Taking out a mortgage will probably be one of the most significant financial decisions you make in your lifetime. So make sure you understand just what you’re getting into.
When it comes to home loans, fees can quickly add up. It pays to investigate just what upfront and ongoing charges you will be up for. Consider everything for the life of your loan from application costs and mortgage insurance to monthly, redraw and early exit fees.
Lenders may charge an application fee of $600 or more, a valuation fee (often more than $300) and a loan settlement fee of $200 or so. Also, many lenders will insist on mortgage insurance, especially if you are borrowing more than 80 percent of the value of your new home. This can cost as much as one percent of the loan amount.
There may be a fixed monthly fee or others charges relating to using the loan and depending on your contract, the lender may be able to increase these costs at any time. Early-exit fees vary between lenders and come in different disguises, such as “deferred establishment fees”. These fees become significant should you wish to pay off your loan or refinance with another lender. Always ask your potential lender for specific early-exit fees and costs.
Remember, if you can negotiate to reduce any or all of these fees up front, it will help to reduce the size of your loan. If you aren’t a good negotiator, you might want to use a mortgage broker to help secure a better deal.
Redraw/extra payment limitations
Some loans will restrict you from making extra repayments into your mortgage account. This is significant in that any extra money you put into the loan will help to reduce interest and can have considerable tax advantages.
Other loans allow you to make extra repayments but have limitations when it comes to redrawing that money. Check whether you’ll be required to apply in writing, how long it might take for approval to come through, and if there are any costs involved.
Borrowers should always be cautious when it comes to honeymoon loans. They may sound competitive and be so for the first six to 12 months of the loan, but you can end up with a rude shock when they revert to much higher rates that can eclipse the standard variable rate.
Bells and whistles loans
There are hundreds of different types of loans on the market and while you might get sold on the features of some, take a step back and think about what you really need. There is no point in paying extra for a home loan with bells and whistles when you won’t be using any of these features.
Most features of home loans are not set in stone and borrowers need to realise that they are in a position to negotiate with lenders. The best time to do this is before you sign on the dotted line, so do your research and try for the best loan you can get. Again, a mortgage broker may be able to do the leg work for you.
Don’t accept interest rates at face value — see if you can talk the lender into a lower rate. After all, any reduction can mean huge savings over the life of a loan.
When it comes to fixing your interest rate, the biggest factor you need to be aware of is the high break costs should you wish to revert to a variable rate. This involves you having to pay for all the “lost” interest to the lender if you had paid the higher rate through to the end of the fixed term and can add up to a considerable amount of money.
On the dotted line
And lastly, don’t sign anything you don’t fully understand. If you’re in doubt, get independent legal or financial advice.