Know how much you can borrow and what type of mortgage is right for you.
It’s important to get your mortgage right the first time. You don’t want to be stuck with ongoing payments you can’t afford, but it’s not just about staying within budget. Your mortgage choices are as much about your lifestyle and circumstances as your income.
What’s my limit?
There are standard income tests lenders use to calculate how much you can borrow. But it’s much more important that you’re comfortable making repayments, along with your other financial commitments. And although the RBA cash rate has been falling for almost 5 years, it’s unlikely to stay low for the life of your loan. So try and future-proof your budget by looking at what you could afford if the cash rate rose as high as 10%.
Then there’s the questions of loan to value ratio (LVR). Some lenders may lend you more than 80% of a property’s value if they’re satisfied you can make the repayments. But loans like this come at a price. It’s called Lenders’ Mortgage Insurance (LMI) and can add thousands of dollars to the cost of buying your home.
Fix and feel secure?
So you’ve got a good feel for your loan amount and repayments. Now comes the tricky business of sifting through all those different products and comparison rates to find the right home loan for you.
Choosing to go fixed or variable has costs and benefits either way. Fix and you’re paying more now with the expectation that you’ll save in the future when rates go up. Go with variable and you’ll pay less interest now but will feel the squeeze if there’s a rate hike. And you can hedge your bets by choosing a split mortgage with variable and fixed components.
Making the right decision depends a lot on your circumstances – your level of income and savings – and how comfortable you are with uncertainty. Speaking to an expert mortgage broker can be a great way to help you look at your own priorities and come to a good decision.
Features and perks to help you get ahead
There are a host of loan features designed to add flexibility and save you money. Offset accounts, redraw facilities, and interest-only mortgages are just some of these and they all have their pros and cons, depending on what type of property you’re buying and your future plans.
For example, owner occupiers making extra repayments can pay a loan off faster and make substantial savings. But if you’re an investor, you can’t claim tax benefits from these payments and may want to look at other ways to reduce your costs.
Is it all too much?
There’s certainly a lot to weigh up when you’re choosing a mortgage. To feel comfortable that you’re getting the right deal, it’s a good idea to speak with an expert mortgage broker who can suggest loans and features that offer you value.
Have you arranged your first mortgage recently? Tell us about your experiences in the comments below.