For many Australians, owning a home is the ultimate dream. Of course, the process of buying a property is not that simple. From working out how much you can afford to borrow to applying for a home loan pre-approval and then choosing the right property, there are several different steps involved, which can easily become confusing and overwhelming.
We’ve put together five things any potential property owner should know about home loans before signing up.
Your credit matters
Ever since the subprime mortgage crisis, lenders are a lot more cautious about who they give mortgages to. After all, they are risking a great deal of money, so it pays to be a little more careful these days.
What that means for borrowers is that a good credit rating is essential if you want to qualify for a mortgage. Even if you do qualify, poor credit could lead you to pay a higher interest rate.
It’s a good idea to do a credit check before you start shopping around for a home loan, and you can usually find somewhere that does it for free. If your credit could use some work, there are several things you can do to improve it, such as paying your bills on time, having an active credit account, avoiding payment defaults, and limiting your credit enquiries.
Your budget should include extra costs
When trying to calculate how much you can afford to borrow, it can be all too easy to use a home loan borrowing calculator and assume that’s how much money you will have to spend on your new property.
However, there are a few things you need to take into consideration. Firstly, just because that’s how much you can afford to borrow, doesn’t mean that is how much the bank will lend you. You will likely need a 20% deposit, and you’ll also need to work out a reasonable repayment schedule, as well as budget for the cost of stamp duty.
You will then need to factor in all the extra costs, such as mortgage establishment fees, lenders mortgage insurance, landlords’ insurance, ongoing home loan fees, pest and building inspection fees, home and contents insurance, and more. These hidden costs can really add up, so it’s important that you budget for them early on in the process.
You may be able to get an offset account
Offset accounts are a relatively new feature in home loans, so not everyone will know to look for one or be aware of the benefits. It’s essentially a savings (or transaction) account that is linked to your mortgage. The account balance reduces the balance of the home loan that incurs interest, potentially saving you money and helping you pay off your mortgage faster.
As with anything, it’s important to research your options and speak to your lender as well as your financial advisor. You will need to have a clear understanding of how the offset account operates, as some will charge a monthly fee or come with restrictions on moving money. If the account costs you more than you would save in interest, then it won’t be worth getting the account.
Low deposit home loans could be an option
If you’re struggling to save the required 20% for your deposit, then you may be able to get around this with a low deposit home loan. If you’re looking to buy your first home, then you may only need to save up 5% for a deposit.
If you are considering applying for a low deposit loan, then you will need to make sure you do your homework, as these often involve higher levels of risk and special conditions such as additional fees, higher interest rates, requirement for mortgage insurance, and more stringent credit assessment.
Extra repayments without penalty
Your financial situation could easily change over time. You may find that you can afford to make extra repayments on your mortgage further down the line, so you want to make sure that the mortgage you sign up with allows you to do this without having to pay any additional fees.
Making additional payments towards your home loan on a regular basis can make a big impact in the long-run. Remember, when you reduce the amount you owe , you also reduce the amount that your interest is calculated on.