Things to consider before taking out a mortgage
Borrowing
27 April, 2018 - 12:14 PM GMT

Things to consider before taking out a mortgage

Are you thinking of buying a property? Whether you are a first home-buyer or looking to invest, there is always something to learn to help you get a better deal.

These four steps will keep you on the right track:

 

#1 Planning your finances

Purchasing a property for the first time is a daunting yet exciting experience. After all, it is probably the biggest financial decision you’ll ever make. Before you begin the house hunting process, sort your finances out.

Extra costs you need to prepare for are:

  • stamp duty (this varies from state to state)
  • legal fees
  • lenders’ mortgage insurance (which covers any financial loss for the bank if you can’t afford to keep up their home loan repayments)
  • land and water rates
  • home and contents insurance and repairs

Carefully consider all of these costs before figuring out whether you can afford a mortgage.

Ensure you save as much as you can! Having a bigger deposit will save you from having to borrow money, will save you a huge amount of interest over the life of the loan and may save you from costly mortgage insurance. If you are purchasing your first home, then you may be eligible for the First Home Owners Grant.

 

#2 Choosing the right home loan

The next step is choosing the right mortgage that suits your financial needs. The lending industry is increasingly competitive so spend time comparing home loans to make sure you get the best deal. Also, ensure you have a good overview of the housing market so you can make educated decisions. In doubt? Seek expert (and unbiased) help. Keep asking questions until you are comfortable you understand and are well equipped with the information you need.

 

#3 Interest rates

Making sure you understand the specifics behind each loan feature is very important. What may seem to be the cheapest loan won’t always be the best choice for you in the long run.

Keep an eye on interest rates and loan packages once you have bought a property and don’t be afraid to go to your bank manager every year or so to ensure you are getting the best deal. Don’t suffer from property inertia and automatically accept whatever interest rate you are offered.

Ensuring you pick a rate that best suits your needs will determine the cost of your loan and your monthly repayments.

The different types of interest rates:

  • The introductory rate: you may be offered a particularly good interest rate for an agreed time period when you initially take out a home loan
  • Variable rate: this can fluctuate up or down in accordance with market changes so you can win or lose with a variable rate
  • Fixed rate: it’s a good idea to sign up for a fixed rate when interest rates are low so you know exactly how much you’ll have to pay each month
  • Split mortgage or a partially-fixed rate: you also have the option of fixing a percentage of your mortgage and leave the rest variable so you can ‘play the odds’

Currently, home loan interest rates are low. But it won’t stay that way forever. Remember, if you make extra repayments while interest rates are low then you will slowly reduce the balance of your loan, save on compound interest and be ‘ahead’ when interest rates rise.

Never take out a mortgage unless you can service a loan long-term if interest rates rise by 3% or so. Also, review your budget and see if there is any room to reduce your expenses to make extra payments on your loan.

 

#4 Credit card debt

What does having credit card debt mean for you as a future homeowner? It means the amount you are allowed to use on your credit card will directly impact how much the bank will lend you. For example, if you have a $25,000 credit card limit then this amount will be taken into serious consideration by the bank when they are working out how much they’ll lend you for a mortgage. It is likely you’ll be offered $25,000 less to borrow on a home loan from the bank. So, lower your credit card limit to the lowest amount you are comfortable with ASAP.

You will also need to sort out any debts before you purchase a property. If you have any credit card debt, then work hard to eliminate it now so you can start with a clean slate and prepare to enjoy being a home owner.