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Choosing The Right Loan; What You Need To Know

Posted in Choosing the Right Loan on 17 May 2019

Loan contract, pen, paper.

 

A home loan is nothing to be taken lightly. It’s most likely the biggest financial commitment that you will ever make. A good mortgage should be manageable and shouldn’t land the debtor in financial strife.

 

However, many people fall into the trap of too much enthusiasm. Remember to take your time and do your search to find a loan that suits you.

 

If you’re looking at this guide, then good job!

 

This is the first step towards taking the necessary steps. It shows that you’re thinking about a home loan seriously.

Taking the time to research and read this blog is the first of many good decisions.

 

Just like any great story, the acquisition of a home loan works in stages.

 

Just as a narrative has a beginning, a middle, and the end – getting a good mortgage comes in four parts. The first is preparation, where you examine the parts of your loan that are affected by your financial situation. This first step also include getting ready to take on a mortgage.

 

Next comes research, where you look at who and what is out there. This allows you to draw conclusions from comparisons. Negotiation is where you take the information from the first two stages and then confront potential lenders face-to-face.

 

The final stage is acquisition, where you go about securing your loan.

 

Stage 1: Preparation

 Man writing on a loan application.

As stated above, preparation involves a self-examination of kinds. This stage can take anywhere from a few months to 1–2 years.

The aim of preparation is to make sure that you can handle the responsibility of regular repayments. Whilst also be prepared for life’s unpredictable eventualities.

 

The first thing you need to do is to create a budget. This is a simple enough process, look at your income on a fortnightly or monthly basis.

 

Then gather your bills, or look through your online banking or any bank statements you might have gotten, and chart your fortnightly/monthly expenses by:

 

Essentials:

  • Food
  • Bills
  • Rent
  • Fuel
  • Medical expenses

 

Non-Essentials:

  • Entertainment
  • Subscriptions (streaming services, games, etc.)
  • Takeaways/Dining out.

 

Once you have this information create a document that shows your expenditure against your income. This will reveal one of two outcomes.

 

Either you’ll be in deficit, meaning you need to sacrifice one or more of your spending habits to get yourself out of deficit, or you have surplus money, in which case, depending on how much surplus you have you should then put a certain percentage into a separate saving account with a high interest rate.

 

Once your budget is done you should have three vital points of information:

  1. How much you’re capable of saving and how quickly you can save it up.
  2. How much you need to spend and what you can afford to go without in an emergency.
  3. An updated record of your debts.

 

All of these are important factors in determining whether or not you can currently handle the financial responsibility that is a mortgage, and once you’ve done your budget, it’s a good idea to re-do it after stage 2, but we’ll go into that later.

 

For now, there’s still another step of stage 1, which is to get your credit score.

 

Your credit score can have a large impact on what lenders will do business with you, as well as the potential interest rate you can get, and how much you can borrow.

 

Your credit score is easy to get, and it doesn’t cost any money, but if your credit score is lower than you’d like it to be, it can be fixed in a matter of a few months by:

  1. Paying bills on time.
  2. Paying off debts/outstanding loans before the due date.
  3. Diversifying your credit.
  4. Avoiding taking out new credit.
  5. Avoid using your credit card where possible.
  6. Keeping accounts that have good repayment records.
  7. Checking your debt-to-credit ratio.

 

While doing this check your credit score every 2-3 months, when you’ve got it nice and high (“good” is 622-725, “very good” is 726-832, “excellent” is between 833-1200), then it’s a good idea to move on to stage 2.

 

Stage 2: Research

Man reading business newspaper.

Once you’ve done the appropriate preparation, then you can start looking at loans.

 

There are many different types of loans and picking the right one for you (as well as a lender that can operate within your means) is a huge task. Fortunately, there are multiple online tools that can assist with the process.

 

The first thing you want to do is to draw up a list of what you need from your home, and what you want. As with making a budget, buying a property is about attaining a special balance of what you can and can’t live without.

 

You need to take a long, hard look at your lifestyle, and decide what is essential, and what would be nice to have but you don’t need. Weigh up these decisions and then base your property around that.

 

Then look at areas that you’re interested in and collect a portfolio of various properties that meet your requirements in those areas. This will give you an idea of how much you can expect to spend in what areas.

 

The next thing to do is acquaint yourself with the types of loans that are available. Here is a quick list, but we encourage you to do some more in-depth searching, as these definitions are decidedly basic.

 

Variable Rate.

 

A loan where the repayment amount is determined by the fluctuation of the cash value in the global market on a month-by-month basis:

 

Fixed Rate.

 

Regular repayment at a fixed amount at a small percentage higher than the current interest rate.

 

Interest Only.

 

Make repayments only on the interest, generally for a period of 5-7 years, after which the principal is then charged.

 

Family Pledge.

 

Borrow 80% or more of the cost of the property and avoid paying Lender’s Mortgage Insurance at the cost of a family member putting up a portion of the equity on their home as security.

 

Low Doc/Alt Doc.

 

A loan is given to those who don’t have access to the standard documentation necessary for most other loans. Often comes with higher interest rates.

 

Line of Credit.

 

Borrow from the equity on your home loan to pay for other things. Can extend the overall loan term.

 

Non-Conforming.

 

A loan for people with poor credit, people who have undergone long periods of unemployment, or those who want to borrow 80% or more of a property’s value.

 

As stated above, please do your own research on these loan types. What is written here can’t even begin to explain the full length and breadth of each loan type.

 

Once you have done this research, it’s time to check out comparison websites, and see which banks or brokers offer which kinds of loans, and what their specialties are if any.

 

With these comparison websites, you’re checking for interest rates, customer testimonials, what features, and benefits are offered by what lenders, what types of loans certain lenders offer, and any information at all about the lenders.

 

It’s a good idea to call some places and make some basic inquiries.

 

This isn’t with a goal to actually take out a loan, but just to see how the company treat potential clients. You’re looking for patience, a willingness to explain, and transparency. Anyone who treats you with anything less should be avoided.

 

Even go to some offices and collect some brochures. Keep them on file and see what they say, look at their claims against their client testimonials, try and determine the truth behind each company and narrow down a list of potential lenders.

 

Some things to look out for include:

  • How long have they been in business?
  • How upfront are they about their service fees?
  • What do their customer testimonies say?
  • Do they push you to only one option which seems expensive?
  • How often they report back on the status of your application?
  • Do they make a trustworthy impression?

 

Before moving onto the next step, this is where it becomes handy to re-do your budget. By looking at the lenders and the potential deals you can get, as well as an amount for the loan you’re looking at getting, you can draw up your budget with an estimate on how much you’ll be repaying fortnightly/monthly.

 

This allows you to essentially predict the financial future, see what’s manageable, what isn’t, and set a concrete goal in relation to your home loan.

 

Once you’ve done this, you can move onto stage 3.

 

Stage 3: Negotiate

Business people negotiating

You’ve done some hard work up until this point, and for that, you deserve to be congratulated. It’s time to take a rest and get your bearings because now it’s time to do the really hard work.

 

All the preparation you’ve done up to this point has armed you with the information you need to have some hard conversations with some hard people.

 

Meeting the people, you’ve been scoping out for the past few months can be an interesting, and challenging experience.

 

But there is something you can take advantage of. Lenders are in constant competition with one another. They want your business and many of them are willing to be lenient or offer a deal if it’s evident that you know that.

 

From the outset, you want to make two things clear. First, you’ve been preparing for this and that you know what you want. Don’t be afraid to drop terms, and outline in clear, concise language, utilising the jargon you’ve picked up, exactly what you want.

 

Ask for the best possible deal and see what you’re offered, then make a record of it.

 

Second, make it clear that you’ve been shopping around. This is something you want to make known as soon as possible. As it’s likely to get you the best deal possible.

 

Regarding that, a handy hint is to save your favourite potential lender until last. Why? Because if you’ve gone down the list of your not-so-favourite choices, and one of them offers you a better deal, you can take that deal to your favourite and see if they can offer you something that can beat it!

 

At the very least they might be able to match it, giving you the benefits you liked so much, with a hugely discounted interest rate.

 

It’s also worth seeing if your place of employment has had any dealings with any of the lenders you’re looking at, as arrangements can often be made between companies getting you a discount on your loan.

 

If you’re not confident in doing any of this, then take the information you’ve gathered thus far to a mortgage broker. Have them look over what you’ve done, and they should be able to find a home loan structured to suit your needs, and with the best possible deal.

 

Stage 4: Loan Acquisition

Mortgage application form.

Once you’ve worked through stages 1-3, the only thing left to do is to lodge the application for your loan!

 

You can either do this through your broker or directly with your lender, but either way, this is what you’ve worked so hard towards. Check your credit score one more time, and then if it’s good – lodge the application.

 

After that, it’s simply a matter of buying your home and sticking to your budget as close as possible.

 

Following this guide should give you three major assurances.

 

First, it should ensure that you know and understand exactly what is happening, and what is going to happen.

 

Second, it should prepare you for entering the responsibility of a mortgage.

 

Last, it should ensure that you have at least some savings, or a saving routine set up so that you’ve got money set aside for any unforeseen eventualities.

 

Home Loans for Business Owners

 

If you’re interested in pursuing a home loan, or if you’d like more information about taking out a loan, Guardian National Mortgage can help! A home loan is as easy as calling us on 1300 LOAN STAR or by sending us an email at . Contact us today and we’ll make sure we get back to you in 24 hours at any time during the week.

 

Disclaimer

The article on this website was correct at the time of writing but lender policies are subject to frequent change. This information is for general purposes only. Whilst we strive to keep our information up to date and correct. We take no responsibility for any loss or inconvenience caused from a person(s) or organisation(s) relying on this information. We recommend you contact us before acting upon any of this material.

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