Buying a house is exciting, but it can also feel stressful at times. From choosing the right property to getting the right type of home loan – there’s a lot to do before you can move into your dream home. But a little bit of planning can make the process much more straightforward, especially when you are shopping around for a home loan.
Here’s a quick guide to help you find the right home loan for you with minimal fuss.
1. Budgeting for a new home
Purchasing a house involves various costs on top of the property’s purchase price. This includes stamp duty, the fee charged by the lender for setting up your loan, and conveyancing fees.
You also need to provide at least 20% of the purchase price upfront to qualify for a home loan or pay for Lender’s Mortgage Insurance (LMI), which could run into thousands of dollars depending on the size of your loan. LMI allows you to borrow more than 80% of a property’s price, but it can significantly add to your costs. However, it can help you climb the property ladder without waiting too much to save a deposit. It’s also worth checking whether you are
eligible for any concessions or grants as a first home buyer to save money while buying a house.
The First Home Owners Grant (FHOG) is a national grant administered by some states. You can check the First Home Owner Grant website to find out about the latest rules in your state. You may even be eligible for a stamp duty concession in some states and territories if you are purchasing your first home. It’s worth visiting your local government website or speaking to a mortgage broker for information.
2. How much can I borrow?
Even before you start searching for properties, it’s worth calculating your borrowing capacity using a borrowing calculator. Once you know your borrowing capacity, you can calculate your monthly repayments using a repayment calculator to estimate how much you can comfortably afford to borrow for a house.
When calculating your repayments, it’s usually a good idea to use an interest rate about 2% higher than the average variable rate. This helps you plan your finances better if the interest rates were to rise in the future.
Once you have a ballpark figure, you may apply for a home loan pre-approval directly with a lender or through your mortgage broker. Getting pre-approved for a home loan can help you narrow down your property search by giving you a fair estimate of how much you might be able to borrow. It can also help reduce the time taken for you to get approved for a home loan once you zero down on a property, as the lender is likely to assess your financial situation in detail before pre-approving you for a mortgage.
4. Comparing home loans
After you have figured out the amount you wish to borrow, it’s time to compare home loans to get the best deal for your situation.
Comparing interest rates on home loans can help you save money in interest, but don’t fall for the lowest rate available. There are other costs associated with a home loan, such as the ongoing fees charged by the lender, which add up to how much a loan is going to cost you over its term. It’s advisable to compare apples with apples when comparing home loans by considering the comparison rate, which takes into account the interest rate as well as most of the fees charged by a lender.
It’s also up to you to decide whether you want to apply for a vanilla home loan or pay for additional features, such as an offset account or a redraw facility, to potentially save money in interest and make your home loan more flexible.
4. Types of home loans in the market
You should also understand the various types of loans available in the market to pick the right one for your needs.
Principal and interest loans
Principal refers to the actual amount you borrow. In this kind of loan, your repayments are used to pay off the interest and a part of the principal to gradually reduce the loan amount. It is also possible to pay off the loan faster by increasing the frequency of payments or making additional repayments occasionally.
In an interest-only loan, the repayments are only applied to pay off the interest and not the principal for a fixed period. Thus, the actual amount you borrow does not reduce, but you have to pay smaller instalments than a principal and interest loan. However, your repayment amount can increase significantly once the interest-only period is over, which could strain your budget.
It’s generally advisable to take out a principal and interest loan for your home to reduce your outstanding gradually and build equity in your home.
If you choose to buy a vacant piece of land and build your own home or plan to renovate extensively, applying for a construction loan might be a good idea. Construction loans allow you to draw down money at different stages of construction, and you are only charged interest on the amount you have drawn down, saving you quite some money in interest payments.
Low doc loans
Lenders often ask for proof of regular income before approving your home loan. As a self-employed individual or a freelancer, you can opt for a low doc loan that requires minimal paperwork. However, the interest you pay on a low doc loan is likely to be higher.
Fixed or variable rate home loans
When applying for a home loan, you also need to consider whether you want to pay a fixed or a variable rate on your mortgage. With a fixed-rate loan, you can fix your interest rate for up to five years. This could benefit you if you want to lock in a low rate amidst the uncertainty of future rate hikes.
If you take out a variable rate home loan, the interest you pay will change according to the current interest rates. This means the interest you pay can increase or decrease over time, depending on the market.
Variable-rate loans are also more flexible and generally offer features like free additional repayments and a 100% offset account facility to help you save money in interest. Eventually, it’s for you to decide whether you want the certainty of fixed repayments or ride the market with a variable rate loan. Some lenders might also offer a split rate home loan. It means you can fix a part of your home loan and continue paying interest at a variable rate on the rest of the loan.
If you want to find out more about the different types of home loans or have queries around a home loan product, you may want to contact a broker or ask a Hashching expert for their opinion.