THE GUIDE TO BUYING A HOME
Step 3 – Arranging Your Finance
Choosing the right mortgage can be daunting due to the large number of different products available. It is important to do lots of research before you choose your lender and if necessary seek advice from a financial expert.
There are two options available to you in organising your finance. You can apply directly to the financial institution or you can use a mortgage broker to help you though the process.
Most of the financial institutions apply different criteria in assessing how much they will lend you and what interest rates they charge. It is important to shop around to make sure you get the mortgage that suits your financial needs.
In order to apply for a mortgage you must be over 18 years of age and have a regular income to meet the loan repayments. The maximum term to repay your mortgage is generally 30 years for a home loan and 25 years for a residential land loan. Repayment options are usually on a weekly, fortnightly or monthly basis. The more frequently you make mortgage repayments, the lower the interest cost will be and the sooner your home loan will be repaid
Banks, building societies and other financial institutions
There are many banks, building societies and other financial institutions that offer mortgages. You can find a list of mortgage providers in the business section of any of the major newspapers, specialist mortgage magazines and on the internet.
Most institutions will come to your home or office for an appointment or you can get information online or over the phone. Alternatively you can make an appointment to see your bank's manager.
When searching for a finance provider, it’s great to compare what home loan providers are offering before you sign on the dotted line to ensure you get the best deal available. Click on the link to view an example of the comparison sheet you should create.
Brokers
If you find it difficult to understand the many different products available, or you don’t have time to do the research, consider using a mortgage broker to do all the work for you.
Mortgage brokers are financial experts who act as a ‘middle-man’ between you and the mortgage provider. They understand the differences between the various finance options available to you and have the expertise to assess the best products to suit your needs. They also do the ‘running around’ for you saving you lots of time.
Mortgage brokers don’t charge fees, as they get paid a commission from the lender when borrowers take up a home loan that was recommended to them. You will usually meet with a broker face to face. It’s a good idea to ask friends or colleagues for a recommendation when looking for a mortgage broker.
Ensure that the broker you choose is accredited with the MFAA (Mortgage and Finance Association of Australia).
Common home loan types
Most mortgage providers offer the following five types of home loans:
| 1. |
Honeymoon rates home loan |
Discount introductory mortgage rates which, after a certain period (normally 6-12 months), revert back to a variable rate home loan |
| 2. |
Basic variable rate home loan |
A lower rate than the standard variable rate, but some features are not available or you need to pay to use them, such as a redraw facility |
| 3. |
Standard variable rate home loans |
A higher rate than the basic variable rate, but with more features with either lower or no fees |
| 4. |
Fixed interest home loans |
A fixed rate of interest over a period of time, which will usually revert back to a standard variable rate home loan after the nominated term |
| 5. |
Line of credit |
A loan where you borrow to a ceiling amount and you can pay down and draw back up to that ceiling amount |
Fixed v’s variable
Fixed Interest Home Loan – The interest rate is fixed (doesn’t go up or down) over a set period of time, usually for between one to five years. If interest rates increase, you will be protected from these rises. However, if they decrease you will not enjoy the benefits of lower rates. A fixed rate provides you with certainty as to what your repayments are each month, which can help with budgeting.
Generally, a fixed interest home loan is less flexible (eg. You can’t redraw any extra repayments you’ve made) and have charges for early repayment. Your mortgage repayments are determined by the amount borrowed, the term of your home loan, frequency of the repayment and the interest rate.
Variable Home Loans – The interest rate goes up and down depending on the rates determined by the Reserve Bank of Australia. So your mortgage repayments will rise and fall depending on movements in the interest rate. They often allow greater flexibility than a fixed loan, by offering such things as a cheque book, a redraw facility (allows additional repayments made on a loan to be accessed, or drawn on by the borrower, at any time) and to make extra lump sum mortgage repayments.
If you are unsure whether to go with a fixed or variable rate loan, you should seek professional advice before you make a decision. You should also consider taking a split loan whereby a portion of your loan is fixed and the rest is variable. If you choose this option check to see if there are any extra costs involved.
Applying for a home loan
Your mortgage provider will give you the application forms to complete. Generally they will require you to provide a range of documents to support your home loan application. Click here for a list of documents may require.
If you are using a mortgage broker, they will complete the application forms for you and tell you what documents are required to support the application.
Once you have decided which mortgage product you want, it is a good idea to apply for the mortgage to become “pre-approved” for a loan. Pre-approval means the bank is prepared to lend you up to a certain dollar amount. This enables you to conduct your property search with the knowledge and comfort of how much you can spend to buy your dream home.
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