Now’s the time to check your credit record
If you’re planning to apply for a home loan, it’s a good idea to check your personal credit file. This is a record of how well you have managed debt in the past, and when you apply for a home loan, it’s one of the first things lenders will cast their eyes over.
They’ll be looking for:
- Obvious personal details such as your name and current address, your employment details, and directorships
- Credit applications you’ve made in the past – such as for credit or store cards – and to see if you’ve defaulted on payments, or have an ‘infringement’ to your name
Over time, your credit records are updated and deleted. Applications and defaults disappear after five years, and serious infringements and bankruptcies go after seven years.
You can check your own credit record free of charge or for a small fee. Credit Savvy is a website that offers you your credit report for free. If you live in Tasmania you should also contact the Tasmanian Collection Service.
Loan pre-approval – do you need it?
You don’t need to find your new home before you can apply for a loan. In fact, there are good reasons to speak with your Aussie Mortgage Broker to get your loan sorted beforehand.
Some lenders provide a loan pre-approval which is usually subject to meeting required terms and conditions. This is where your loan limit is approved for a certain time (usually around six months), and providing your circumstances have not changed you’ll know exactly how much you can afford to pay for a property, and you’ll have the freedom to make an offer on a property knowing that your finance is already organised. 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, and 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.
With a pre-approved loan, there are fewer chances of hiccups with the sale process, and in some cases, vendors (sellers) will accept an offer below list price and 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 finance is sorted – this will help you avoid being gazumped, and you can bid with certainty at auction.
There are hundreds of different loans out there in the mortgage marketplace. But fundamentally, they are all based on two key things:
- Principal – the amount of money you borrow
- Interest – how much you pay to borrow the money. It’s calculated on the outstanding principal
From here, there is a wide variety of loan features and structures to choose from, and it’s worth knowing what’s involved with each to make an informed decision.
Variable rate loans
This is the most popular type of loan in Australia. The interest rate you pay may vary in line with movements in market interest rates, so you can expect the repayments to vary (up and down) over the course of the loan.
With this type of loan the rate you pay – and the loan repayments, are fixed for a set period, usually between one and five years. This makes it easier to budget for repayments and you are protected from increases in market interest rates. The downside is that if rates fall, you could end up paying more than necessary.
Many lenders will let you fix one part of your loan, while the remaining portion has a variable rate. This can give you the best of both worlds – some protection from rising rates though still with the ability to benefit from any rate cuts.
Decision: fixed, variable or split loan?
To help you decide which loan would be right for you, we’ve outlined the pros and cons of fixed, variable and split loan types below:
|The interest rate is fixed for the term you choose – usually from 1 - 5 years. The fixed may be higher or lower than the prevailing variable at the time of fixing. The rate you pay will also vary depending on the fixed term you select.||The interest rate may vary in line with the official cash rate plus other factors, and it may be higher or lower than fixed rates.||One part of your loan will be fixed and the other can fluctuate with the market.|
|Your repayments will stay the same for the ‘fixed’ period of the loan.||Your repayments may fluctuate with interest rate changes. This could be up or down so you need to be sure your finances could cope with a higher rate.||Interest rates can go up and affect the variable part of your loan.|
|Fixed repayments make it easier to budget though you may have fewer opportunities to pay more off your loan.||You could pay off your loan faster by making extra repayments.||Allows you to have interest rate security with repayment flexibility.|
|If you want to switch back to a variable rate or refinance to a new loan during the fixed term, you could be asked to pay ‘break charges’.||Exit fees have been banned on loans taken out after 1 July 2011.||Most lenders will let you set the fixed/variable portions in the way that suits you.|
|Some – but not all, fixed rate loans allow extra repayments up to a set amount each year, and some also offer redraw.||You can usually make extra payments whenever you like, typically at no extra charge.||You can access variable loan features like redraws and extra payments but have a little more certainty around your long-term budget.|
Other types of loans
Within the categories of variable, fixed and split loans, there are other types of home loans to choose from.
Basic versus standard
‘Basic’ home loans are variable rate loans that often come with a cheaper rate though less features than a ‘standard’ loan. The definition of ‘basic’ varies widely between lenders so it’s worth checking carefully which features are available with any loan the lender describes as basic.
The important thing is to only pay for loan features you are likely to use now or in the near future. Note too, some features can help you pay off the loan sooner, and this will mean saving money over time so the cheapest loan isn’t necessarily the one that’s best for you.
An offset home loan involves a savings or transaction account that is linked to your home loan. Instead of receiving interest on the balance of the offset account and paying separate interest on the full balance of the outstanding loan, the balance of the offset account is deducted from (or ‘offset’ against) the value of the loan for the purpose of calculating interest.
For instance if you have $20,000 in the offset account and the value of the loan is $350,000, you will only pay interest on a loan value of $330,000. This can make an offset account a real money saver if you have some spare cash.
A package loan, sometimes called an ‘ongoing discount’ loan, combines a home loan with other financial products – usually a transaction account and/or credit card.
You can expect fee waivers on some or all of the bundled products plus a discount on the home loan interest rate that usually lasts for the life of the loan. On the downside, you may be asked to pay an annual package fee, which is usually around $300 to $500. This makes it important to weigh up whether the fee savings and rate discount are worth more than the annual package fee.
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.
These are loans designed for self-employed people who don’t have all the financial documents providing proof of income normally required to secure a loan. A low-doc loan can be either fixed or variable though the rate is generally higher than for a standard variable or fixed loan, but it may be reduced after a few years if your repayments are on time. In previous years low doc loans were offered by a large number of lenders but these days many lenders treat self-employed borrowers in much the same way as traditional borrowers often offering access to the same loans as long as good records (like tax returns) can be provided for personal income.
Choosing the right home loan is an important part of buying your first home. It’s not easy sorting through the huge volume of loans available in the market so it’s good to know your local Aussie Mortgage Broker can streamline the process, comparing a wide range of loans to help you find a loan that’s well-suited to your needs with the features you want and a competitive interest rate.
Deposit Power Guarantees*
A Deposit Power Guarantee can be used as a substitute for a cash deposit when purchasing residential property. You can choose to use a Deposit Power Guarantee for all - or just part - of your deposit, up to 10% of the purchase price.
This makes a Deposit Power Guarantee a handy option because you can still sign a contract to buy the property of your choice when you find it as long as you have the funds available at the time of settlement.
Using a Deposit Power Guarantee doesn’t remove your obligation to pay the deposit; it just delays payment of the deposit amount until settlement, and allows you to hold on to your funds for a bit longer. If you feel a Deposit Power Guarantee could be helpful for your circumstances, talk to an Aussie Broker about how to apply.
Continue to information about understanding mortgage broking and whether you need a mortgage broker.