Finding the home of your dreams is easy, but purchasing it is a different story. That dream can become a nightmare if you don’t have the cash to buy it upfront.
Here are useful tips to avoid problems when applying for a home loan.
Check Your Current Financial Status
Before identifying potential lenders, it’s important to evaluate your current financial status. These include your income source, savings, and, more importantly, your credit score.
Once you assess your financial standing, ensure you have enough money to pay 20% of your property’s value. Most financiers allow customers to borrow up to 80% of the home value, and you have to raise the remainder yourself. For instance, if you want a $1 million property, you must have at least $200,000.
The interest rate dictates how much your monthly instalments become equity and the amount the bank receives. Many borrowers think the lowest rates are the best, but this isn’t always correct. So instead of emphasising the numbers, look at the terms to see the type of interest that suits your needs.
The two main options are fixed-rate interest and floating-rate interest.
As the name suggests, fixed-rate interests don’t change throughout the repayment period. So, when applying for a loan, this interest type exempts you from unexpected changes during repayment. It also makes it easy to calculate how much equity you gain on your new home. On the downside, most lenders offer the same rates, making it difficult to find a good deal.
Alternatively, you can choose a loan with a floating interest rate. Such loans have criteria that influence the prevailing rates. These criteria are the monetary policy of the Reserve Bank of Australia and the status of the Australian economy. Simply put, you get favourable rates when the economy thrives and vice versa.
The most significant advantage of floating interest is an opportunity to pay lower interest rates. Besides, you can pay extra money in your instalments, and switching loans is easy. However, budgeting your repayments during hard economic times can be quite difficult.
It’s also crucial to consider loan length when applying for a mortgage. A longer tenure reduces the monthly instalments, making it easier on the pocket. However, it comes with higher interest rates.
Conversely, a short-term loan means higher monthly repayments at lower interest rates. Evaluate your financial status to see which option suits you better.
Generally, it’s better to choose long-term loans. As time progresses, your revenue streams increase, so you can choose to continue with monthly instalments or repay completely.
Besides monthly instalments, your lender might require administrative and processing fees during the loan application. Ensure you discuss these with your bank. Check if they are one-off or monthly payments – if it’s the latter, budget appropriately, adding them to your monthly instalments.
A home loan is a legally binding contract, so ensure you read the document and understand it before signing it. If you have any trouble, it’s advisable to seek assistance from a professional mortgage lender.