Choosing the right mortgage is not just important for your needs, but could make the difference of thousands of dollars in the long term. There are so many products from so many financial institutions all with differing interest rates and a plethora of features and fees. So where do you start? Aside from seeking help from a financial advisor (which may be a very wise decision), there are some ways to begin narrowing down which loan is right for you.
Purpose and requirements of the loan
First consider the purpose of the loan. If you are a homebuyer intending to live in your property you will require a home loan while investors need a residential investment loan. The next step is to decide what type of loan will best suit your needs. For example, do you want the flexibility to pay off more than your scheduled payments or offset your mortgage against your regular transaction account thereby saving on interest expense? Would you like a credit facility on your account for personal purposes such as purchasing a new car or making home improvements? Would you prefer a fixed or variable rate? If you and your spouse intend to start a family in the future will you need a period of time where you will be able to reduce your repayments? Over what term (how long) do you intend to repay the loan?
Loan Features
Make yourself familiar with the features of several loan products. Keep in mind too that many banks will also allow you to split your loan amount over more than one type of loan to meet your needs – this can be useful if part of your loan is for investment and you need to claim your interest payments as a tax deduction. As a general rule, the more features and flexibility a loan has, the greater the associated costs, so make sure you don’t pay for anything you won’t need, and make the most of those you do include in your loan. The following list of features are typical of those offered by many loan products (most of which incur one-off or ongoing fees).
Additional repayments: Making extra payments when you can will save you thousands and cut years off your loan.
Portability: If you move house, this feature will allow you to keep the same loan. This may incur a fee but will still be less than establishing a new loan.
Redraw: Allows you to have access to any additional payments you have made above the normal scheduled repayments.
Credit facility: Rather than take out a separate loan for personal finances such as renovations a credit facility on your loan increases the credit limit on your existing loan. This is subject to approval and other lending criteria.
Repayment holiday: By building up extra funds in your loan account you can take a break from making regular repayments for as long as there are extra funds in your account to cover them.
Parental leave: Lets you to reduce your repayments by up to 50% for up to six months. Conditions will apply.
Mortgage offset: Links your mortgage with your transaction account so that every dollar in your transaction account offsets the interest calculated on your mortgage.
Income to loan account: By depositing all your income into your loan account you can save in interest calculated on your mortgage and still access cash or pay bills by setting up automatic transfers into other transaction accounts (held with the same bank).
Consolidation of accounts: An account which merges your transaction, savings and credit accounts may simplify your banking and save you interest on your loan with every dollar you deposit into the account while still giving you access to funds through the usual facilities.
Refix: Allows you to enter into another fixed loan rate at the end of your current fixed rate period.
Compare Lenders and Financial Institutions
Most financial institutions will have an interest in loaning you money (provided you meet their criteria) but they do not all offer the same products at the same costs. It pays to do some research and find out what they are offering. While many will offer loan products that sound similar, compare costs such as interest rates, administration charges, loan application fees and other one-off or ongoing fees mentioned in the small print. These may be incurred as penalties such as late repayments, exiting the mortgage, switching to (or exiting from) a fixed rate loan, moving the mortgage to a new property or basically changing any of the features as originally agreed. If one lender offers you a good deal contact the other lenders you have been speaking with and ask them to meet or better the offer. After all you are making a business deal and it is their interest to try and win your custom. If you have an existing mortgage and want to change to another loan product, do not be afraid to negotiate your new mortgage and ask for certain fees to be waived – after all, the bank can only say no and you can then consider whether you would prefer to move to another lender.
Long term expenses
Try to prioritise your preferred features in a loan (some banks have online questionnaires to help you with this) and calculate the long term costs of the options you are considering. For instance, if you are looking at a loan with a mortgage offset facility plus the option of extra repayments and a fixed interest rate, measure the long term expenses of this type of loan against say a more basic loan (which may include administration charges) with perhaps a slightly lower interest rate. If you make the most of the features of the loan, will you save more than if you chose the loan without the features even though its interest rate is slightly lower? This may depend on how disciplined you are with budgeting, your family’s lifestyle and your future plans. Think about these things as well in order to forecast as accurately as possible your ability (and limitations) to repay your loan.
Speak to a loan advisor
Once you have thought through the purpose your loan will serve, the term over which you want to repay it, the features that suit your saving and spending patterns and your preferred financial institutions, draw up a business proposal showing you have done your homework concerning the type of property you wish to purchase. Summarise your assets and debts, (with documentary evidence as needed) showing: ” your monthly income; ” savings available in bank and building society accounts; ” investments & other policies; ” your credit rating; ” existing loans; and ” number of dependants. Include details of the amount of deposit you have saved, the approximate value of the property to wish to buy (and the amount you are hoping to borrow) and information about your employment. Evidence of your savings history, your ability to budget and make repayments on time will also strengthen your case. Take your notes about the loan products and features that appeal to you and make sure you have the opportunity to discuss these to ensure that you come away with a clear understanding of what each one offers (and the associated costs). If the loan advisor suggests a different type of product from the type you were looking at, ask him or her to demonstrate their case with some calculations showing the long-term benefit of their recommended product. Do not feel pressured into entering into a loan agreement until you feel comfortable with all the terms and conditions of the mortgage. This may mean making a couple of appointments, but if you can show the advisor that you have done your homework and need to compare the options available to you, he or she should be more willing to help you with your questions and give you the time you need to make a decision you will be comfortable with.
Online services
Using online services from banks and lenders is a great way to get hold of information about their loan products in order to measure and compare these products against your needs. Many of these websites also have mortgage calculators that will give you an idea of the amount you will be able to borrow given your current income and expenses. These can vary somewhat, so use them as a guideline only. There are also many mortgage companies who offer different mortgages from various lenders and claim to offer the best deal by giving you the mortgage to suit your needs with the lowest associated costs. Compare these products yourself against those others you are considering before deciding whether it really is the best deal.
Staying on top
It is very important to look at the long-term costs of the loan before you decide which is going to suit your needs best. Choosing one type of loan over another could make the difference of several thousand dollars over the term of the loan. Although it is never possible to know which way interest rates will go in the future, even the decision to repay your loan in fortnightly installments rather than each month could mean a saving of 10% over the long term. Similarly, increasing your mortgage payments when circumstances allow (for example, following a job promotion) can reduce it by several years. It is therefore well worth conducting a little research on the topic, especially if you have never considered some of the ways possible of saving money on your mortgage.
Word of Advice: A mortgage is a guarantee or pledge to repay the loan you take to buy real estate. The word mortgage comes from a French word ‘mort’ (death) and means ‘agreement until death’. Keep this in mind when reading the terms and conditions of the mortgage you are entering!