This guest blog is written by Andrianes Pinantoan.
Whether to buy a home or not, it will be one of the biggest decisions you have to make in your life. It is certainly the biggest buying decision you have to make in life. Despite this, however, many first time home buyers don’t know enough about mortgages to make a sound decision.
If you’re a first home buyer who wants to avoid the fate of receiving unpleasant surprises from your financial institution, then these 10 tips are crucial. Let’s start with the basics.
1. How Much Can You Afford?
The first thing you need to know is how much can you afford? It sounds obvious but it’s really not. Most people buy their first property during good times. The economy is soaring, you have a good job – perhaps you were just promoted – and interest rates are low.
Psychological studies have shown that during good times, people tend to be optimistic for the future. They assume that things will always go that way till the end of times. But we all know that’s not true!
When considering how much can you afford for your mortgage, assume that your income will go down and interest rates will go up. Can you still afford it then?
2. Don’t Get Too Excited When You’re “Pre-Approved”
Pre-approval is largely a marketing term to get you to apply for the home loan. That does not you’ll be approved for the amount you applied for – or even approved to get a loan at all.
Plus, the banks will also be sending a valuer to make sure the property you’re buying is not overvalued (if you can’t repay the loan, that property will be theirs) and you can be sure that won’t happen in 60 minutes.
3. Your Credit Score Affects Your Interest Rate
If pre-approval doesn’t affect your eligibility, then what does? Well, your credit score is the first thing lenders look at after they put down your application form. It’s unfortunate, but the lower your credit score is, the lesser options will open to you and the higher your interest rate will be.
You’d think that people with lower credit score would need help, and therefore should get a helping hand in the form of lower interest rate. Our economy isn’t built on helping people out, however. The more you can afford it, the more you’re rewarded because you’re less likely to default on your loan.
4. Fixed or Variable?
Once you know the basics of what will influence your home loan application, it’s time to consider whether to get a fixed or a variable home loan. A fixed home loan means the interest rates you’ll be charged is fixed for a certain period of time – giving you security but you often have to pay more in interest. The interest on variable home loans fluctuates as the economy goes up and down.
Some people argue for one or another but no one can recommend one over another without seeing your personal circumstances. It’s a complex issue and you should consult a financial planner to determine your best option.
And it’s not just interest rates you need to worry about. Some common fees include an annual fee, legal gee, valuation fee, application fee, settlement fee, title discharge fee (when you paid out the loan) and early exit fee (if you want to repay your loan ahead of schedule).
This is why it’s important to compare not just the variable or fixed rate of the home loan, but also the comparison rate. The comparison rate takes into account all the compulsory fees (like an annual fee) associated with a loan so you can compare the true cost of a home loan.
6. Yes, You Can Haggle
Most first timers don’t know this but yes, you can haggle. Like in any negotiation scenario, you need to know what your leverage is and what are the lenders concerns?
For example, the higher your credit score, the better the result of your haggling tend to be. When the economy is bad and no one is borrowing, and the sales manager need to meet a quota, the better your chances are to land a great deal.
7. You Can Insure It
You may not know this but you can insure your mortgage. No, not the house, but the mortgage. You insure it for the benefit of both you and your lender.
Many people want to enter the property market but couldn’t afford to because they don’t have the lump sum deposit required. With mortgage insurance, lenders will be willing to consider a low deposit application because they will be protected if you default on the loan.
Note, however, that you will charged with a premium for the insurance.
8. The LVR
So do you or do you not need a mortgage insurance? That depends on the LVR. LVR is the loan to value ratio, calculated by dividing the amount you want to borrow against the value of the property.
The lower the LVR is, the better your chance is at landing that loan. The higher the LVR is, the likelier it is that you need insurance. Higher LVR is also usually charged more in interest because that loan is a higher risk for the lender.
9. Family Guarantee
If an insurance fails to get you a loan, perhaps a family guarantee would. This is when a family member puts down his/her asset to guarantee you will not default on your loan – and if you do, the bank has the right to seize that asset.
A family guarantee can be used to avoid mortgage insurance, it can be used to maximize the amount you can borrow and/or open you to more home loan options.
The catch is it’s always difficult to get a family member to guarantee your loan. We’ve all been there, right?
And the last thing you want to consider is the flexibility of the home loan. Can you increase your repayment sum if you so like? Would you be charged with a fee if you do that? Can you pay your mortgage weekly instead of monthly (which will reduce interest rates since loans are usually calculated daily)? Can you put down a lump sum as a repayment (say you inherit a sizable wealth, hit a jackpot or received nice tax returns)?
And is your mortgage flexible? Meaning, can you sell the property and buy a new, and transfer your the mortgage to the new property?
Many mortgages appear cheap at first glance but they limit your options – and you’ll pay more in interest than you have to in the long run.