Table of Contents
1. Talk to your Mortgage Broker 2. Preparation 3. How Much Can You Borrow? 4. How Much Deposit Do I Require? 5. What are the Costs Involved in Buying a Property? 6. Can I Afford It? 7. Types of Home Loans
Talk to your Mortgage Broker!
The lending process is complex, so it is important to engage your broker early in the piece. There is the deposit to think about, your borrowing capacity, the type of security and even the type of loan. Even if you are not quite ready to buy, we are here to get you prepared for the process so you can get into your new home sooner.
Preparation
The Key Before Getting Your Keys
How much can I borrow?
How much deposit do I require?
What are the costs involved?
Can I afford it?
How Much Can You Borrow?
The amount you can borrow will depend on several factors and is another reason why it is important to engage your Mortgage Broker in the process BEFORE you are wanting to buy a house. Your borrowing capacity will depend on several factors including:
Your Income
This includes your fixed remuneration and any bonuses or allowances you receive. It is important when discussing your income with your Mortgage Broker that you disclose the types of income as some lenders may assess different types of income at different rates. As an example, your overtime might only be assessed at 80% of your income, but if you were in essential services it may be assessed at 100%.
Your Living Expenses
Mortgage Brokers and lenders have an obligation to ensure they are not putting you into a loan that would cause you undue hardship.
Key factor in assessing this is reviewing your living expenses. This is normally done by assessing your last 3-6 months transaction and credit card statements to assess how and where you spend your money.
One of the key benefits of working with your Mortgage Broker before you are ready to buya property is that they can help you identify any changes in your spending habits thatyou could make to provide a more favourable view to the lender.
Your Financial Liabilities
This includes things like credit cards, personal or car loans and Student HECS debt speak to your Mortgage Broker when they are assisting you with your loan to check whether the lender will need to factor in Student HECS Debt for servicing. It also includes limits and Balances of buy-now-pay-later services like After Pay and Zip Pay and any interest free loans you may have. Credit cards with no debt owing but still active also need to be disclosed
How Much Deposit Do I Require?
There are many options available in relation to how much you will need to come up with as a deposit. Depending on your situation it could vary from 5%-20%. Sitting down with your trusted Mortgage Broker will ensure you know which options are available to you.
Most lenders will want to see evidence of consistent savings over a period of 3-6 months.
This is to not only show that you have the funds to complete the transaction, but that you also have the discipline and commitment to pay your ongoing mortgage repayments once you settle your loan.
However, there are some lenders that may make an exception, so be sure to discuss this with your mortgage broker so they can guide you.
The amount of the deposit can be varied, some lenders will allow you to borrow up to 95% of the value of the property requiring you to only have 5% of the value of the property saved.
This will require you to pay Lenders Mortgage Insurance (LMI). LMI is a cost which you, the borrower, pay at the settlement of your loan which protects the bank in case you default on the loan and they must sell the property at a loss.
It is important to understand that LMI does not protect you if you get sick or lose your job. To avoid paying LMI you generally need to borrow less than 80% of the value of the property.
If you would like to learn more about the LMI difference click here (https://helia.com.au/) to head to one of Australia’s leading providers of LMI to find out more. However, to find out if taking out Lenders Mortgage Insurance is in your best interest speak to your Mortgage Broker so they can run analysis on your situation.
What are the Costs Involved in Buying a Property?
The cost involved in purchasing a property is more than just the purchase price and can include such things as:
Bank Fees Including application and valuation charges.
Stamp Duty Please note you may be eligible for a waiver of the stamp duty depending on the state you are borrowing in and your circumstances. Your Mortgage Broker or conveyancer can assist you.
Lenders Mortgage Insurance This is a cost to you, the borrower, that is generally charged by the bank if you have less than a 20% deposit on the property. It can vary between lenders and your Mortgage Broker can assist you in calculating this amount.
Government Fees These include things such as mortgage registration and transfer fees and title searches.
Legal Costs Either a conveyancer or solicitor will review your Contract of Sale and ensure appropriate checks are conducted on the property with local government agencies.
Property Checks It is always recommended that prior to purchasing a property, you hire professionals to inspect the property for structural defects, concerns, pest infestations, anything that could potentially cause damage to your property.
Removalist Costs Will you do this yourself or hire a company?
Utilities Set up of utilities which may include a connection fee and up to 2 months of charges as they may charge in advance.
Can I Afford It?
Please note, whilst it is good to review your living expenses and reduce discretionary costs, it is also important that you balance that with your lifestyle. You want to ensure that this is a budget you can stick to long term and not feel like you are sacrificing too much for the sake of buying a house. It is important to therefore factor rate increases into your calculation.
Types of Home Loans
There are several different types of home loans and your Mortgage Broker will assist you in choosing the right one for your specific needs.
Fixed Rate Home Loan
A fixed rate simply means that the interest rate is guaranteed for a certain amount of time – commonly between 1 year to 5 years. The benefits of a fixed rate loan are that you know what your repayments will be over a specific time frame and you can budget accordingly. The interest rate is not going to go up (or down) over that period. The disadvantage however is that fixed rates loans are not very flexible. There will be a limit to the amount extra you can pay off over the fixed term and fixed rate loans rarely allow you to redraw any surplus funds or have an offset account. The other thing to be aware of is that if you have to sell the property during the fixed rate period, you may incur break costs which could run into the 1000’s of dollars
Interest Only Home Loan
An interest only loan is where the borrower only has to pay the interest accrued each month on the loan, rather than paying down the principle balance. Usually it is associated with investment properties in line with a strategy from the accountant or financial planner. The benefits are that the repayment is reduced, thus freeing up cash for other purposes however, the principle will still need to be repaid and once the interest only period is over you will be paying off the principle at higher repayments than you would if you started paying the principle off from the beginning.
Split Home Loan
A split loan offers the best of both, offering the certainty of a fixed rate and the flexibility of a variable rate.
Variable Rate Home Loan
A variable rate means that the interest rate will rise and fall with the market over the period of your home loan. This can be in line with movements in the official cash rate by the Reserve Bank or it may be a decision by your financial institution to vary their rates. The main advantage of a variable rate loan is flexibility. While you must meet your minimum monthly repayment, you can usually pay more if you want to. There is also no cost penalty if you decide to sell your property and move. You also generally can have access to an offset account, redraw or both. The main disadvantage of a variable rate loan is that your minimum repayment amount may rise or fall at any time in line with either the Reserve Bank or a business decision by your financial institution. This can make it hard to plan especially for those on a tight budget.