Owning your own home - the Great Australian Dream. Our team has over 25 years experience in the home loan arena. We know what it takes to get going on your journey to owning your dream home. We also know that this is one of the biggest and most important decisions you will make in life. It can feel confusing and overwhelming trying to navigate the path to home ownership
We are here to help you escape the stress of the process, avoid making mistakes and maximise your chances of obtaining the right home loan for you. Our service is completely free and has the potential to save you thousands. Here is a guide to help get you started on your journey.
One of the most important decisions in your life. How do you get it right?
Getting a home loan to purchase your dream home or investment property can be a confusing and complicated road. In this blog we have provided some fundamentals to teach you have to navigate your home loan journey. Before we get into that, here is a quick checklist to help you prepare.
Start saving for a deposit.
If you are starting to plan for owning your home, you should start saving for a deposit. This will improve how lenders view your financial position when you ask to borrow money, as they will see you have genuine savings and are financially stable. Also, the bigger your deposit the less you have to borrow and the less you will pay in interest. This will greatly assist you in reducing the overall cost of purchasing a property.
Choose the right property
Buying a home is a very exciting event but keep a cool head. Don’t look to buy what you can’t afford. Consider factors such as the current economy, your work and financial situation, the cost of the debt and repayments weighed against your budget, the size and age of the home, and the location and potential resale value. Homes are not just buildings, they are environments that impact your quality of life. So make sure you pick a location that has all the infrastructural facilities to suit your needs, such as a place close to good schools, work, transport and community amenities.
Enlist the help of a mortgage broker
Buying a home is not something you do every day and you can benefit greatly from guidance from experts in this area. Mortgage Brokers have a ethical responsibility to act in your best interests and have the experience to guide you simply and quickly through the process. They know all the factors that need to be considered and collect and verify all the necessary paperwork. Mortgage Brokers also have access to a panel of lenders and can help you find the loan product, with competitive interest rates, to suit your needs and unique financial situation.
Mortgage brokers can assist you through each stage:
i)Get ready to buy with a Pre-approval. Here the necessary financial information is gathered to give you an idea of the amount you can borrow. This can greatly strengthen your bargaining position when making an offer on a home.
ii) Move forward with an Unconditional approval. This will require a contract of sale, a valuation on the property and if all is approved, your loan documents will be drawn up. Your loan documents and contract of sale will need to be reviewed by a conveyancer or solicitor and finally signed by you and the seller.
iii)Finalise the process with Settlement. Here the property will be officially transferred to you by the seller. You will receive the keys to your new home and your loan requirements will come into effect. This will include payment of upfront costs such as stamp duty.
Want to know everything in a nutshell?
Getting a home loan can be exciting but also complex and stressful. It involves a variety of factors and steps. Below we have put together your ultimate summary guide to teach you all the basics you need to know in a simple way.
Your financial position
Before a bank or lending institution will approve a loan they will need to assess the risk of lending to you. This involves assessing your financial position. It is important that you understand the factors involved in this, so that you can work on dealing with necessary areas before you embark on seeking a home loan.
The main thing lenders will want to determine is if you can afford to pay back the loan amount. They will check how much income you earn, your employment status and the length of your employment. They will then compare your income to your expenses. Lenders will have access to your bank statements and get a picture of your spending habits. So if you want to come in with a strong foundation as a prospective borrower, consider cutting back on non-essential expenses. Lenders will also look into your assets and your existing debts, such as personal loans, store and credit cards.
Lenders will also check your credit score. The higher your score, the better your chances of obtaining a loan. Your credit score is determined by your existing credit and your past credit behaviour. It will be negatively impacted by factors including defaulting on payments and receiving credit infringements. If you have an impaired credit score, there are ways you can improve it. https://www.nab.com.au/personal/life-moments/manage-money/money-basics/improve-creditworthiness
Having too many credit checks conducted over a short period of time can negatively impact your credit score. This can lead to having loan applications rejected and these rejections can also damage your credit score. To avoid these unnecessary attacks on your credit score, it is important to make sure your financial circumstances are suitable before you apply for a loan.
Deposit and Other Costs
Most home loans involve a deposit of 20% of the property’s purchase price, which means you have an 80% Loan to Value Ratio (LVR). However, in some circumstances you may be able to borrow with at least a 5% deposit. If your LVR is higher than 80%, because you have less than a 20% deposit, then lenders may also require proof of genuine savings (money that you have saved over time, usually over at least 3 months). In most situations, if you don’t have 20% for the deposit, lenders will consider the loan as riskier and require that you pay for Loan Mortgage Insurance (LMI)
There are other initial costs to keep in mind. These include Stamp Duty, Government Registration Fees, conveyancing and legal fees. Some other costs could include Monthly Account-Keeping fees, Loan Application fees, Break Cost fees (for early exit from fixed loan terms) and Annual Package fees.
One cost you won’t have to worry about is the fee for our expert guidance on your home loan journey. All the work we do to secure your home loan, is absolutely free!
Loan Terms
Most Australian home loans are taken over a term of 25 to 30 years but the ultimate life of the loan will depend on the amount borrowed and how quickly you repay it. You can choose to make repayments weekly, fortnightly or monthly.
The Principal
The principal refers to the amount of money you borrow to purchase your home. This amount reduces as you make repayments. As the principal owing reduces, the equity you have increases. Equity is the difference between your home’s current market value and the amount you owe on it.
Interest
Lenders charge interest on the amount of principal you owe, and this is calculated on a daily basis. Interest is an important factor to consider because it significantly impacts the true cost of purchasing a home. According to Canstar, a financial comparison site, mortgage holders in Australia pay almost $793,000 in interest on the average home loan. Taylor Troeth, property journalist, explains that this means the true cost of an average $580,240 home loan is actually $1.37m.
This is why it’s important to keep your eye on interest rates and regularly evaluate how your home loan is performing. Sounds complicated? Well you don’t have to stress. That’s what we are here for.
When you come to Paramount Home Loans Illawarra to help with getting a home loan, we continue to guard your interests even after the loan is secured. We will check in on you and your loan, keeping our eyes on the most competitive interest rates and loan products on the market, and providing guidance on whether you should refinance your loan – a decision that could save you thousands. You can find out more about refinancing in our Refinance Blog post.
Loan Options
There are an array of loan products out on the market with lots of options available to you. Three primary options you will need to consider though, are whether you want a loan with a fixed rate, a variable rate or a split home loan. Each offer unique benefits and carry certain limitations. Deciding which type of home loan to take will depend on your personal and financial circumstances.
Fixed Rate Home Loans:
This type of loan has the major advantage of providing you with certainty of repayments. It allows you to lock in your interest rate, generally for anywhere between 1 to 5 years. Once the fixed rate period ends the loan automatically reverts to a standard variable rate loan or you can decide to refix it.
A fixed rate loan protects you against interest rate rises but also means you won’t benefit from interest rate decreases. It is also not as flexible as a variable rate loan as you are restricted in the amount of additional repayments you can make, generally only up to $10, 000 although in some cases up to $20,000. Additionally you cannot redraw any additional repayments made, you may have to pay a break cost fee for paying the loan out earlier and it does not provide access to Offset accounts.
Variable Rate Loan:
This type of loan is more flexible. It allows you to make a greater, sometimes unlimited, amount of additional repayments and redraws on those repayments. A Redraw facility allows you to access any additional repayments you have put on your loan. This means you can pay your home loan off faster when you have extra money but have the security of being able to redraw that money if you need to.
It also offers you a means to save on interest payments by providing access to linked Offset accounts. An offset account is linked to your home loan. You can deposit savings into it which are always accessible to you and work to reduce the amount owing on your loan. So for example, if you have a loan of $400, 000 and have $100, 000 in your offset account, the loan is viewed as only being $300, 000. This means you will only be charged interest on $300,000. This can be a great tool to save a great deal on interest costs and pay your loan off quicker.
Having a variable rate loan means you can take advantage of interest rate decreases but of course it leaves you open to interest rate increases. It also makes it more challenging to budget for the future as your repayments change over the course of the loan.
Split Home Loan: If you want to take advantage of the benefits of both fixed and variable rates, you can choose to split your home loan. So that means a portion of the amount you borrow is fixed and the rest is variable. This allows you to benefit from the certainty of fixed rates and the flexibility of variable rates.
Home Loan Tax benefits
An investment property is one purchased with the intention of renting it, reselling it in the future, or both. It’s basically a property you do not plan to live in as your home and is bought with the aim of earning a financial return.
If you borrow money to purchase an investment property you can obtain tax benefits through negative gearing. This allows you to reduce the amount of your taxable income if the costs, associated with owning the property, such as interest charged on the loan, are higher than the rental income obtained.
Advantages and Disadvantages of paying off your Home Loan
You would think the ultimate goal is to get rid of that home loan right? No more debt, no more repayments. However there are a couple of points to consider when making this decision.
Paying the loan off has the benefit of liberating you from this debt and providing a sense of peace and security in knowing that the home is all yours. You will no longer be at the mercy of the fluctuating cash rate that can lead to interest rate increases.
Paying off the loan does however have the disadvantage of cutting off your access to this relatively lower-interest debt facility. Home loans are generally the cheapest way of borrowing money, with comparatively cheaper rates than other lending avenues such as personal loans and credit cards. They can provide you with access to funds for other needs such as future renovations. Keeping a home loan can mean keeping an avenue to access greater amounts of cash quickly and more cheaply.
Deciding what the best choice is depends on your personal circumstances, goals and financial situation. You can get help setting your goals by talking to a good financial advisor.
Do you feel prepared to take the first steps to getting a home loan?
It's a big step and an important one, so make sure you have prepared yourself before you take that step. Armed with the right information, you can enter the home loan journey with the confidence that you are ready. Our Ultimate Guide has highlighted a range of necessary factors you will have to consider and given you some powerful insight into how you can best prepare yourself for success on your path to owning your dream home. Take the time to do your research, assess your situation and your goals and ultimately select the best option for you.
And remember, you are not alone! Our team of expert mortgage brokers has years of experience and is ready to help you find the best home loan solution. We are committed to providing our clients with a quality professional service that has a personal touch. Let us help you achieve your home loan goals quickly, easily and stress-free. Contact us to gain access to our free services and take the first steps on your home loan journey.
We look forward to working together with you to help you achieve your goals !
Written by Natalie Estalote Astill
Mortgage Broker at Paramount Home Loans Illawarra, working in partnership with illawarra Mortgage Brokers
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