Choosing the right home loan lender

Choosing the right home loan depends on the purpose for the loan and your short and long term strategy.

Then there is a layer of complexity to add, by way of who is borrowing, their character, capacity and collateral.

And the final layer is the lender - their risk appetite for the type of loan, the interest rates, features and terms they are willing to offer.

Essentially, there are hundreds of different elements in a home loan, so working out which of those elements are important, is best done using a home loan broker who can help ensure you are fully informed to select the right one.  

Let’s start with the why

• Are you going to live in the property?

• Is the property going to be an investment?

• If the property is land, are you holding it for increasing value or building on it later?

Just asking these questions can help a home loan broker provide you with options that will suit your immediate, short and long term needs.

Your strategy can and will change

Of course, your strategy can and will change, but half the battle is knowing how your home loan will be affected if you do change direction. Life can get in the way of strategic decisions and with property market changes, you may need to sell before you originally intended to. Depending on how you structure your home loan, there may be costs if you end the term earlier than expected. You home loan broker will be able to guide you through the changes.

Home loan features to suit you now and in the future

Your home loan broker will be able to provide an insight on repercussions of your selected home loan. If you choose to fix your interest rate, there may be financial costs with breaking the loan. However, knowing that early in your strategy will help you to prepare for the potential costs.

Types of home loans

There are many types of home loans and combinations of home loans. Depending on the purpose, some options and features may not be available. For example, in most cases interest-only home loans attract a higher interest rate than principal and interest, but the repayments are lower than a standard P&I repayment schedule.

The most common components of home loans are;

• Owner-occupied

• Investment

• Principal and interest

• Interest only

• Variable interest rate

• Fixed interest rate

• Split (a combination of fixed and variable)

Features of home loans

In addition to the core components, depending on the type of loan, borrowers may select features such as;

• Offset

• Package (higher fee, but more features, flexibility and eligible for interest rate discounts)

• Basic (lower fees, but less features, flexibility and interest rate discounts)

• Line of credit

• Low-doc

• Re-draws

• Extra repayments

SAVING FOR A DEPOSIT

Before you buy a property, you’ll need a deposit of between 5% and 10% of the property price. For example, if you want to buy a house that costs $500,000 you’ll need a minimum of $25,000 of your own cash to use as a deposit. There are ways to avoid saving for a deposit and if you’ve got family or a really great friend who own their own property and have equity (amount owed to the bank is lower than the property value), they could cover/guarantee your deposit with their equity.

There are also government incentives for First Home Buyers that may help contribute to your deposit.

COSTS ASSOCIATED WITH PROPERTY PURCHASES

In addition to the deposit, you’ll need cash to cover associated purchase costs like stamp duty, conveyancing/legal fees, mortgage insurance. These costs vary from state to state, so a good guide is to put aside a minimum of 5% of the purchase price.

SECURE YOUR HOME LOAN

Before going property shopping, you need to know how much you can spend. Mint Equity is able to assess your financial situation and advise you of how much you can borrow on your home loan before you go shopping. Banks and lenders credit criteria vary, but essentially the more deposit, higher income and lower expenses you have, the more you can borrow.

What do home loan lenders look for?

Each lender has different application requirements, ever changing policy and risk appetites so it pays to work with an experienced mortgage broker to find the right fit. Every borrower is equally as different and there are many contributing factors to selecting the right home loan lender.

The consistent element across every lender is the risk level of the applicant, and that is generally best reflected in the “Three C’s” – Character, Capacity and Collateral.

• Character – a borrower’s credit rating, history and employment status

• Capacity – a borrower’s income and ability to repay the loan, taking into account living expenses and dependents

• Collateral – a borrower’s savings/deposit and the property the loan will be leveraged against

GET PRE-APPROVED HOME LOAN FINANCE

One of the steps to buying your dream home is to secure pre-approved finance. Not only will you feel more comfortable knowing that the bank or lender have approved your home loan, it will enable you to make quick decisions and beat buyer competition.

Pre-approval finance is essential for auction conditions because once you buy at auction, the property is yours and if you don’t complete the purchase, you lose your deposit.