There are a number of things to consider when embarking on the journey towards home ownership. This article provides guidance around mortgages and obtaining a home loan on the terms that best suit you.
What is a mortgage?
A mortgage is a term which is thrown around a lot in relation to home ownership. A mortgage is a loan from a bank which is secured by your home. When you accept a home loan, you grant the bank a mortgage over your home. The mortgage is registered on the Record of Title for the property. By agreeing to borrow money from the bank, you are also agreeing that the bank could sell your home at mortgagee sale if you do not make your home loan repayments.
Maximising your lending potential
When banks assess how much money they are willing to lend you, their main consideration is your financial position which involves a review of your income and outgoings. The bank wants to ensure that you can afford your loan repayments (even if they were to increase). To make yourself more attractive to the bank, you may consider doing the following things:
- Put money aside after each pay to show you can regularly save. If you can cut down on your outgoings (where possible) and put money into your savings regularly, this will help show the bank that you can afford to make repayments, and that you have some financial responsibility.
- Reduce your debt. This is obviously easier said than done, however reducing your credit card spending limits, buy-now-pay-later debts, and your student loan will make you more attractive to lenders. If your student loan is paid off, then the money that was previously going straight from your employer to the government is now available to help fund your home loan.
Fixed or floating?
Choosing the right type of interest rate on your loan is crucial and depends on your situation.
- A fixed interest rate is a set rate over a period of time (between six months and five years). This provides certainty as to how much you will need to repay over the period and can save you money in the event interest rates go up. However, fixed rate loans generally restrict additional repayments, giving less flexibility to make additional repayments. If you want to repay in full or break the fixed interest rate, you may be required to pay a fee so that the bank is not out of pocket (i.e. does not miss out on interest they would have otherwise been paid).
- Floating rates change with the market and can fall lower or climb higher than the rate which first applied when you borrowed the money. Floating interest rates are generally higher than fixed interest rates, but they allow you to make additional repayments at any time without additional charges which can help to pay off your loan more quickly.
It is common to have a fixed rate for a portion of your loan and a floating rate for another portion. This gives some certainty while retaining an element of flexiblilty. We recommend shopping around different banks and finding one with a loan scheme that works for you. Alternatively, a mortgage broker can assist you in finding the best rates and the right loan structure for your circumstances.
Cash Contributions
Most banks now provide a Cash Contribution as an incentive to pick them over another bank and to retain you as a customer. A Cash Contrbution is usually about 1% of the value of the loan. It is interest free and, provided you stick with the bank for about three years, it does not need to be repaid. These funds are provided to you directly upon drawdown of the loan (rather than being used for the purchase of your property). You can use the funds to buy furniture for your new home, or even pay your legal fees!
