Bessie Hassan | Money Expert at finder.com.au
Regardless of whether you’re a first home buyer or a seasoned property guru, purchasing real estate and applying for a mortgage can be a lengthy and expensive process. While you don’t always have the benefit or wisdom of hindsight, there are certain things you should keep in mind before you apply for finance and sign on the dotted line.
Decide if you’re really ready.
For many of us, buying property with your partner can seem like a natural step or progression, take the time to reflect on your readiness to buy a home both emotionally and financially. Things such as your job security, the number of dependents you have, and the length of time that you intend to stay in the property, are all factors which should be well thought-out before buying property.
When deciding if you’re purchase-ready, think about the stability and security of your current job. When you apply for a home loan, most banks prefer that you’ve been in your current job for at least 12 months (and they also prefer that it’s a full-time work arrangement), as this shows that you have a reliable income source and the means to repay your debt.
Another factor to consider is whether you have any dependents and/or if you’re thinking of settling down and having kids, as this will influence your borrowing capacity. Most banks recognise the high costs associated with having kids so they may ask you to factor in the cost of childcare or education fees when you disclose your expenses during the application.
It’s worth noting that Family Tax Benefits are often only considered as a secondary income source so if you’re receiving this type of government benefit, you won’t be able to rely on it as your sole income source.
Your lifestyle plans and the time you intend to stay in the property will also help you work out whether you’re ready to buy. Due to the extensive costs of buying property and servicing a mortgage, you should stay within your property for at least 5-10 years as this will be enough time to build up some equity and to allow your property value to rise.
Get your head around the upfront, ongoing and hidden costs.
Saving a deposit is just the beginning; there are many associated costs with applying for a home loan and purchasing a property. Stamp duty is a big upfront costs you’ll need to factor into your budget but there are plenty of online resources you can use to get a ballpark figure.
Depending on your loan-to-value (LVR) ratio, you may need to pay for lender’s mortgage insurance (LMI) which is another sharp expense to account for. However, you can get around this by coming up with at least a 20% deposit.
Along with these, you need to think about establishment fees, inspection costs, your ongoing repayments, taxes, and any costs related to maintaining the property such as for a renovation project, landscaping or replacing plumbing or electrics.
Structure your mortgage the right way.
If you play your cards right, you can get strategic when it comes to selecting your home loan and structuring it in a way that will minimise your interest payable.
Making fortnightly or weekly repayments (instead of monthly) is one of the smartest ways to fast-track your repayments and reduce your loan term. For example, if you had a $375,000 loan with 5.5% interest, your monthly repayments would be $2,129 and total loan cost would be $766,515. However, if you switched to fortnightly repayments, you would save an impressive $77,819 in interest and you would lower your loan term by 5 years.
Another useful tactic is to opt for a mortgage that comes with a 100% linked offset account and a redraw facility. An offset account effectively ‘offsets’ or reduces the interest payable on your mortgage by the amount sitting in the account. For instance, a 100% offset account with $50,000 in it, on a mortgage of $300,000, would mean interest is calculated on $250,000 instead of $300,000. This could also save you thousands of dollars over the life of your loan.
Round up your repayments.
When you’ve got some spare cash up your sleeve, it may not always occur to you to throw it towards your mortgage, but this is an easy way to pay down your debt faster. Whether you’ve taken on a second job or you’ve managed to get a discount on your utility bill, put the extra funds towards your mortgage repayments. It will be most effective if you can continue to make regular overpayments on your mortgage, but even if you do this a few times each year, it will make a big difference.
Don’t pay the lazy tax.
People don’t realise how competitive the home loan market it is and how easy it can be to score a discount. Don’t fall into the trap of applying for a home loan and then staying loyal to your provider for the sake of being loyal. Staying loyal to your bank could be costing you money so regularly review your needs and decide whether the loan is still meeting your needs. Are you getting the best possible rate? Does the loan have the features and terms you need? If not, it may be time to move on.
“Bessie Hassan is the Money Expert at finder.com.au — Australia’s most visited comparison website — and is a respected media commentator and author who is passionate about helping Australians make better financial decisions.”