There are so many kinds of home loans now available that buying your new home or rental property comes with mixed blessings. There’s the excitement of making probably the biggest purchase you’ll make in your life, and the stress surrounding the choice of home loan with so many now available. But don’t let the number of loans offered by the many different lenders who offer differing loan lengths, interest rates, benefits and fees faze you. Even though it seems the simple 25-year home loan with regular repayments is a thing of the past, and what’s also rare is the ability to just pay off a home mortgage as fast as you can, there are ways to navigate the maze. There’s a lot of new technology that helps first-home buyers. For example, there’s a stamp duty calculator that can guide you in working out the amount of stamp duty you need to pay, and to help you work out a loan you can apply for there’s a borrowing power calculator.
The First Home Owners Grant
Every State in Australia has its own style of grant, with different rules and regulations and varying amounts from $5,000 in some, to $20,000 in other states. In NSW, first home buyers receive $10,000 if they’re buying a brand new home up to $650,000 or $750,000 if you are building. You must be an Australian citizen or a permanent resident who hasn’t (or your spouse hasn’t) previously owned a home in this country. You will usually need to live in the house for six consecutive months within the first year after you buy.
The Types of Home Loans
- Basic - These are basic, low-interest rate loans with few features, various fees and limits, though some lenders now offer a redraw facility. You often can’t pay extra on this loan.
- Standard - Standard home loans are more flexible and also offer a redraw facility and the chance to switch to a fixed rate or split the loan into variable and fixed portions.
- Packages - Home loan packages are usually cheaper than basic loans and can offer interest rate discounts of up to 1.2 percent depending on the size of your loan. Part of the package can be free transaction accounts or a credit card with no annual fee.
Apart from interest rates you also need to check regular loan fees and charges, and establishment fees which affect the cost of your mortgage. You also ought to negotiate rather than accepting what the bank offers. Lenders can waive fees and offer better rates or discounts.
Some of the common fees and charges:
- Loan application fees: You can expect upfront establishment and application fees, however, you can always ask the lender to waive or discount them.
- Lender's mortgage insurance: Without a 20 percent deposit you might have to pay this insurance which won’t cover you, just the lender, and can cost you thousands of dollars. It ensures the lender against you defaulting on your loan. It doesn’t absolve your debt; the insurer will chase you for the funds.
- Valuation/ lender's legal costs: Lenders may expect you to pay for a property valuation, even if your loan is not approved.
- Monthly or annual fees: There can be regular, high and ongoing monthly or annual fees that could affect how fast you can pay out your loan.
- Exit fees/break cost: With fixed rates, the exit fees are high, and if the variable rate is lower it’s more likely. You need to be aware that changing your mortgage or leaving the lender you might be required to pay the interest the bank 'lost' because you broke away rather than remaining for the life of your loan.
Fixed or Variable
The interest rates in Australia are very low right now and many borrowers want to fix their rates, but be aware that this comes with less flexibility. There are also some high expenses should you opt to move your loan or pay it out early. Some fixed loans allow extra payments, with limits, but some disallow it. The advice is to only borrow if you know you can afford a higher rate since you can’t tell if you would save by fixing for a few years, so split the loan. Fix half and leave the remaining half at a variable rate. You can then pay extra on the variable part and still have the security of the fixed part.
Due to the low interest rates, there is a strong demand for interest-only loans, but these can be dangerous if the banks don’t properly assess your ability to repay it. If interest rates rise again, and they will, your income will decrease and payments will rise.
Here are some ideas to help you from becoming trapped in a risky home loan and you should be aware of these before you begin to search for the home you want to buy.
- Ensure you are able to financially withstand a three percent interest rate rise.
- Open a bank account with a high-interest rate to save for your deposit and regularly pay into it what you expect the mortgage will be, plus extra to cover a three percent interest rate rise.
Once you get your home loan:
- Try to make extra repayments to get ahead if you can.
- Pay any lump sums you receive (tax refund etc.) straight onto the mortgage.
- If you have a guarantor, to release them asap, pay extra.
- Split the loan.
Banks probably won’t be offering many risky no-deposit loans since the Banking Royal Commission in Australia which uncovered some questionable practices and lenders lowering their standards. A healthy deposit is now vital. For a home costing $400,000 with a $20,000 deposit you can pay:
- First-home buyer: $12,500 others $14,000
The 40-year loan
This has to be the loan with the most risk attached. If you extend your mortgage to 40 years is financially ill-advised if you can’t afford it since the minimum monthly payments won’t be very much lower than a shorter loan time. These loans are a risk because over the term you will pay a lot more for your home.
What You End Up Paying For a $300,000 loan
You will pay an estimated extra:-
- $ 99,674 over 10 years
- $215,830 over 20 years
- $347,515 over 30 years
- $492,308 over 40 years
This is without knowing what interest rates will do in the 40-year lifespan of the loan.
Alex Morrison, has worked with a range of businesses giving him an in-depth understanding of many different industries including real estate, financial support and health care. As the owner of Integral Media Digital Agency he is now utilising his knowledge and experience with his rapidly increasing client portfolio to help them achieve their business goals.