Mortgage is a funny word which comes from the Old French. ‘Mort’ means death and ‘gage’ means pledge. With Melbourne house prices going up through the roof, the new entrants to the housing market will equate mortgage to death sentence. With monthly payments totalling more than 50% of the income, an unsuitable loan may break the backbone of a family. Even a minor reduction in the interest rates and fees of a home loan, will save home buyers thousands of dollar during the life of the loan. When someone approaches a Bank for home loan, where they hold a transaction account, banks have a tendency to act like having a control over the customer. It is impossible for the home buyer to approach every single lender and ask for their best deals and then compare. But mortgage brokers do have that facility and no wonder, now a days around 60% of the home loans are written by mortgage brokers.
But to keep the home buyer’s interests’ best served, it is important for the home buyers to have better understanding of the home loan process. This includes, an awareness on what you really need. Knowing how a home loan is packaged by lenders, will help you better understand the pitfall of burdening yourself with an unsuitable loan. Here are some of the information that may come handy in such situations.
The type of loan
Mainly there are three types of loans: variable, fixed and split loans. In a fixed interest loan, interest rates are locked in for a certain period. With variable rate loans, interest rates will fluctuate in response to market rates. A home loan can also be split with a certain percentage of it fixed and the remaining with variable interest rates. It is generally a good idea to lock in your loan when interest rate are historically low, which is the current situation. If the interest rates are high and there is a possibility for a decline, it is better to keep your loans at variable interest rates. The other factor to consider is the possibility for an early pay off.
You can choose to pay only the interest part of your loan for a maximum period of ten years. This is useful especially when you are buying an investment property. This will help you leverage and make a gain based on the property value appreciation.
The fee and the extra features
Interest rates are an important consideration for choosing a loan, but the fees associated with your loan will also make a huge difference during the life of the loan. Loans are designed to have a balance between fees and interest rates. Usually loans with extremely low interest rates will have fees and charges associated with it. It is important to inquire your lender about the fees and charges for specific events like late payment, redrawing, topping up etc. Upfront and ongoing fees also should catch your attention.
Home loans come with feature packages like offset account, redraw, line of credit etc. Some of these features may prove to be useful for you but not all. For example, if your connected offset account never go past a balance of $2000, it may not be worth to have an Offset account facility. If you want such flexibility built into your loan ask about the associated extra fees or constraints. Some home loans come with bonuses such as discounted insurance plans and fee-free credit cards, which you may want to take into account when selecting a home loan
The size of your deposit
Once a decision is made to purchase a home, you must get an understanding of, how much you can afford. Most home buyers fail to take into consideration, other associated costs like stamp duty, conveyancing charges, solicitors costs etc.. These costs will run into thousands.
Another important factor is ‘Lenders Mortgage Insurance’. It is better if you can save 20% of the value of the property that you wish to purchase. Loan to value ratio above 80% will invite a one off lenders mortgage insurance premium charged to your loan. LMI is calculated based on the loan amount and the loan value to ratio (LVR), the higher the loan to value ratio, the higher the risk to the lender and the more you will pay for LMI.
This is to give you a better understanding of the features your home loan offers. Below are some of the features associated with home loans
- Redraw facility – Redraw facility allows you to access additional repayments you have made against your mortgage. Redraw is not available to fixed home loans.
- Additional repayments – This decides whether you can make extra repayments on a regular basis without incurring extra charges.
- Lump sum repayments – Decides whether you can make bulk repayments on ad-hoc basis.
- Offset account – An offset account is a transaction account that can be linked to your home or investment loan. The credit balance of your transaction account is offset daily against your outstanding loan balance, reducing the interest payable on that loan. For example, if your mortgage is $300000, and you are able to deposit $50000 into the offset account, the interest is calculated on $250,000, provided you have a 100% offset account. An added benefit is that you don’t have to pay tax on the savings in your offset account.
- Mortgage Portability – This allows you to keep the same home loan product but change the property (supporting security for the loan). This comes to use, if you are selling your property and buying a new one at the same time. It could be requirement that the new property is of equal or higher in value to the old one.