income in the future. This type is also good for those who want to make a profit when they sell their property, although they need to make sure it will not depreciate. Young homebuyers can also benefit from interest-only loans, as well as those with low income.
- Guarantor loans
When you borrow money to buy a house, you want to get as much as possible. If you want to have at least 80% of the price of the property, a guarantor loan may be an option. This type of loan does not require you to pay for mortgage insurance. However, you will need to ask your parents to become the guarantor. Being a guarantor means they will allow you to utilise a portion of their home as collateral. This option is often useful for first-time homebuyers.
- Low documentation loans
Freelancers and self-employed people often have problems in finding the loan they require. They do not have some papers, such as payslips, which are needed to apply for a loan. A low documentation loan can be the ticket to getting the mortgage you need. You will usually have to provide certain documents, such as bank statements and income declaration.
- Line of credit
This type is loan is more suitable for those who want to make renovations to their property. They can use this loan on top of their existing mortgage. You may also know this loan type as a home equity loan where you can use your mortgage to pay for certain things.
- Variable-rate loans
When you are ready, you can request a loan estimate to get an idea of how much you will have to pay for the amount you plan to borrow. Let a trusted mortgage broker help you along the way. Talk to one of our pros to get started.