Looking for a Home Mortgage?
Looking for a Home Mortgage – What You Need to Know
Taking on a home mortgage is daunting. There are usually a lot of zeros on the left of the decimal point, and at least one comma. In Sydney, generally two. So going into the process armed with accurate information is essential.
Where Do I Start?
Forewarned is forearmed and all that. The key to being confident you are making the right choices is to know what to look for, what your options are, and what the impact will be on your back pocket.
Once you have decided taking on a home mortgage is for you, and before you get too deep in the weeds with your planning, it’s a good idea to get some professional advice.
Whether you give your regular bank a call, or talk to a mortgage broker or financial advisor, at this stage all you are doing is determining if a lender is likely to see you as a potential borrower.
Once you have determined you are in the ballpark it’s time to roll up your sleeves and get into the specifics.
There are four key things you should look at when you’re getting started.
1 – Size of the Mortgage
It’s time do the research and work out how much you’ll need to borrow to buy what you want, where you want.
Lenders will consider a number of aspects when evaluating you for a home mortgage.
- Debt to income ratio
- Credit rating
- The type of property you are considering – owner occupied or investment
Take a look at our article Applying for a Mortgage for a little more information on what lenders are looking for when approving a home mortgage.
At this stage, you’re not looking to nail down a definite number, just to identify a ballpark figure.
It’s often a good idea to work out a ‘range’. You might be prepared to pay a certain price for a house that only offers your ‘must haves’, but a higher price for houses that offer one or more ‘nice to haves’.
This is also the time to work out your LVR – Loan to Value Ratio. The larger your deposit, the lower your LVR, and generally speaking, the more willing a lender will be to offer you funding.
The loan to value ratio is:
Loan amount – deposit ÷ value of property x 100 = LVR
Loan Amount: $1,000,000
Deposit: $ 120,000
Property Value: $1,000,000
1,000,000 – 120,000 ÷ 1,000,000 x 100 = 88% LVR
Lenders are generally looking for an LVR of under 80%. If your LVR is higher than this you may find it difficult to secure a loan, and you will almost certainly be required to pay Lenders Mortgage Insurance (more on that later).
2 – Type of Mortgage
There are so many types of mortgages on the market these days, and each one has features and benefits to suit different needs.
Principle & Interest – as the name implies, you pay a portion of the principle plus interest in each mortgage payment. Whilst this means your repayments are a little higher than interest only, you build equity in your property much faster, and ultimately pay less interest as the principle reduces.
Interest Only – Your monthly payments will be lower, but your equity will only build at the rate the home is appreciating.
Fixed Rate – where you agree the interest rate up front, generally for a pre-determined period of 3-5 years. The benefit with this type of loan is you are able to plan your finances without worrying about rate increases. The downside is you don’t get the benefits of falling rates, and these loans are generally less flexible.
Variable Rate – Whilst it’s harder to plan your finances with a variable rate loan, they generally come with more flexibility than fixed rate loans and lower or no early exit costs.
Partial – Gives you the best of both worlds. You can fix the interest rate for a portion of your home mortgage, and leave the rest variable. What percentage you fix will depend on your individual circumstances,
3 – Costs
There are essentially three types of costs related to home mortgages.
Interest Rate – it’s important to shop around for the best rate, because over a twenty- or thirty-year period, a small difference adds up. Just be careful of honeymoon rates. Make sure the ongoing rate is competitive.
Fees – These might be upfront costs like loan application fees, mortgage registration fees and potential ongoing or yearly charges.
Conditional Costs – if your LVR is above 80%, you will probably be required to take out Lenders Mortgage Insurance. How much this costs will be dependent upon the loan amount, as well as your employment status and the insurer being used.
In Australia fees and conditional costs can add up to over $40,000, so make sure you take them into consideration when comparing loans, and running the numbers on how much you’ll have available to spend on your property.
4 – Additional Features
It’s easy to be seduced by the bells and whistles of some home loans. But this is where you need to be realistic. Bottom line? Home mortgage features come at an additional cost. So if you’re not going to use a redraw facility, or a line of credit, don’t be tempted by a loan that offers one for just a tiny bit more. As we mentioned earlier, even .05% adds up over the long term.
This is where it’s helpful to seek advice from a qualified Financial Advisor or Mortgage Broker. They will look at your personal circumstances and let you know if a feature would genuinely benefit you, or if you’re paying extra unnecessarily.
Whatever you choose to do, and however you structure your loan, always keep the long term in mind. This home mortgage will be with you for a while, so it’s important it grows, or hopefully shrinks, and changes with your circumstances.
If you are considering taking on a home mortgage and would like advice on how much you might be able to borrow, and what kind of loan will work best for you, Manly Financial Services have the knowledge and experience to provide you with the right advice. Give us a call on (02) 9976 3388 for a chat, or contact us via the below link.