When you take on a mortgage, it’s a big financial commitment. So it’s important to choose the right home loan for you.
Here are eight questions you should ask that can help you find the best deal for your unique situation:
1. How much can I afford to borrow?
When you apply for a home loan, lenders look at your income, assets, debts and expenses to help calculate how much you can afford to borrow. This is known as your borrowing power. So before you start shopping around for a new home, it’s usually a good idea to get an estimate of your borrowing power by using an online calculator.
2. What is the comparison rate?
When you compare home loans, the comparison rate gives you a more realistic picture of a product’s true cost than the interest rate alone. This is because the comparison rate takes into account:
● The loan’s interest rate;
● Most fees and charges (including one-off costs like establishment fees and valuation fees as well as ongoing charges such as monthly or annual fees);
● Repayment frequency.
3. Should I choose a fixed or variable-rate home loan?
Interest rates on home loans are fixed or variable. When the rate is fixed, it means it won’t move up or down for a defined period, typically between one and five years. In contrast, variable rates can increase or decrease in line with market movements. Both have their pros and cons, so you might want to get advice from a finance professional to see which would be a better option for your particular circumstances.
4. What features does the loan come with?
Interest rates aren’t the be-all and end-all of home loans. You also have to consider the product’s fees as well as any features it comes with, including redraw facilities, offset accounts and the ability to make extra repayments. Features like these can help you pay down your mortgage faster, saving you money throughout the life of the loan.
5. What repayment options do I have?
Many lenders offer weekly, fortnightly or monthly repayments. And while you would be forgiven for assuming this won’t make much of a difference, making more frequent payments can help you reduce your principal faster. And the quicker you pay back the principal, the less interest you’ll get charged over the life of the loan.
6. How big of a deposit do I need?
Saving up for a deposit can be a daunting task, likely taking years and years of cutting back and budgeting. And while the exact amount of money you need depends on the value of the property you’re buying, most lenders require you to come up with 20% of the purchase price if you want to avoid paying lender’s mortgage insurance (LMI). LMI is a one-off premium that covers the lender should you subsequently default on your repayments, and can add thousands of dollars to your overall costs.
7. How might my circumstances change in the future?
While you probably don’t own a crystal ball, it’s worth considering how likely it is your life will change in the near to mid-term future. For example, becoming a parent or changing careers can have an impact on how much you can comfortably afford to repay.
8. If anything were to happen, could I still afford the repayments?
Life doesn’t always go as planned. So it’s a good idea to leave yourself some breathing room when you work out your borrowing power. If the worst happens and you do end up struggling to pay back your loan, remember many lenders work with borrowers to solve their financial problems rather than immediately foreclose on them. And the sooner you tell the lender, the better.