What are the basics of getting the best home loan?
There is a lot of talk about finding the right buyers’ agent, location and actual property, but what about your home loan?
Personal finances are the biggest cause of stress among Australians
The importance of the best-fitting loan structure can’t be understated, as a comprehensive survey from the Australian Psychological Society found that personal finances are the biggest cause of stress among Australians.
There are a plethora of options available, and ensuring you have a suitable financial package could save you thousands of dollars, and stress, over the long run.
According to the Australian Bureau of Statistics (ABS), every month the value of lending to buyers (both owner-occupiers and investors) is around $32 billion. It’s not hard to get a home loan, provided you have the necessary credentials and capital; however, it can be difficult to choose a mortgage that you will be able to maximise the benefits of.
Here are a few tips for working out the most suitable home loan for your circumstances:
How much can I borrow?
This is perhaps one of the most common questions asked, as the answer will essentially determine the location and the kind of real estate you can purchase.
Essentially, armed with just your borrowing power, you can go and see your local property buyers’ agent who will be able to give you an idea of the homes within your price range.
Your savings, income, expenses and any equity you hold in other investments will depict how much you can borrow.
What kind of loan should I go for?
There are a number of options that you need to consider when choosing a home loan. Perhaps first and foremost is whether you go for a principal and interest or an interest-only loan.
According to the Australian Securities and Investments Commission (ASIC), some of the main characteristics of each structure include:
Principal and interest
- The most popular home loan, especially among owner-occupiers
- Means you pay off the principal (the amount that you have borrowed) and the interest together with regular repayments
- The borrowed amount will eventually be completely repaid, most often over a long period, like 25-30 years
- Enables you to pay only the interest from borrowed amount for a fixed period of time
- Allows reduced repayments, which can be useful in the short term
- A popular loan among investors looking to take advantage of capital gains
- Means your total repayment will be greater over time
Should I go with a variable, fixed or split interest rate?
The decision that you make in terms of your interest structure will depend entirely on where the rates are sitting. While the lenders can change their rates independently, they are usually dictated by what the official cash rate is doing. Here is a basic rundown of each option:
- Will go up and down depending on interest rates
- Provide the most flexibility and the least restrictions – for example, if you just landed a promotion, you can usually make extra repayments at no extra cost
- Means you will reap the benefits of any interest rate drops – however, you need to ensure that your budget is braced for any sudden rises
- Allows you to create an accurate budget as you will know the exact amount of your repayments throughout the loan’s term
- Interest rate rises won’t affect you, but you won’t benefit from drops either
- If something in your life changes and you need to redraw, sell the property, or reduce or increase your repayments, you could be confronted with high-break costs among other penalties and fees.
- Gives you the ability to allocate variable rates to a portion of your mortgage and fixed rates to the other
- Provides the best of both worlds, but also some of the restrictions
What about the other features?
There are often a number of features that lenders can offer to make their financial package more fitting to your circumstances. The ASIC asserts that some of the most common are offset accounts, redraw facilities and line-of-credit loans.
There are many other benefits that lenders can provide
An offset account can significantly reduce the amount of interest you have to pay. Essentially, it is a savings account that is linked to your home loan – the balance is subtracted from the amount you have left owing on your mortgage, decreasing your interest repayments.
For example, if you owed $100,000 on your home loan and $20,000 in your offset account, you would only pay interest on $80,000.
A redraw facility will allow you to make extra repayments into your home loan, but still enable you to redraw them later on if you need the money. Credit providers may impose restrictions or fees on taking funds out, so it’s important that you ask before making any commitments.
A line-of-credit loan will let you withdraw credit on your loan up to a set limit, usually based on your equity. This type of loan is best suited to those with an irregular income who may need an injection of money from time to time.
There are many other benefits that lenders can provide along with their home loan, including credit cards, insurance packages and discounts on other products. The ASIC recommends being wary, though, as these extra features often come with a cost.
What are the fees?
As they say, nothing in life is free, and the same goes with home loans as there are usually a number of upfront costs. According to Westpac, these can include the loan establishment fee, lenders mortgage insurance (if your deposit is less than 20 per cent of the home’s value) and home insurance (as this is a condition of most mortgage agreements).
While lenders have to tell you about all the fees and charges that you will face, it’s a good idea to do your own homework to get a proper understanding.
Who should I borrow from?
Who you borrow from will depend entirely on whether you would rather have competitive interest rates or convenient features. The large banks will generally be in a better position to offer you financial packages, including bank accounts and credit card facilities, among other things.
The smaller lenders won’t always be able to match these features, so they will often compensate by providing lower interest rates.
When deciding on a lender, it’s vital that you do your due diligence, taking into account all of the small print and elements to ensure it is the most fitting option for you. As the ASIC stresses, if it sounds too good to be true, it most probably is!
Should I regularly reassess my home loan?
The short answer to this is absolutely. Regular reassessment of your mortgage can help to ensure not only that you’re consistently meeting your obligations to your lender, but also that the loan still suits your needs.
As time passes, it’s likely that your life circumstances will change. Using the aforementioned example of a promotion at work, you may want to increase your repayments, while including a redraw facility for any unforeseen situations, meaning a different mortgage may be more suitable.
How can a buyers’ agent help?
Buyers’ agents will often maintain vast networks of real estate professionals
Provided you employ the services of a competent buyers’ agent, there are a number of benefits to help your real estate pursuits. On top of holding expert knowledge on your local market and surrounding areas, buyers’ agents will often maintain vast networks of real estate professionals.
This will not only provide you with access to private house sales before the general public, but also allow you to take advantage of your buyers’ agent’s exclusive contacts to help you secure a competitive financial package.