Choosing the right loan and considering the costs

What is 'pre-approval' and why do you need it?

You don't need to find your new home before you can apply for a loan.

It's actually better to get your loan sorted beforehand.

You'll know exactly how much you can afford to pay for a property.

Once you find the right property, you'll be able to focus on the purchase—rather than having to sort out the finance at the same time.

You'll have a better idea of what properties to look for, because you won't waste time looking for something outside your price range.

With a pre-approved loan, there are fewer chances of hiccups with the sale process.

Sometimes, sellers will accept an offer below list price, because they have peace of mind that the property really is sold. The seller can take the property off the market with confidence knowing the buyer is serious.

If you decide to make an offer you'll be in a position to move quickly if your finances are sorted – this will help you avoid being gazumped.

Getting your loan pre-approved can make sense from both a peace of mind and time management point of view but speak to your broker or lender to work out the best option for you.

What are the costs to consider?

Before you apply for a home loan, you need to figure out how much you can afford to pay each month.

Don't forget the extra costs

The 'real' amount you can afford in repayments is affected by your lifestyle and other commitments, such as other loans you may have. It will also be affected by the ongoing costs involved in owning your own home, such as:

• Land and water rates
• Electricity and gas
• Strata charges
• General maintenance

To get an accurate grip on these figures, you'll need to do a budget. This will show what your expenses (outgoings) currently are, and how much you have 'left over' from your income.

You can also get an idea of how much a typical lender would be prepared to lend to you by using our Borrowing Power Calculator.

Then use the Loan Repayments Calculator to work out what the monthly repayments would be on various figures.

You'll then have a pretty good idea of the costs involved in taking out a home loan, and how much you can afford without overstretching yourself.

Other costs to factor in

When you're buying a property, there are also costs associated with the purchasing process. You'll need to budget for:

• Stamp duty
• Pest and Building reports
• A strata search (usually if you're buying an apartment)
• Conveyancing costs (the legal fees)
• Loan application fee
• Insurance, which could include Lender's Mortgage Insurance and your own Mortgage Protection Insurance as well as property insurance

To get an accurate understanding of these costs, it's a good idea to meet with a broker or your lender early on. You'll then know what to expect, and can budget accordingly.

The two types of stamp duty you'll pay

Stamp duty is a tax that you need to budget for when buying your first home. There are two types you need to be aware of:

• Duty paid on the transfer of the property to you.
• Duty paid on the mortgage you take out to pay for the property.

Stamp duty is charged by the state and territory governments, and the amount will depend on where you buy the property. It will also vary according to the purchase price of the property.

The good news is that first home buyers qualify for some stamp duty concessions. For more information take a look at the website of the revenue office in your state or territory:

ACT | NSW | NT | QLD | SA | TAS | VIC | WA

You can also calculate how much duty you'll need to pay by using our handy Stamp Duty Calculator.

The 5 different loans you're likely to meet

There are hundreds of different loans out there in the mortgage marketplace. But fundamentally, they are all based on two things:

• Principal — the amount of money you borrow.
• Interest — how much you pay to borrow the money. It's calculated on the outstanding principal.

The differences you'll come across are the type of loan and the type of features that come with the loan. Here are some of the most common types of loans you'll find.

Fixed loans

Interest rates and repayments are fixed for a set period, usually between three to five years. This makes it easier to budget. Find out more about fixed loans

Variable loans

This is the most popular type of loan in Australia. The interest rate (and your repayments) will vary throughout the term of the loan, so they may rise or fall. The rates are usually lower than fixed rates. Find out more about variable loans

Split loans

This loan can give you the best of both worlds. You fix one part, and let the other part vary according to market fluctuations. Find out more about split loans

Low-doc loans

These loans are mostly for self-employed people who don't have all the financial documents normally required to get a loan. A low-doc loan can be either fixed or variable. The rate is generally higher than a standard variable or fixed loan, but this is usually reduced after a few years if your repayments are on time.

Line of credit

This type of loan allows you to draw from a fixed amount at any time, to pay for whatever you want—which could be shares, renovations, or even a holiday.

It's like having a credit card with a big limit, but your home still acts as security for the loan. You only pay interest on the funds you use, but you need strong financial discipline to ensure you pay off the principal as well as the interest.

Decision: fixed, variable, or split loan?

There are several different types of loans, but many first home buyers choose either a fixed or variable rate loan. If you want the best of both worlds, you can hedge your bets and borrow a portion of money in a fixed rate loan, and a portion in a variable rate. That's known as a 'split loan'.

To help you decide which loan would be right for you, here are the pros and cons of fixed, variable and split loan types:

Continue to information about understanding mortgage broking and whether you need a mortgage broker.