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Posted in Choosing the Right Loan on 18 Jun 2018
Getting a home loan is an exciting time, especially for first time-borrowers. Owning their own home is often the pinnacle of success for people, and a home loan is often a big part of that process.
It is hard to get the money together for a home entirely on one’s own, and with the housing market being what it is, more and more people are deciding to take out a mortgage.
Yet it soon becomes clear that making the decision to take out a loan is far easier than the process to actually take out a loan.
Getting into the home loan market is daunting, and before we continue to the actual list that is the crux of this article – it would be a goog idea to familiarise ourselves with exactly what kind of home loans are out there.
After all, a home is no mere trinket. There is possibly no more important purchase that you will ever make in your life. However, as life develops, so too does what you need from your home. With the near-inevitability of changing homes in the future, it is important that you know when you take out a home loan, that you understand what you’re getting into.
These loans are so named because they rely on the constantly fluctuating cash rates, which in turn affects interest rates. The obvious effect of this is that one month the repayments may be tiny, the next month they could be huge.
While it sounds like a gamble, this option is very popular among home buyers. They are attractive because the fluctuation apparent in the home loan rates means that there are extra repayment facilities, redraw facilities, and an offset account.
These options allow buyers to pay off their loan and lower their interest rate quicker, meaning they can enjoy the freedom of their home sooner. However, this is not an option for first-time buyers, or buyers with a low budget, as the fluctuating repayment method could prove too much for them to handle.
This loan is popular among people with regular incomes. The Fixed Rate Loan locks an interest rate for a period of 1-5 years, normally at above the current rate variable.
This is a popular option among buyers on a budget. The fixed rate means that there is little to no trouble thinking about whether the loan can afford to be paid. However, the rate is typically higher than the norm, and it doesn’t offer the repayment facilities of a variable rate loan, with switching loan types often incurring an additional cost.
Property investors looking for negative gearing enjoy interest only loans, because it allows them to pay for the interest only, minus principal for a period of about seven years.
Young home owners and people on a tight budget that are eager to own their own home are also well suited to interest only loans, as they can pay the interest off while they build some savings.
It should be noted, however, that after the typical 7-year arrangement, the borrower will have to start paying the usual principal and interest payments.
This is for people that want to borrow more than 80% of the purchase price for the property, but don’t want to pay the LMI (Lender’s Mortgage Insurance) fees. However, it is more complicated, and the personal risks scare away some buyers.
A Guarantor loan involves appealing to family or friends and using a portion of their home as a security blanket for your own mortgage.
While this will enable you faster entry into the market, it is of paramount importance that your guarantor be properly consulted before entering this kind of loan – because ultimately it is their house that the banks will come for should things fall through.
Short for “Low Documentation” loans, this is the go-to option for most freelancers, business owners, or self-employed people who don’t have the regular papers that would be expected when applying for a home loan. Generally, income declarations and other financial statements such as bank statements or BAS (Business Activity Statements) are enough to secure a loan.
However low doc home loans generally carry higher interest rates and fees when compared with other loan types.
Also known “Home Equity Loans”, a Line of Credit Loan allows borrowers to take advantage of their mortgage to pay for other things. While an attractive option, it is important to be aware of your spending habits. Impulsive borrowers often find that they extend the length of their loan term, having borrowed more than they can reasonably afford and pay back.
The amount that can be borrowed in this loan depends on the amount of equity that the borrower has on their property and can either be used as a lump sum or drawn from bit by bit.
People with bad credit history, who have been unemployed for a long period of time, and who want to borrow more than 80% of a home’s value typically seek out Non-Conforming Loans.
They are like low-doc loans in that neither use the standard loan application materials. Despite this, low-doc loans are more applicable to people with a good credit history, and who aren’t looked to borrow more than 80% of the home’s value.
While it is a good option for people who may find it difficult to get into the housing market, it is important to note that these loans typically have much higher interest rates.
With the different kinds of loans available, it can seem difficult to work out what the right one is for you. And going through the processes to take out the loan can be daunting, especially for first time borrowers.
The most important thing to do when seeking a home loan is to take your time. Before you can actually submit an application, it’s important to do your homework first so that number the number one person in this scenario (you!) is protected.
A large part of what determines how much you can borrow, as well as the amount you repay and your interest rates, is your credit.
Obtaining an up to date Credit Score is vital to acquiring a home loan. People with a higher credit score will receive a lower interest rate, while those with low credit scores will invariably be charged more on their interest.
It is incredibly easy to obtain a credit record, and it doesn’t cost anything, so this should be the very first thing you do when seeking a home loan. If there is too much activity or defaults on the record, it can set off all kinds of alarms with potential lenders.
If, after you get your credit score, you realise that it is deplorably high, don’t panic. A credit score can be fixed in an incredibly short amount of time. The methods to fix your credit score are relatively simple:
• Pay bills on time
• Don’t apply for new credit
• Pay outstanding loans and debt, if possible before their due dates
• Keep credit card balances low
• Check your debt-to-credit ratio, and finally
• Diversify your credit if possible by spreading your money across different asset classes
Once you have an up-to-date credit score, it’s then time to move onto the second stage of getting a home loan.
Too many people have been burned by simply not taking enough time to explore their options, compare them, and then make a decision.
It is easy to fall into the trap of thinking “lower is better”, and a lot of less-ethically-geared banks will take advantage of this. They will decorate their website with fancy terms and percentage symbols and make themselves out to be the cheapest (and therefore best) option.
Sadly, we don’t live in a perfect world where everything on the internet is true. A critical step in obtaining the right home loan for you is to shop around and make sure you understand what you’re getting.
Not only does shopping around make sure that you have more avenues for research and therefore understanding, but it means that you find the most competitive rates, you find out which lenders have what LMI (Lender Mortgage Insurance) rates, and what features and benefits you want.
While it is important, interest rates are far from the most important thing to be focussing on while searching for a home loan. Most honeymoon interest rates go up after a year or so, meaning you may have taken out a loan thinking your interest rate was low, then a year goes by and suddenly you’re paying double.
The reality is that with most home loan interest rates are on the low end of the spectrum of importance, and your focus should be on what features and benefits you want, and what you’re willing to pay for.
Do your research as to what is available and make a list of features and benefits that you want and are willing to pay a little extra to get, as well as features and benefits that you would like to have, but don’t want to pay for.
Another key item to compare between potential loaners is their LMI rates. LMI stands for Lender Mortgage Insurance, and is a one-off, upfront payment designed to protect the lender in the event that you might fail to make your home loan repayments.
Different loaners charge different LMI rates, and it is a common occurrence that an interest-rate obsessed buyer has incurred a monumental LMI fee, with no features or benefits, all because they saw a low interest rate. The costs incurred from such a mistake far outweigh the savings gained from the lower interest.
When comparing loaners, it is drastically important to know what it is that you’re getting yourself into. Weigh up the options and make a practical, informed decision.
As we’ve already seen, no matter which home loan you take out, or the loaner you get the home loan from, everything you’ve worked so hard to build up can all be snatched away by a minor missed detail.
It is important to begin with a realistic budget. Know what your income is, any outstanding or ongoing expenses, any savings you might be able to hang onto, and then plan your home loan around that.
As well as the costs we’ve already discussed (interest, LMI, features, and benefits), there are also numerous other costs associated with the task of obtaining a home loan. Just a few are:
• An upfront fee of 7% of the property price
• An accountant
• A broker
• Legal representation
And then there is the home loan itself, which included with the other previously mentioned costs comes Stamp Duty (tax).
Once you have budgeted, found a loaner, and considered the costs, then you can go about submitting your loan request.
Your credit file is a catalogue of all your major financial decisions, including any assets you might own. But in this situation, the most important bit of information is the amount of applications you file for a home loan.
A little-known fact is that all applications are recorded on your credit file, but it doesn’t show whether or not said applications were approved.
Lenders who see a lot of applications on a credit record tend to get nervous about the amount of loan applications present. They don’t know whether you’ve been accepted or rejected by the people you applied for.
This is where a broker can help. Where a layman might submit multiple requests to sources they consider “good”, a broker will be able to look at specifics, find who objectively has the best deal for you, and then send through the relevant applications.
Pre-approval is an important thing to get once you have completed the monumental task of submitting a home loan application.
Pre-approval is a preliminary evaluation of a potential borrower (you) by a lender to determine whether they can be given a pre-qualification offer.
Pre-qualification means that the lender has given the borrower a dollar value as to how much the borrower could potentially get in their loan. Once this offer has been given, a loan can be fully pre-approved, meaning that the loan has been formally applied for, tax returns and pay stubs have been submitted, credit is verified, and a written contract with the lender has been drawn up for an agreed upon amount.
Sellers generally find buyers with pre-approved loans more attractive to sell to, as pre-approval means that your application for a loan has been accepted and that you are going to be able to pay the asking amount.
Now that you have been educated on the finer points of applying for a home loan, it can all feel very daunting. There’s no need to fret though. Guardian National Mortgage is able to help you research and make these decisions. Simply call us on 1300 LOAN STAR or email us at