How To Choose Your Home Loan
Buying your first home is a tremendous step forward in life, one that signals the start of a new chapter that involves greater responsibilities. In many scenarios, the purchasing of a house can correspond with a major life event, such as marriage.
Or maybe you have landed a high-paying job and it’s time to take the plunge further into adulthood by investing in property?
Nevertheless, this is a significant task so you should always perform due diligence to find the best option, whether it’s for personal benefit or your family.
How do I find a home loan that suits me?
You should examine your financial circumstances before applying for home finance.
For starters, you need to be very realistic. You can’t be buried in debt, unemployed or working the minimum if you wish to buy a house. You should also avoid something that is out of your league. For example, you earn a salary of $70,000 but wish to purchase a property that is worth $1.6 million.
You’ll be required to place a deposit –approximately at least 5 – 10% of the house’s value. To improve your chances, you can increase the deposit amount and demonstrate to the lender that you are capable of affording the mortgage payments. Most lenders will ask for pay slips as evidence of your financial capacity.
Keep in mind any additional costs involved, including application fees, redraw fees, and stamp duty. As payments are ongoing, maintaining a home loan requires a steady source of income. Fortunately, there are couples who are both employed and can contribute with two revenue sources. If you are single, that’s okay, as long as you budget wisely and have enough money to pay the mortgage.
How Can I Effectively Budget?
To start off, calculate how much money is required to cover the payments and all costs necessary for the running of a household. This includes costs for groceries, hygiene essentials such as soap and washing powder, and if you have children, fees for their education and lunch money. Once you deduct that figure from how much you earn, you will have a greater understanding of whether you can effectively manage a home loan.
This exercise is useful because it can reveal items that can be reduced from your expenditure. You might be spending too much money on unnecessary things so cut down on those and save, save, save! Think about it this way –all that money can be put to better use, towards the mortgage or alleviating a more pressing need, such as reserving some cash for a holiday!
You should also consult people around you who are managing a home loan and mortgage. Pick their brain on the matter and learn tips from their experience. If you are still unsure, visit a home loan provider such as Newcastle Permanent for professional advice on how to stay on top of your home finance.
Types of Home Loans
There are two main types of mortgages you can choose in a home loan package. Both come with pros and cons but are suitable for the customer if their benefits meet their requirements.
A fixed rate mortgage has an interest rate for a certain period, generally up to 10 years. These are ideal for people who wish to possess an element of financial certainty because the monthly payments will remain the same, allowing home owners to budget more conveniently. This is because a fixed rate mortgage prevents economic changes to affect your payments.
A variable rate mortgage is more susceptible to economic factors. In Australia for example, cash rates are determined by the Reserve Bank of Australia. Hence, you will pay less when the cash rate decreases and this type of mortgage is cheaper than their fixed rate counterparts. This is why a variable home loan rate is certainly a favourable factor for a new family seeking to buy their first house.
Wait –there’s more options to consider apart from the two most common ones!
There are also low doc loans which, as the name suggests, don’t require a lot of documentation. Although you have to state your income and show evidence that you are able to make payments, you’ll generally be exempt from providing paperwork such as pay slips and tax returns. Business owners should consider applying for this type of home loan, especially if it’s difficult for them to produce documents that chronicle a steady income. Of course, the interest rates will be higher and you might be asked to pay ‘risk fees’ since the lack of documentation is interpreted as a higher risk by lenders.
Introductory rate loans are great for first-time home buyers who are inexperienced in maintaining a mortgage. The interest rate is lower for a specified period of time –generally one year –and is effective in easing a newcomer into the mortgage payment process. It’s also useful to know that this type of home loan can have variable or fixed rates.
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