Choose wisely and save smart to secure the best home loan possible for your future
Buying property can be daunting as well as exciting
Buying property can be daunting as well as exciting. After all, it’s probably the biggest investment you’ll ever make and paying off a mortgage is a responsibility you’re likely to be tied to for many years.
On the plus side, home ownership has been steady at about 70% in Australia for decades, so most of us are taking the plunge. And although interest rates may rise, competition between lenders remains heated, making it a good time to get a foothold on the property ladder.
‘It’s a great time to be applying for a loan. There are offers out there that I haven’t seen in all my years of being a broker,’ says Melbourne-based Mortgage Choice broker Neil Gorman.
‘It’s no harder to get a loan than it was pre-GFC. In fact, because we’re now seeing some big lenders returning to lending 95% of the value of the property, it’s become a lot easier for first homebuyers than it was previously.’
Avoid credit risk
We’ve all missed a payment deadline for a utility bill or credit card, but if late payments are a regular thing or you’ve got a default recorded on your credit file, look out.
‘One late payment won’t be such an issue but if you’re regularly making late payments, it may reflect on your ability to repay your mortgage,’ says Neil.
Lodging too many credit applications, whether for a loan or a new credit card, can also work against you, he warns.
‘The more applications you’ve lodged, the lower your credit score is. As a result your loan application may never see the light of day.’
It can take just four to six credit applications within the past six months to leave you tarred with the ‘bad credit risk’ brush.
Broker or bank?
According to the Mortgage Choice 2011 Recent First Homeowner Survey, 40% of respondents preferred to see a mortgage broker for loan advice, while 19% opted for a lender.
Using a broker minimises research time because brokers have access to hundreds of loans, can suggest ones that suit your needs and budget, and will secure the loan on your behalf.
Most brokers don’t charge fees and although some may get paid different commissions depending on which lender you choose, many receive the same commission regardless of who you sign up with.
Sticking with the bank is easier if you have an existing relationship with them, already hold a mortgage there, or want to release equity in one property in order to buy another.
Purchase for investment
Scott, a senior analyst, lives in Sydney and bought his second property, an investment flat in Queensland, five years ago. He obtained the mortgage through his bank.
‘Getting the mortgage was relatively easy but I needed quick approval, as I’d already found the property and wanted to use the equity in another property I had,’ says Scott.
‘I wanted the flexibility of several smaller loans that could be paid off at different periods, without the need to refinance or pay early discharge fees.
'I also wanted a fixed interest rate and the option to repay more.
‘I’d been with this bank for a few years and had built up a relationship with my personal banker. Their solution gave me confidence that I didn’t need to research other options.
‘The initial approval was verbally provided in the first meeting and I signed the mortgage papers a week later,’ says Scott.
The mortgage toolkit
Arm yourself with as much information as possible before you hit the For Sale ads.
- Do the sums. You’ll find a dizzying array of mortgage calculators online, which can help you work out everything from your borrowing limit down to what your basic loan repayments might be. Visit mortgagechoice.com.au or yourmortgage.com.au/calculators.
- Check your rating. Head online to My Credit File (mycreditfile.com.au) to request a copy of your credit file, which is used by lenders to determine your credit worthiness. The report costs $50 and will outline loans you’ve previously applied for, bad credit or defaults that may be lodged against you.
- Get a grant. The First Home Owner’s Grant (firsthome.gov.au) is a one-off payment of up to $15000 available to first homebuyers who satisfy the criteria. There is also a range of different concessions depending on which Australian state you live in.
- Boost your savings. A First Home Saver Account (FHSA) makes saving for a deposit easier for eligible applicants because the government will pay up to 17% of your personal contributions for the financial year, up to a yearly maximum. Parents and other family members can also contribute to your FHSA. Visit ato.gov.au for more info.
- Choose the loan. Should you go with fixed to protect against interest rate rises, or would you be better off with a part fixed, part variable loan? The Fixed vs Variable Interest Rates factsheet from Mortgage Choice can help you understand the difference.
The assessment process
Securing a mortgage is dependent on a number of factors and when you apply for a loan you give a lender approval to dig into your finances and credit history. Generally, lenders tend to focus on what are known as the four Cs of lending:
- Character is a measure of your stability, so if you bounce from job to job you may be viewed as high risk. If you’re thinking of changing jobs, it’s best to apply for a loan before you leave the old one. ‘The lender looks at whether the applicant has been with the same employer for 6 to 12 months and in the same occupation for a couple of years,’ says Neil. ‘And you’ll need to have been self-employed for two years before a lender will consider your income.’
- Credit is the ‘big black box’ between you and the potential lender. It’s an automatic system that scores you before an actual physical assessor even looks at your application, according to Neil. ‘The black box has a load of equations and predictable questions in it which are asked. ‘These questions include the number of credit enquiries or loan applications you’ve made, as well as the loan to value ratio, your income and so on,’ says Neil.
- Capacity refers to whether you have the means to make the repayments and your lender will make sure of it before they give you the mortgage nod. ‘Lenders look at your income and expenses and work out if there’s enough left over to repay the debt,’ says Neil. The number of kids is taken into account as well as high credit card limits.
- Collateral refers to a measure of the value, condition and marketability of the property you’re intending to buy. ‘Banks only lend 90 to 95% of the value of the property so you need a deposit plus extra money to cover costs,’ says Neil.