To help begin your research, we have developed a handy guide that arms you with all the information you need to know when it comes to buying a new home. We still recommend you conduct your own research and seek advice relevant to your personal circumstances as well.
How much can I borrow?
The important thing to remember is not to stretch yourself and to ensure you can adequately meet mortgage repayments while continuing to meet your ongoing financial objectives. It is important you also recognise that changes in your circumstances could place a strain on your resources. Some of these changes might be as a result of life choices and stages - having a baby, education of children, taking a holiday; while others that are difficult to plan for could include changing jobs or reducing household income down from 2 to 1 wage only.
How much do I need for a deposit?
You may also choose to take out mortgage protection insurance which is designed to protect you in case of loan default, and also cover the cost of regular monthly mortgage repayments in case of serious illness, job loss or death. This form of insurance is specific to your mortgage and different from regular income protection insurances that are available.
Equity is also an important factor to consider when it comes to your home loan. Equity is essentially the difference between the value of an asset, such as your home, and how much you still owe on your mortgage. Through your regular contracted mortgage payments, you will gradually grow the amount of equity you have in your home. Increasing equity through increased or adhoc additional payments to your mortgage, can provide the added benefits of reducing ongoing interest payments and could see you paying off your loan sooner than the negotiated term. Property prices also affect equity - if the value of your property increases following your purchase, the equity in the home will also increase. Learn more about equity.
Choosing a finance provider
One of the ways to help you navigate these options is to use a mortgage broker. A mortgage broker can review a range of loan offerings and then present you with a range of choices along with the advantages and disadvantages of each. It is important to remember that a broker doesn’t work for a bank, their primary job is to present a range of loan offerings for purchasers, recognising that everyone’s circumstances are unique and there is no one product that suits everyone.
Types of loans
Standard variable loans
The most popular finance option in Australia is the standard variable loan. Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and funding costs. Your regular repayments pay off both the interest and some of the principal - if interest rates go down you can maintain your repayments which will help you pay off more of the principal amount. If they go up, your overall payments may need to increase in order to cover the additional interest payments and the agreed amount of principal loan repayments.
There are still further options within a standard variable loan; for example you can also choose a basic variable loan, which offers a discounted interest rate but has fewer loan features, such as a redraw facility and repayment flexibility. While a lower interest rate sounds good, having the ability to alter your repayments to pay off the loan faster while still having access to these additional funds if you need it, may be more important to you.
Banks also offer fixed interest rate loans over a certain period which is usually the first one to five years of the loan. This means your regular repayments stay the same regardless of changes in interest rates. Choosing this loan type allows you to carefully budget your finances knowing that your repayments will not change over the fixed period, however while it protects you from increases in interest rates, you also don’t receive any benefit if interest rates decrease. At the end of this period, you can then decide to switch to a variable loan or go back into a fixed loan arrangement at the prevailing market rate.
Split rate loans
As the name suggests, this sees you splitting your loan so part of the loan amount is variable, and the other is fixed. You decide on the proportion of variable and fixed. This allows you some of the flexibility of a variable loan along with the certainty of a fixed rate loan.
For this loan you only repay the interest that you accrue on the borrow amount for usually the first one to five years of the loan. Due to not also paying off any principle, the monthly loan repayments are lower however at the end of the interest-only period you will have to begin paying off both interest and principle. These loans are suited for investors who plan to pay off the principle when the property is sold.
Suited to self-employed people these loans require less documentation or proof of income than most however conversely they have higher interest rates or require a larger deposit than others.
How much will repayments be?
What fees do I need to consider?
Understanding all the elements associated with gaining finance to buy your home is important to ensure you make the right financial decision and there are many organisations around to help guide you through the process.