Not so long ago your mortgage was almost as long term a commitment as your marriage. People would get married, buy their first home, take out a mortgage and pay it off over the next 25 or 30 years of their life. Things are quite different today. There are hundreds of lenders in Australia all offering a very wide range of home loan products. How do you pick the loan that is right for you? Here are some pointers.
Your Loan Size
In most cases your ability to borrow and the size of loan you can qualify for will be determined by
- your declared income;
- asset and liability position;
- available deposit.
The loan affordability calculator used by each lender is different. Therefore even if you have been knocked back by one lender you may find that another lender may approve on exactly the same financials and loan size.
One thing to keep in mind is whether you believe that you will be able to afford the loan repayments. In the current interest rate market it is important to factor in a couple of probable interest rate increases when working out your loan affordability.
It is no good finding a lender who is prepared to lend you $500,000 when you yourself do not believe that you can comfortably repay such an amount.
Key Loan Reduction Techniques
There is no magic product that makes your mortgage disappear. In fact, there are only a couple of ways to save money on your home loan:Paying lower interest rates.
Borrowing for a shorter time.
In other words, if you want to clear your loan quickly, you need to make larger and more frequent repayments, at the lowest possible interest rate.
If finding the required repayments on your desired mortgage will present a problem, then the mortgage selection rules change. In order to afford that $500,000 mortgage, you may need to start with a Honeymoon product and then move to an interest only loan for a period of time. Perhaps repaying more and faster is not the path for you. Again the rules change depending on your individual circumstances.
Most lenders offer a range of loan options. Some allow you to have access to your money like mortgage offset accounts and redraw facilities. Others allow you to transfer your mortgage to another security - portable loans.
It is up to you to decide which features are necessary and which are 'nice-to-have'. As with most things in life, extra features tend to come at a greater cost. Therefore it is wise to only take and pay for what you need.
You must be aware of all the fees and charges associated with your loan. These may not be apparent at first glance but will be reflected in the comparison rate of your loan. If you are looking for the cheapest possible loan then you need to include in your calculation the cost of set up, monthly fees, redraw fees, as well as possible fees if you refinance or pay off the loan.
Honeymoon Home Loans are great if you wish to take advantage of a lower rate in the shorter term, where your financial circumstances are likely to improve down the track.
If you need the Honeymoon rate in order to afford the loan - do not proceed with it.
These loans present a short term saving only, as they revert to a standard variable rate at the end of the Honeymoon period.
Fixed or Variable
Many Australians are now looking at the escalating interest rates and are wondering if they should fix the rate on their mortgage or leave it as variable. There is no right or wrong with this decision. Much depends on where you believe the rates will go next. While people often choose to fix to avoid the hurt of future interest rate increases, you should be aware that the market will often build the anticipated direction of future interest rates into their current fixed rates. Hence fixing the rate today does not necessarily mean that you will pay less in the long run.
Professional Package Offers
It is always worth investigating the Professional Package Loans offered by the lender of your choice. These generally offer a lower interest rate and despite their name are also available to 'non-professional' applicants.
Low Doc Loans
Low Doc loans are great if your tax returns are not up-to-date or if your circumstances are a little outside the criteria of the traditional lenders. These loans are low on paperwork and high on flexibility. We have seen many asset rich but cash-flow poor applicants do very well with such loans. The Low Doc Loan market is so competitive that Low Doc Mortgages are available through a number of lenders at rates not much different to the full doc loans.
Revolving Line of Credit
A great product where you have already built up some equity in your home, and would like to use it towards any worthwhile purpose. A Line of Credit is like a credit card but money is made available at home loan rates. Providing you are a responsible borrower, this is a great financial product
If you would like to learn more about the Australian Home Loan Market please visit
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