article 17 June 2024
Navigating mortgage options
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Purchasing a home is a monumental step, and for most people, it involves securing a mortgage. Understanding the various mortgage options available on the market and preparing your finances ahead of time can make the home-buying process much smoother and far more manageable.
Different mortgage options:
- Fixed-rate mortgages offer a stable interest rate for a specified period, typically ranging from one to five years. This type of mortgage provides predictability, as your repayments remain consistent regardless of market fluctuations during the fixed term. It’s an excellent choice for those who prefer financial certainty and want to avoid potential interest rate hikes. However, banks typically charge you a slightly higher interest rate.
- Variable-rate mortgages have interest rates that fluctuate based on the Reserve Bank of Australia's cash rate and other market factors. While this means your repayments can vary, these mortgages often offer more flexibility, such as the ability to make extra repayments without penalties. This option is suitable for those who can tolerate some uncertainty in exchange for potential long-term interest bill reductions.
- Interest-only mortgages require you to pay only the interest on the amount borrowed for a set period, usually up to five years. After this period, the loan typically reverts to a principal and interest repayment structure. This type of mortgage can be particularly beneficial for investors looking to minimise initial outgoings or for those expecting an increase in income in the near future, or for someone who knows they are in for a windfall.
- An offset account is a transaction account that is linked to your mortgage. The balance in this account offsets the amount you owe on your mortgage, reducing the interest payable. For example, if you have a $300,000 mortgage and $20,000 in your offset account, you’ll only pay interest on $280,000. This can be a powerful tool for reducing overall interest payments and paying off your mortgage faster.
- A split mortgage allows you to divide your loan into fixed and variable portions. This can provide a balance of predictability and flexibility, allowing you to take advantage of the benefits of both fixed and variable rates. It’s an attractive option for those who want to hedge their bets against potential interest rate changes, but if you exit a fixed rate arrangement there is likely to be an exit fee charged by your lender.
Preparing for a mortgage
There are some practical measures you can take to best prepare yourself for a mortgage application process:
- Before applying for a mortgage, take a thorough look at your financial situation. Calculate your income, expenses, and existing debts to understand what you can realistically afford. Use mortgage calculators to estimate your repayments based on different loan amounts and interest rates or speak to a mortgage broker.
- A higher credit score can help you secure a better interest rate on your mortgage. Pay off outstanding debts, reduce your credit card balances and avoid applying for new credit in the months leading up to your mortgage application.
- If you have several credit cards, pay off and cancel all but one of them before you apply for a bank loan.
- Aim to save at least 20% of the property’s value for a down payment. A larger down payment can not only reduce your loan amount but also potentially save you from paying Mortgage Lenders Insurance.
- Cutting back on non-essential expenses can help you save more for your deposit on a home and demonstrate to lenders that you are capable of managing your finances responsibly. Review your monthly subscriptions, dining out habits and other discretionary spending.
- Mortgage pre-approval gives you an indication of how much you can borrow and shows sellers that you are a serious buyer. It can also streamline the buying process once you find the right property.
- Buying a home involves more than just the purchase price. Be prepared for additional costs such as stamp duty, legal fees, inspection fees and moving expenses. Factor these into your budget to avoid any surprises. If you are a first-time buyer of a new house or a block of land, stamp duty is not applicable as of 6 June 2024 in South Australia.
For more tips and guidance on buying a home, stay connected with the Association of Building Consultants and discover more great insights visit www.buildinginspectors.org.au
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