It literally pays to choose the right home loan
When it comes to choosing a home loan, most people tend to just stick with their childhood bank. Unfortunately, this can put you at a disadvantage if your lender is not offering the most competitive options for your specific needs and goals.
In fact, you may miss out on a mortgage with a lower interest rate or fewer fees. You could pay tens of thousands of dollars more in interest over the life of a loan with a more costly lender, simply because you didn’t shop around.
Every home loan from every lender is different, suited for a range of purposes, and offering different perks and downsides. This doesn’t make it more complicated, it simply means you should choose a mortgage that suits your needs, not your bank’s.
This is why it is crucial you compare your options carefully before you sign on the dotted line.
When it comes to home loans there are five key areas you need consider:
- Loan size: How much can you borrow? You can calculate an estimate of your borrowing power before you apply for a mortgage.
- Loan type: What type of a buyer are you? Are you an owner-occupier (you’ll live in the property you purchase as a primary residence) or an investor (you’ll rent out the home)?
- Interest rates: What type of interest rate do you want? This includes choosing between a variable rate home loan or a fixed rate home loan. Comparison rates can also be helpful in getting a ‘true’ cost of the loan estimate.
- Fees: Some lenders charge a range of upfront, ongoing and exit fees. It can be possible to minimise these by choosing a low-fee or fee-free option.
- Features: Do you need flexibility in your loan? You may want to prioritise a mortgage with features like an offset account, redraw facility, extra repayments or split rates.
If you can answer these questions, you’ll be in a better position to find a mortgage option that actually meets your needs and budget.
Steps to taking out a home loan
1. Calculate your budget
Speaking of budgets, before going property shopping or even selecting a home loan, it’s important to crunch some numbers. You can use a Borrowing Power calculator to crunch the numbers on how much a lender may let you borrow, based on your income and expenses. The amount you can borrow will influence the property price you can afford to buy.
2. Compare your options
You’ve answered the five questions above, so you should be able to easily compare home loan options using helpful tools, like comparison tables. Simply jump on a comparison table and enter your details to filter down your options, such as your loan size or the features you want. Comparison tables help home loan customers compare apples with apples, as you can easily view mortgages side by side and see how details – like rates and repayments – compare.
3. Gather your documents
To make the application process easier, it may be worthwhile grabbing your personal identification documentation ahead of time. While the application process is much more streamlined nowadays, you will still need to provide proof that you are who you say you are. This may include:
- Payslips
- Bank statements
- Bills
- Proof of identity (e.g. driver’s license or passport)
- Tax records - particularly if you are self-employed or a business owner
A lender will also look at your credit history and credit score as part of your application. Before you apply, make sure your credit score is where you think it is, as a poor credit score could mean a home loan rejection.
4. Choose your home loan
You compared your home loan options to create a short list of possible loans, and you’ve gathered your documentation - it’s time to choose your ideal home loan.
If you’re still not sure which home loan is best for you, it could be worth basing it on which option best suits your budget. Especially if you are a first home buyer, as you’ll likely be spending a lot of your savings on your deposit (and stamp duty or Lender’s Mortgage Insurance, if applicable).
Take your shortlist and jump onto a Mortgage Repayment Calculator. Enter the loan details and view how much that mortgage could cost you each week, fortnight or month in repayments. A good rule of thumb is to try and keep your repayments less than 30 per cent of your pre-tax income to avoid being in ‘mortgage stress’.
If you’re not as fussed about repayments, you could consider choosing the home loan lender that best suits your needs. For example, if you want innovative fintech, choosing an online-based lender could provide this. If you rely on face-to-face customer service, you may want a lender that provides local branch access. Or if you prefer the “stability” of a major institution, you may want to opt for a big bank home loan.
5. Apply for the home loan
Now you know your ideal home loan, it’s time to apply. Simply hop online to the lender’s application page, visit your nearest branch, or just pick up the phone to speak to their home loan team.
It’s important to keep in mind that you only make one home loan application at any given time. Any mortgage applications you make will show up on your credit file, and having multiple applications at once tends to hurt your credit score and chances of approval.
As you already have your documentation in front of you, the process should not take more than a few minutes. If you are applying for pre-approval, you may get a response instantly about if you qualify. Full approval can take a few business days to receive.
Congratulations! You’ve successfully applied for your first home loan.
Alex Ritchie is a Personal Finance Writer and Editor at RateCity, and has been writing about Australian finance for over six years.
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