July 30, 2016
The question at the top of every home buyer’s mind is the interest rate of a loan. But when applying for a mortgage, there is a lot more information you need to find out to ensure you get a good deal. If you are like most people, your mortgage will be your biggest expense, so it pays to do your homework.
The most overwhelming part of the process for many buyers is that mortgages aren’t a one-size-fits-all product. Whether you are purchasing a home for the first time, upgrading or thinking about refinancing, the answers to these questions will demystify the process and give you a clearer picture of which loan is right for you.
1. What is the true cost of the loan?
While interest rates are important, it’s the true cost of a loan that gives you the best indication of value. That’s because the true cost will account for all upfront and ongoing fees of a loan. Each loan will have different establishment and ongoing fees, so it’s worth knowing which of your options is the best value in this regard.
2. Do I need to pay lenders mortgage insurance and how much will it cost?
If you need to borrow more than 80% of a property’s purchase price, it’s likely you will be required to pay lenders mortgage insurance (LMI). A lot of first-time borrowers get confused by LMI and think it’s a form of personal insurance, but it’s actually there to protect the lender in the event that you default on your loan. The cost of LMI is based on the lender, the size of your deposit and the loan amount.
3. How long will the application take?
There are times when banks and lenders get busy, which can delay pre-approval of a loan application, and then there are times when lenders process a loan in just hours (although this is a rarity). For this reason, it’s important to check your timeframe, as this will affect when you can start making offers on properties. As a general rule, you should allow two weeks for your application to be processed.
4. Can I make extra repayments?
If you want to pay your loan down quickly, a variable rate may be your best option. This is because most fixed-rate loans can have limitations on extra repayments. Variable loans also have the option of an offset account, which allows you to use additional funds to offset the interest accruing on your loan. Over the term of a mortgage, this can save you a considerable amount on interest payments, however an offset account is really only worthwhile if you have a reasonable balance of around $5,000.
5. What features does the loan have?
In addition to offset accounts, many variable loans also offer the ability to redraw extra repayments. This feature is similar to an offset account, as your extra repayments offset the interest accruing on your loan. The difference is that offset accounts can be used as transactional accounts, whereas the redraw feature is intended to give you access to larger sums of money when you need them. This is a good option for holding money for things such as private school fees or renovations, but you should check the fees associated with redrawing funds.
Determining which loan is best for you
If you aren’t planning to access extra features and you simply want to make the minimum repayments stipulated by your lender, you may be best off choosing a fixed-rate home loan, as this will allow you to budget without fear of an interest rate increase.
The more questions you ask, the better informed you’ll be about the loan that’s right for you. Think about your mortgage in a holistic sense, accounting for your future plans as well as any existing debts you may have, as there may be ways to use your mortgage to streamline these things. And if you are still confused, I’m only a phone call away.
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Your Garden City Mortgage Broker, Brisbane
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