Buying your first home is an exciting but overwhelming experience, especially when it comes to securing a mortgage. With so many options available, it can be difficult to know where to start and what to look for. That’s why we’ve put together this comprehensive guide for first-time homebuyers.

Before you start looking for a mortgage, it’s important to understand the different types of mortgages available and the features and benefits of each. Let’s take a look at some of the most popular types of home loans.

Popular home loan types

Fixed rate mortgages: With a fixed-rate mortgage, your interest rate stays the same for the life of the loan, which can be between one and five years. This means you’ll have the peace of mind of knowing what your monthly payments will be and you won’t be impacted by changes in interest rates.

Variable rate home loans: With a variable-rate mortgage, the interest rate can change throughout the life of the loan. This means that your monthly payments can go up or down, depending on interest rate movements. Variable-rate mortgages typically offer more flexibility and can be a good choice if you expect your income to increase in the future.

Split home loan: With a split-rate mortgage, you can have both a fixed and a variable rate on the same loan. This can be a good option if you want the security of a fixed-rate mortgage but also the flexibility of a variable-rate mortgage.

Interest only home loans: With an interest-only mortgage, you only pay the interest on the loan for a set period, typically between one and five years. After that period, you’ll start paying both the interest and the principal. This type of mortgage can be a good choice if you want to keep your monthly payments low and if you plan to sell the property before the end of the interest-only period.

Once you have an understanding of the different types of mortgages, it’s important to start thinking about what you can afford.

Step 1: Determine How Much You Can Afford

Before you even start looking for a home, it’s crucial to determine how much you can afford. You’ll need to consider your income, expenses, and debts to determine how much you can realistically afford to spend on a home. The amount you can afford to spend is directly related to your borrowing power (ie how much you can borrow) and how much you can save to contribute to the costs of buying a house.

You can use online mortgage calculators to get an idea of what your monthly payments would be, but it’s always best to speak to your lender to get a more accurate picture.

Remember – Just because you’re approved for a certain amount doesn’t mean that you should go and max out your budget. Consider how much you’re comfortable paying each month and aim to stay within that range.

Step 2: Improve Your Credit Score

Your credit score is a critical factor in securing a mortgage, as it reflects your ability to repay debts. If your score is low, take steps to improve it before you apply for a mortgage. This may include paying down debt, disputing errors on your credit report, and avoiding late payments. Aim to have a credit score of at least 600 or higher before you apply for a mortgage.

Step 3: Shop Around

When choosing a lender, it’s important to shop around and compare interest rates, fees, and other features. You should also take the time to read the fine print, so you understand what you’re signing up for.

There can be many types of home loan options out there including ones from Banks, Credit Unions, Online Lenders and even Private Lenders – you just need to go and have a look. Sometimes, it might even be best to have a chat with a lender directly to get a feel for how their customer service might work out for you. If you’re going to be dealing with a lender for a long time (could be up to 30 years!) then you’d better like them.

Step 4: Get Pre-Approved

Getting pre-approved is an important step in securing a mortgage. This process involves providing a mortgage lender with information about your income, debts, and credit history, so they can determine how much you can afford to borrow. Usually this will mean providing:

• Proof of income – payslips or tax returns
• Evidence of savings – bank statements
• Details of other loans or credit you have
• Information about your living expenses

Some online lenders will also run a credit report, so it’s important to note that you can have an enquiry listed on your report. A good online lender like Well Money will be able to provide you with a pre-approval without running a credit check so that you can try before you buy.

Pre-approval gives you an advantage when making an offer on a home, as it shows sellers that you’re a serious buyer with the financial means to follow through. It can give you a clear idea of your budget so that you can also avoid looking for homes that are way outside your budget.

Step 5: Choose the Right Mortgage Type

There are many different types of mortgages to choose from, including fixed-rate, variable-rate, and interest-only mortgages. Fixed-rate mortgages offer the stability of a fixed interest rate for the life of the loan, while variable-rate mortgages offer lower initial interest rates that can change over time. Interest-only mortgages allow you to pay only the interest on your loan for a set period of time, but your monthly payments will be higher once the interest-only period ends. We’ve covered the more popular types of mortgages above.

Consider your financial goals, budget, and the length of time you plan to stay in your home when choosing the right mortgage type for you.

Step 6: Submit Your Mortgage Application

Once you’ve chosen a lender and a mortgage type, it’s time to submit your mortgage application. This process involves providing the lender with information about your income, debts, and assets. You’ll also need to provide documentation, such as pay slips, tax returns, and bank statements, to support your application. The lender will use this information to determine whether to approve your loan and, if so, at what interest rate.

You’ll also need to provide documentation on the property you want to purchase, such as a contract of sale.

Step 7: Final Approval and Settlement

Once you have found a property you want to buy and have a formal offer accepted, it is time to finalize your mortgage. The lender will review your application and may ask for additional information or documents. This process is called final approval, and it can take several weeks.

When your mortgage is approved, you will receive a formal loan contract. You will need to sign this contract and return it to the lender, along with any other required documents, such as insurance policies.

The final step in the process is settlement. This is when the property changes hands, and you become the legal owner. Settlement can be a complex process, and you will need to work closely with your conveyancer or solicitor to ensure that everything runs smoothly.

Buying your first home can be an exciting but daunting process. Getting a home loan is a key part of the process, and it pays to be well-informed about the options available to you. By following the steps outlined in this guide, you can improve your chances of securing a mortgage that fits your needs and budget and with a little preparation and the right information, you can make the process as smooth and stress-free as possible.

Read more: How to Apply for a Home Loan – The Ultimate Guide