Written by Katie Douglass
01/04/2021 | 5 minute read
For most Australians, a home will be the most expensive purchase they make in their lifetime. As such, it’s often essential that you take out a home loan to cover the purchase price. Home loans, otherwise known as mortgages, are loans from a bank or other financial lender to be used most commonly for the purchase of a home, or the building or renovating of a home. Compared to personal loans or loans for other assets such as a car, home loan terms generally span 25 to 30 years. They are repaid through regular repayment instalments.
In the unfortunate circumstances that you are unable to repay your home loan, the lender may be able to settle the debt via sale of the property. For this reason, it’s essential to do your research before you agree to a home loan, to ensure that it is affordable for you. We’ve put together a simple guide to assist you to review and compare the offers on the market, to find the right home loan for you!
Before you delve into your research, consider whether you are borrowing money to purchase a home to live in, or to purchase an investment property. If you’re purchasing your own home, then a home loan is the right option. If you’re looking to purchase an investment property, then you’ll require an investment loan.
The principal difference between the two types of loans is that investment loans may come with slightly higher interest rates. This is because, hopefully, the value of the property will rise over time and you can make a capital gain.
Home loans for building or renovating your property are generally no different to a regular home loan for the purchase of a property. However, in the case of renovating, you may be taking an additional loan on top of your current home mortgage. Consider whether you can afford additional repayments on top of your current ones. Similarly, building a house incurs its own additional costs. Consider whether you are able to afford the loan for the land and building costs.
If you already have an existing home loan, you may be able to switch to a better deal. Refinancing is often an available option for many loans, so check with your lender whether your home loan can be. You may refinance with your existing lender if they offer you a better deal, or you may be able to switch to an entirely different lender. Be wary of any additional costs associated with refinancing, such as exit fees and establishment fees.
As with all loans, there are many home loan features to compare when you’re doing your research. A loan with the right features will give you the most control over your money. We’ve outlined the main features below for you to consider.
Arguably, interest rates are the most important feature of home loans. Essentially, interest is a percentage of your loan that is charged in addition to your regular repayments. It may be helpful to think of it as a small fee charged by your lender in exchange for their service of providing the money to you.
A home loan calculator will assist with this task. However, first, you must acquaint yourself with the different types of interest rates.
Firstly, fixed interest rates denote an agreed-upon rate that will not vary over the course of the loan. Comparatively, variable interest rates will vary depending on the current loan market. Over the life of your loan, you will be paying varying amounts of interest each repayment.
Secondly, base interest rates describe the percentage of your loan that is being charged in interest. Comparatively, comparison interest rates help you to compare the true cost of the loan. It includes the base interest rates, plus any additional regular fees payable. Whilst comparison rates will give you a better idea of the cost of the loan, check with your lender if there are any fees that are not included in the rate.
The available term for home loans will vary between lenders. As mentioned above, home loan terms often span 25 to 30 years, as it’s a large amount of money to repay. Consider what you can afford. A shorter loan term will require larger repayments. Though you will pay off the loan faster and accrue less interest, you are paying more each instalment. This will, therefore, leave you left off with less money each month. Alternatively, repaying a loan over a longer term will mean the opposite: The debt will be yours for longer, and you will accrue more interest. However, paying less per instalment may be more flexible for your needs.
Further, determining the frequency of your repayments may be an option available to you. Though regular instalments are usually monthly, you may be given the option to choose weekly or fortnightly.
Over the course of your home loan, there will be many fees payable. When reading the fine print of your loan agreement, look for any of the following:
|Application / establishment fees||Many lenders will charge a fee to establish your account, or process your application. This is a very typical one-off cost to cover the cost of processing your loan documents.|
|Ongoing fees||Though ongoing fees will often be included in the comparison rate, check with your lender if there are any ongoing fees that are payable throughout the life of the loan.|
|Valuation fees||These fees will cover the lender’s cost to have your property valued by an expert. Valuation is often essential when refinancing, as well as if you choose to sell the property.|
|Legal fees||Lenders will often accrue conveyancing costs during the purchase and sale of the property. These fees will cover such costs.|
|Exit/discharge fees||Exiting the home loan agreement to refinance may cause lenders to charge you an exit fee. This covers the cost of settling the balance and closing your account with that lender.|
Home loans vary between lenders. Once you have compared the most important features, such as interest rates and loan terms, consider the additional features that lenders may offer. For example, many lenders may offer the ability to make extra repayments. This will allow you to pay the loan off faster and will save you money in interest.
Moreover, it is common for home loans to offer a redraw facility. This facility will allow you to make additional repayments towards the loan and withdraw the additional money when needed. Such an option is helpful in cases of emergency when you are in need of some extra money.
Lastly, it’s wise to consider the lender that you want to borrow money from. The Big Four banks, for example, are the dominant options for home loans. They may offer competitive features, but often have higher interest rates than smaller lenders. With this in mind, consider other, smaller banks, as well as digital banks, online lenders, credit unions and specialist lenders.
The amount that a lender will agree to lend you depends on many factors. Your income and expenses are the chief consideration for lenders, as they will be able to assess what you can afford to repay. If you are earning a stable salary at a stable job (e.g. having been at your job for more than 12 months), and you generally stay away from frivolous expenses, many lenders will be inclined to accept your application. Beyond this, however, lenders will consider your current debts and liabilities to scope out your current repayments and how reliable of a borrower you currently are. They may also consider your employment history and whether you are upfront and honest.
A great tip is to check your credit score. A good credit score will maximise your chances of getting approved for a loan, as the lender will be able to see that you are financially responsible. A bad credit score will have the opposite effect
You can check your score through government-approved bureaus, such as Equifax, Experian or Illion (FKA Dun & Bradstreet). These bodies are required to provide you with a free copy of your credit history report every twelve months.
Obviously, one of the first things you’ll do is to consider the house you want to buy. Look at the prices in the area that you wish to buy to get a realistic sense of your budget. Examine your spending habits. Set frequent saving goals for yourself. Consider repaying some of your existing debts.
Now that you’ve worked out a budget, it’s time to actually budget! In Australia, many lenders will require a deposit that is approximately 10% to 20% of the property value. Though this is the average, it can be anywhere above or below these values. The more you have saved, the stronger position you will be in when you apply for a loan.
Note that if this is your first home purchase, you may be eligible for a first homeowner grant. The availability of such grants varies between states, and times. If you are eligible, you can put this money towards your deposit.
Find out more about the first homeowner grant in your state here.
There will be some additional costs that are associated with purchasing a home, such as furnishing, maintenance and taxes. Houses are an expensive purchase in themselves, so you have to assess whether you can afford the additional costs that will inevitably flow after purchase.
If you’ve done your research and are ready to apply for a home loan today, then you can follow the simple steps below. This is obviously a simplified guideline, but it will give you an idea of the process involved in purchasing your home.
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It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.
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The Australian Government's MoneySmart website shows you how small amount loans work and suggests other options that may help you.*This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.