08 October 2016
Buying a home is a significant milestone in your life. Deciding what type should be a well thought out decision and only finalised when you are certain it is the right loan for you. This article will provide you with some points to consider before signing the contract on your home loan.
Firstly, it’s a great idea to know where you stand financially as this will be used later when applying for a loan. This can be achieved in a few simple steps.
Know your credit score
Your credit score is one of the main determinants of assessing the feasibility of a loan and is calculated based on a number of factors including: defaults, bill and loan payments, applications for credit and the amount of creditors you have applied to. You can request a free credit score report every 12 months from Veda or Dun & Bradstreet. Once you have your credit score report you can work on fixing any issues ahead of applying for a loan.
Knowing your credit score is important as a low score (bad credit) can result in higher interest rates or a rejection of your loan application. A high credit score (good credit) will improve your chances of getting a loan at a great interest rate.
Know your budget
It is important to understand your financial capabilities, creating a budget is a great way of achieving this. You can access a budget calculator on our site here or write one out yourself. Don’t be conservative with this, write down all your expenses whether they are personal or essential. You need to have an accurate understanding of your expenses to know how your financial situation will change when you add loan repayments.
What deposit do you have?
The deposit you can put towards a loan will have long and short term effects on your financial situation. A higher deposit will usually mean a lower interest rate and deposits of 20% and over will mean you won’t have to pay Lender’s Mortgage Insurance. Whilst many lenders will let you use a deposit of 5% it may be worth waiting till you have 10%+ for the better rate.
The different types of loans
Once you have built a solid understanding of your financial situation it’s time to consider your loan options. There are many different options when it comes to rates and terms, the guide below will give you an understanding of what each means.
Fixed rate home loans have a set rate for a certain period of time, usually 1, 3 or 5 years. This means that for the duration of that set period the rate will not change allowing for peace of mind and easier budgeting. Choosing this option will mean you know exactly how much you’re paying each month and if the cash rate rises you will still pay the same amount.
However, as good as the benefits are the downsides of a fixed rate loan are still present. The standard variable rate offered could drop below your fixed rate at any point in time. Extra loan repayments are often not allowed during the fixed period, if they are offered they are usually accompanied with an additional fee. Fixed rate loans may also have break fees, i.e. if you decide to sell your house before you pay off your mortgage. Make sure you check the terms to see what the loan offers.
Variable rate loans as the name implies are loans where the rate and repayments can change at any time. This means your rate and repayments could potentially be lower or higher than that of a fixed rate. With a variable rate loan you can often make extra repayments without penalty meaning you can pay your loan off sooner. Offset accounts are available with variable rate loans and let you reduce the interest charged by holding a savings account with the same institution.
The main downside of a variable rate loan is that you can’t accurately predict what your repayments will be as the rate can change from month to month.
This option is often available and will let you split a portion of your loan between fixed and variable. This lets you guarantee a portion of your repayment will stay the same and can allow you the flexibility of a variable rate whilst still being able to budget to an extent.
Some other things
There are some other features which you should consider for adding flexibility to the loan.
- Fee-Free Extra Repayments: Paying any amount extra on top of your repayments will lead to long term savings and help you pay of the mortgage sooner. This means that having the freedom to make these without fee is a big bonus.
- ‘Portability’: The ability to sell your house and buy a new one without taking out a new loan is important as you will avoid break-fees and the hassle of the application process.
- Redraw Facility: Not a necessity but this facility is useful if you need access to emergency funds. A redraw facility lets you take funds you have paid towards your loan back and make them accessible for you. This does however set you back on your loan (money taken back from your payments).
- Mortgage Offset Account: This is great option to pair with a home loan as it lets your savings work towards lowering your interest payments. The balance of this account is deducted off the outstanding loan amount when interest is calculated so you pay less interest as you add more funds to the account.
What’s the verdict?
Taking out a home loan is a significant step and you need to make sure you are well informed of your choices before you settle. There are merits to each type of loan and the right loan for you is a completely personal decision. If you need help deciding contact us today to organise a meeting with one of our friendly advisors.