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Ten Basic Things to Consider when Looking for a Home Loan

By Rhys Southern

Buying a property is a very complex process. It’s not as simple as driving to the shops and buying a house. For many buyers, it takes months or even years to complete a home purchase. Applying for a home mortgage is a vital step that needs to be taken when purchasing a property. It is crucial for you to be informed and well-versed about your finances as well as your choices to make sure the entire process goes flawlessly. There are things home buyers in Australia have to know prior to applying for a home loan.

Fixed vs. Variable vs. Split Interest Rate

When an interest rate is low, a fixed rate sounds enticing. However, fixed rates could come with the problem of decreased flexibility. A high break cost applies when you need to reimburse the loan early or relocate. While many fixed loans enable some additional repayments, there are usually limitations. Some don’t allow any additional repayments at all, which may cost you by leading to a high interest in due course.

Avoid trying to beat the bank – it is extremely difficult to forecast when you will save with a fixed rate over the next 3 or 5 years. Instead, ask yourself if you are able to pay for higher rates. If you can’t, fixing at least part of your loan may be a good choice for you. A split loan may provide the best, enabling you to make additional repayment in the variable part of your loan and still providing you the security of a fixed rate.

Let’s take a look at the fixed rate of the three banks in Australia:

Commonwealth Bank

A 1 to 5 year fixed term rate ranges from 2.24% to 3.14% pa. Commonwealth bank currently offers a standard variable rate of 4.55% p.a.* Click here for more information

NAB

NAB is currently offering fixed-term mortgages for a 1-5 year term ranging between 2.09% to 2.49% p.a. Their standard variable rate comes in at 3.67% p.a.* Click here for more information

ANZ

ANZ’s fixed-term interest rates for a 1-5 year period range from 2.24% to 2.44% p.a. Their standard variable rate is currently 2.72% p.a.* Click here for more information

How Much Deposit Do you Need?

Make sure you have enough cash available to pay 20% of your home’s value. This is a challenging hurdle you have to conquer, particularly if this is your first time buying a property. A lot of banks in Australia allow homebuyers to borrow up to 80 per cent of the home value. Thus, you need to source the outstanding 20% from your savings and other means. So, meaning for a $500,000 property, you can ask a lender to loan you $400,000.

But, if you believe you are able to meet the 20 percent deposit requirement, you can ask your chosen loan lender if they can allow you to borrow more. Some loan lenders are flexible in letting homebuyers lend as much as 95 per cent of their home value.

Potential Fees you Could Incur related to a Home Loan

Here is a list of some of the fees and charges you could face when applying and paying off a  home loan. This is not an exhaustive list and contains general advice only

  • Application fees (known as establishment fee)
  • Ongoing charges like yearly charges
  • Property valuation charges
  • Late payment charge or default feet – this applies to failure to pay on the desired date.
  • Early exit charge
  • Discharge fee or termination charges, or settlement charges
  • Break charges or also known as break costs- once you change loans during a fixed rate term
  • Redraw charges
  • Account keeping charge for an offset account
  • LMI or Lender’s Mortgage Insurance if you just have a small deposit

Homebuyers need to comprehend and understand what charges they may face on their home loan.

Interest Only Loans

An interest-only loan is when you take out a mortgage and inform the bank that you want to only repay the interest on the loan. This type of loan only pays interest only and not principle.  This is most commonly used by retail investors that are looking to minimise their payments on an investment property. 

What is the Minimum Deposit?

In some cases, you may get away with borrowing 95% of the home value, however that may not come without considerable complications, risks, and expenses. Financial institutions and banks can suggest you have an initial payment of at least 20% of the potential home purchase value. So, if the property’s value is $400,000, you need to provide at least $80,000. This can take longer to save; however, it should result in you paying less interest, can reduce insurance costs, and may not require a guarantor.

Therefore, it is all up to you. Think about what is best for your personal circumstances. With regards to long-term financial commitments like home loans, it is about your continuing financial comfort because it’s about having a specific set of funds. However, if you have that $80,000, can you promise you can make your repayments in the coming years?

Refinancing your Home

Refinancing a home loan to benefit from a lower interest rate may save you a considerable amount of money. Prior to switching, ensure the perks offset the costs. If you are struggling with home loan repayment, consider refinancing your loan.

If you are considering switching home loans, perhaps you are focused on getting a good interest rate. However, there are some other factors to think of. Tell your existing lender about your plan of switching to a reasonable loan provided by another lender. To keep the business, your loan lender might lessen the rate on your existing loan. If you have 20 percent home equity, you will have a lot to bargain with. Compare the loans they offer with the others you are considering.

Loan Market Cairns – Darren O’Connor

When planning to get a home loan, it is vital to ask for help from an experienced professional. If you are in Cairns and want to get a home loan, we always recommend Darren O’Connor. He has been in the business for many years and has already assisted many clients in becoming successful in their home loans. He knows the ins and outs of a home loan, so you are in good hands.

Darren uses tools to provide you with sound information about your home loan. The free home loan calculator can help borrowers work out their borrowing power, how much loan repayment will, and check stamp duty fees and many others. Their how much can I borrow tool will assist you to make the most of your borrowing capability and show the best options of loans for you, while the stamp duty calculator helps you determine the amount of money needed to allocate for stamp duty and what needs are in your place. Please note these tools are also general advice and do not take into account your personal circumstances or finances. Click here to Contact Darren for more information

Conclusion

Applying for a home loan is a very complicated process. You cannot do it yourself. So, it is vital to have experts on your side to make the whole process easier. There are factors that need to be considered about this matter, so it really pays a lot to ask for help from a reliable real estate broker.

*Home Loan interest rates are accurate as at 22/06/2021. Terms and conditions apply for these specified rates. Rates are subject to change. Applications are subject to normal credit approval. Full terms and conditions please visit the associated banks website.

Disclaimer

The advice and information provided in this article by Ray White Smithfield is considered general advice only. It does not take into account your specific objective, personal financial situation or needs. Before making a decision based on this article you should consult the advice of a home loan specialist so you can receive accurate information based on your specific circumstance.

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