Navigating through the house buying process can be challenging even in the best circumstances. After you save your deposit, find an ideal property, get an offer accepted or purchase at auction, the next step after signing the section 32 and handling over your deposit is to confirm your home loan. You may have already gained pre-approval before buying to determine your purchase limit, but have you selected your home loan product? Of course, there are numerous types of loans to suit various circumstances, so see below for our guide for an overview of the main factors to consider when you are reviewing your mortgage options.
If you’re completely new to lending, the first distinction that you should understand is there are two major types of mortgages that are called variable and fixed rate home loans, with many variations of these products. A variable home loan fluctuates as the market interest rate does, meaning that the ongoing amount that you repay can vary. Normally you can also make extra repayments and features such as offset accounts, but there is the risk of mortgage stress should the repayments get too high for your household to manage.
A fixed rate loan will lock in an interest rate for a predetermined period so you have certainty in what your repayments will be and after this period it may revert to a variable rate. So although interest rate rises won’t affect your repayments, interest drops will not either and there are often break fees if you wish to end a fixed term before the period expires.
Therefore, a middle of the road option is to split some of your loan into a part that is fixed and part that is variable. This is asound option if in the short term you have limited funds and interest rates are volatile but you know down the track you want the ability to repay more when your finances improve.
Another distinction is the difference between interest-only and principal-and-interest loans. Most home loans for people who plan to live in the house that they purchase, fall into the latter category. This means that over the life of the loan your repayments will lead to you owning the house outright and pay off the interest you incurred from borrowing the money. An interest-only loan however, will see you only making repayments only on the interest of the amount borrowed, normally for a fixed period of time. Although initially the repayments will be less, an interest-only loan will see you paying more over the life of the loan as the principal amount you repay is not reduced as quickly. Also watch out for when the interest-only period ends if you can’t afford the additional repayments when it reverts backto principal-and-interest.
Another consideration that will effect your mortgage selection, is if you’re planning to demolish and rebuild a home on your land, or have purchased empty land with the intent to build on it. In this instance, know that home loans for new home builders will operate differently to an established home that will remain standing after your settlement date. Depending on your circumstances, you may need to acquire a construction home loan which will often provide you with the ability to withdraw funds at certain periods in order to pay the businesses and people that are bringing your custom home design or even your dream house and land package in Geelong to life. To be approved for this loan, however, you’ll typically need approved plans, permits and often fixed-cost building contracts to be eligible.
Once final factor to pay attention to when researching home loans is to determine whether you will have to pay Lender’s Mortgage Insurance (LMI). LMI is a type of insurance that lenders pass onto buyers to protect credit issuers if you are unable to repay your loan. If you need to borrow more than 80% of the value of the home you buy, thanks to a competitive auction day for example, you will be charged the LMI in the form of a fee. Unfortunately this is generally a sunk cost, paid at settlement like your stamp duty, however it can sometimes be paid as an extra amount within your regular repayments. It’s important to also remember that if you refinance your loan to increase the amount you borrow or switch lenders, you may be subject to paying LMI again, so be wary! Furthermore, if you do default on a loan and the property is no longer yours, it does not necessarily mean that your LMI is settled. So, to avoid paying LMI, save a deposit that is at least 20% of your home’s value, determine if you have access to additional finances such as first home owner grants, or use a guarantor that who will allow you to use them as security for your loan.