When looking at mortgages, there are a number of factors to consider:
Interest rate. A lower interest rate will keep your repayments down. It’s also important to decide whether you want a fixed or floating interest rate. Floating rates are often lower and have more flexibility but your rate can go up (or down) at any time. Fixed rates let you budget your repayments more accurately because you know your repayments in advance.
Repayment type. Most borrowers opt for principal and interest repayments, where you repay the principal (the money you’ve borrowed) plus interest together. Interest-only repayments delay the full cost of your loan as you only repay the interest at first. Interest-only loans are a good choice for some borrowers but you’ll end up paying more in the long run. Make sure you understand how interest is charged before deciding on the right option for you.
Features. Always compare a loan’s features, such as offset accounts and redraw facilities. But don’t get a loan with a higher rate and extra features if you don’t really need them.
Fees. Application, settlement and monthly fees can add to your mortgage costs. Be sure to factor them in, but remember that the interest rate matters more than fees in determining your costs.
How much do mortgages cost?
Your mortgage costs depend on the following factors:
Your interest rate. The higher the rate the more you pay in interest. If you’re borrowing a lot of money even a small difference in the rate can add hundreds or even thousands of dollars to your repayments.
How much your property costs. The price of the property determines everything else.
How much you’re borrowing (and your deposit size). If you’ve saved up a large deposit you won’t have to borrow as much, making your repayments lower.
Fees. These may have less impact than the interest rate, but mortgage fees can add up. A loan’s comparison rate can help you understand how fees and the interest rate affect your costs.
Government charges. When buying a property you should factor in paying other government charges.
How do I actually apply for a home loan?
The mortgage application process seems complex and scary. But once you break it down it’s not that hard. Preparation is key:
Is your credit file in order? Find out how to get a copy of your credit file and make sure there are no errors on it. If you have defaults or late repayments on your file, make sure you can explain them. Close any credit cards you’re no longer using.
Are you getting a joint loan? Think about how strong your relationship is with the other party. Changes to your relationship could make it hard if one party wishes to sell their part of the property.
Are you eligible for the loan? Borrowers generally need to be over 18 years of age. There are other requirements too, but those depend on the lender. Some will want you to have a good credit score. Others might not allow you to buy inner city apartments. Always read the eligibility criteria before applying.
If you provide all the required information, your lender can approve your loan in 2 – 3 business days. Some lenders even advertise that they will provide a decision in as little as 60 minutes. Remember that the more complicated an application, the longer approval can take.
Pre-approval means your lender will “conditionally” approve you for a specific loan amount. It’ll take into account your income, debts and liabilities when deciding this. It’s usually extended for a few months, allowing you to look for a property with a bit more confidence. It’s important to note that pre-approval conditions can differ depending on the lender.
What paperwork do I need to give my lender when applying for a mortgage?
Your lender wants to work out whether or not you can afford a loan. They will ask for a lot of information from you, including:
Personal details. Your full name, driver’s licence number or some other form of photo ID, phone number and address.
Employment details. Your lender wants to know about your job, how long you’ve been in your position and may even ask for your employer’s contact information to confirm these details.
Financial details. Your lender will want to know how much you earn and spend. They’ll want to see recent payslips, as well as details of your expenses and debts including personal loans or credit cards.
Information about your property. The exact paperwork required will depend on the type of property you’re buying. You’ll need to tell your lender the property address, the type of property, number of rooms and more. Your lender will also want to know if you will be living in the property or are purchasing as an investment.
Will my credit report impact my application? Your credit history is important when your lender evaluates your application. Lenders want borrowers who have a good track record of paying back credit cards and loans. This can be a good sign that they’ll pay back their loan. Some lenders will auto-decline those with defaults. Others might give you a chance to explain them. Specialist lenders may consider borrowers with credit impairment issues. Be aware that they might raise the interest rate to accommodate the extra risk they’re taking on.
Can I switch from a fixed rate to a floating rate or vice versa? Most lenders will allow you to switch from a fixed rate to a floating rate or vice versa but some may charge a fee for this. If you’re switching from a fixed rate loan, be aware that you’ll usually have to pay a break cost. If you want to switch your home loan to another bank, additional fees will apply.
Can I negotiate a lower rate? The mortgages market is competitive, so negotiating and asking for a better rate is a good idea. Before you do, make sure your credit file is in order and know what other offers are available in the market.
Why does my lender need a valuation of my property? Your lender will want to get an independent valuer to find out what the value of your property is. They’ll then use this valuation to work out how much they will lend to you.
Buying a house is among the biggest investments most of us will make. Set yourself up for long-term success by narrowing down the type of mortgage that fits your needs, budget and property. A strong rate and term can provide peace of mind and save you thousands over the life of your mortgage.
Richard Whitten is a senior writer at Finder covering home loans and property. He helps everyone understand the ins and outs of mortgages so they can make smarter property decisions. Richard trained as a high school English teacher but found it easier to manage personal finances than a classroom full of kids. Before joining Finder, he edited textbooks and taught English to office workers in South Korea. Richard has a Bachelor of Education and a Graduate Certificate in Communication.
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