Understanding the process of buying a house can be tricky, especially if you have never bought property before. Home loans, in particular, can be difficult, as there are so many options. We have put together this quick guide to home loans for dummies to help guide you through the important details you need to consider.
There are five key areas of financing a home purchase. You need to have an understanding of each of these areas if you want to know what to look for in a mortgage:
Firstly, you need to check that you have saved enough for a deposit. Most lenders will only be prepared to lend you 80% of the property’s value, so you will have to pay the remaining 20% as a deposit upfront.
Some lenders will be prepared to lend home buyers 95% of the property’s value rather than the standard 80%, as long as you are willing to take out mortgage insurance to protect them in case you default on your payments.
Mortgage insurance is not compulsory on the vast majority of home loans if you have a deposit of 20% or more. However, if you are looking for a home loan but you want to pay less than 20% deposit upfront, mortgage insurance then becomes compulsory to protect the lender, as you are considered a bigger risk.
What kind of loan – principal or interest-only?
There are two main types of home loan you could apply for – principal and interest, or interest-only.
Principal and interest means that every month you are paying off part of the actual cost of the property, as well as the interest on your loan. This can help you to lower the cost of the interest, as you are reducing the principal balance with every payment you make.
An interest-only home loan means you are only paying off the interest on your loan, rather than the principal cost of the property, each month for a limited period. It reduces the cost of your repayments in the short-term, but your repayments are likely to be higher when the interest-only period ends.
Interest rates and serviceability
Buying a property isn’t just about spending as much as the bank will agree to lend you. It is also about working out the costs of the other things you need. How much can you afford in repayments each month while still enjoying a decent quality of life? What if you decide to have children and take some time out of work? Will you still be able to afford the repayments alongside everything else you need?
You also need to remember that interest rates can change and that your repayments can go up when an interest-only period comes to an end.
Home loan features
There are a number of home loan features you should be looking for to make sure you are getting the best possible deal. These include:
The ability to make extra repayments to reduce the interest and pay off your home loan more quickly.
A redraw facility so you can use the amount of any extra repayments you have made for home improvements if necessary.
Repayment holidays – some lenders will enable you to take a short break from repayments should you ever need it, as long as you are reliable. Do remember, however, that this will lengthen your home loan and possibly cause you to pay more interest.
It is essential that you choose the best product for your financial circumstances. Using a home loan calculator can help you compare different home loans to find the most appropriate mortgage for you.
Alternatively, a reputable buyer’s agent can put you in touch with a reputable mortgage broker making it much easier for you to secure the best product at the best price. If you would like more advice and support around getting a home loan, please contact us, and we will always be happy to help.