In a time when property prices seem to be skyrocketing, Aussies may feel like the debt they’re potentially taking on from a mortgage is climbing higher and higher. This can put significant financial pressure on young Australians to service a home loan, particularly in capital cities.
The latest CoreLogic figures show that the median value of a dwelling in Sydney has ballooned to just short of $1 million ($950,457) in April. The median dwelling price in Melbourne has also grown to $744,679 in April, recording a return year-on-year of 5.3 per cent.
While most first home buyers won’t be applying for properties of this value, it’s evident that the market is heating up and has all but recovered from its COVID-19 dip. Meaning, when it comes time to pay back your mortgage, borrowers will want to ensure they’re doing everything they can to keep costs low.
So, how can you keep your home loan costs low?
Save a deposit of 20 per cent or more
One of the best ways borrowers can get started on the right foot with their mortgage is to save up a deposit of 20 per cent, or more if possible. This is advantageous for a number of reasons, not just including the fact you’ll be repaying a smaller mortgage size.
Home loan lenders typically favour borrowers with larger deposits for their applications. A larger deposit showcases a level of financial responsibility and diligence in savings. Lenders will generally offer their more competitive interest rates to borrowers with larger deposits because of this. Further, the borrower avoids paying Lender’s Mortgage Insurance (LMI), which can climb into the tens of thousands of dollars range, depending on the value of your property.
Strengthen your application
Another way to keep your home loan costs low is to try and bolster your application as much as possible before applying. By doing so you’ll not only potentially boost your chances of approval, but the lender may be encouraged to offer you a lower interest rate.
There are a few ways you may be able to do this, based on the lender’s eligibility criteria, including:
- Have an excellent credit history – Lender’s are more likely to approve borrowers with excellent credit history and a high credit score as this demonstrates their strong creditworthiness and likelihood of repaying the loan.
- Be an Australian resident – While you can get a home loan on a temporary visa, it is arguably more challenging and costly, thanks to foreign citizen stamp duty charges (excluding 444 visa holders)
- Full-time employment for 12 months – The type of employment and length of employment history can also impact your mortgage application and the rate you are offered. Lender’s may look more favourably on borrowers who are employed full time for at least 12 months, as it demonstrates stability in your finances.
Use government assistance
If you’re a first home buyer in particular, it’s worth learning what government schemes, grants, as well as stamp duty concessions or exemptions you may be eligible for to keep the cost of your home loan down.
For example, the latest Federal Budget for 2021-2022 added another 10,000 places to the New Home Guarantee (previously called the First Home Loan Deposit Scheme) for first home buyers to buy or build a new home with a deposit of only 5 per cent. The government then acts as the guarantor on the remaining deposit to bring it to 20 per cent, so that the borrower increases their chances of approval and avoids paying LMI.
Further, check your state or territory’s Revenue department website to see if they offer stamp duty exemptions or concessions for first home buyers. These typically vary per state and territory and carry differing caps on property prices. Stamp duty can also climb into the tens of thousands of dollars range, but unlike LMI, it must be paid upfront. This can significantly hurt first home buyer savings, which are better spent on their deposit.
Ditch the big four banks
If you’ve been banking with the same big four bank since you were a kid, now is the time to consider other options. Smaller, competitor lenders, such as Reduce Home Loans have historically offered some of the most competitive interest rates on the market.
While the actual rate you may be offered will depend on your personal financial situation, it’s worth keeping in mind that there are other lenders out there and they may be able to offer you a better rate, if you’re willing to shop around.
Further, once you’ve been approved for a mortgage, factors such as Reserve Bank of Australia cash rate cuts become an influence on your finances. Take stock now of the banks that did pass on cuts to their variable rate customers, and those who didn’t. Many big four banks did not do so, or only cut fixed rates for new customers.
Use an offset account
Another way you may be able to keep home loan costs low once you’ve been approved is to opt for a loan that offers an offset account. This helpful feature allows borrowers who deposit savings into the offset account to reduce their ongoing mortgage repayments by ‘offsetting’ the total value of their mortgage through these funds. Meaning, if you put $50,000 into an offset account for a $500,000 mortgage, your mortgage repayments are based off of a loan of $450,000, as the savings ‘offset’ the mortgage.