It’s going to be one of the biggest financial decisions you’ll make in your lifetime – purchasing that house which will grow to become a home for you and your loved ones. Finding the right place can be time consuming and an emotional roller coaster. Therefore it pays to do your research on what finance options are available to you early in your journey so you can carefully consider them based on your personal circumstances.
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?
This varies based on your individual circumstances and options provided by financial institutions. There are many online mortgage calculators available that help you see how you much you could afford, such as this one from AFG.
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?
This is typically around 5-10% of the property value, however if you borrow more than 80% of the home’s value you will be subject to Lender Mortgage Insurance (LMI) . LMI covers the lender’s risk should the property value fall, even though the insurance is paid by the borrower. There are some circumstances where you can borrow the full amount of a home loan with no deposit, however this requires you to provide a guarantor – basically a person who is willing and has the financial ability to meet your mortgage repayments if you can’t. Often the role of guarantor is played by parents however this places considerable risk on them and many people are now opting to have parents contribute to assisting with meeting a 20% deposit, allowing them to avoid LMI. Find out more from Canstar.
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
This can be a really daunting task based on the number of providers around that all offer different services, loan types and interest rates. How do you know which bank or financial institution will give you the best deal that meets your financial objectives?
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
Financial institutions are very good at packaging up finance solutions for home buyers and these are always changing based on interest rates, competition and the overall property market climate.
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.
Fixed loans
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.
Interest only
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.
Low doc
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?
This depends on the structure of your loan, the amount of your deposit and the overall loan value. Some of the options available to you relate to the frequency of repayments which can be weekly, fortnightly or monthly. In many cases, the more often you make repayments, the less interest you will pay over the life of the loan.
What fees do I need to consider?
There are a range of fees that relate to the purchase of a property that you need to take into account when deciding what you can afford to spend on a house. It is important to know these upfront so you don’t over-commit yourself. Such fees can include stamp duty, legal or conveyancing fees, building inspections, pest inspections, lender fees, mortgage insurance and moving costs if you plan on using a removalist. A mortgage broker will be able to review these and provide you with the best options based on your finances.
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.
