Looking for your first home loan? Peter Weekes identifies some traps to avoid.
The tide is turning: interest rates are set to rise and lenders are already insisting on larger deposits. Still, for those who are about to sign their first mortgage, now is not the time to panic. Now is the time to plan, to ensure that when rates do rise you are well insulated from any potential fallout.
It really is superfluous to say that for most, buying their first home is the most stressful, terrifying time of their lives. You have scrimped and saved every cent to put as much as you can towards your deposit, so you have a lot at risk.
Don't rush into it, is the consensus opinion of the experts. Take your time, carefully and honestly work out your financial obligations and ask as many questions as you can. The realtor, broker and lender can be helpful, but remember they are earning their commissions from you signing on the dotted line.
Denis Orrock, the chief executive at InfoChoice, which monitors bank products, says the first step to realising your dream is finding the right loan. Visit your existing lender and find out what it can offer, but don't stop there.
"Speak to a number of brokers, ask who their lending panel is, what commission they are paid by the lender [to sell you the loan] and why they think this particular product is right for you," he says.
Lisa Montgomery, the head of consumer information and advocacy at Wizard Home Loans, says borrowers should consider five issues when deciding which loan is the best for them: the interest rate, associated fees, features, flexibility and service.
"You should get the right product from the outset," she says. "It's like buying a car; you need to know what type of car you want, whether you want a sedan or a big engine. You don't go out and say 'I will buy that car' and change it in 12 months. It's the same with a home loan."
When looking at the rate, Orrock says borrowers should not be seduced by low honeymoon rates as, like honeymoons, they are short-lived. Instead, ask to look at the comparison rate.
Also known as the average annualised percentage rate, the comparison rate
is designed to give consumers a better guide to the "true" cost of a home
loan. It includes the interest rate plus any establishment and ongoing fees. It can differ significantly from the advertised rate.
John Harries, ANZ's general manager of retail mortgages, recommends that people get their loans pre-approved before they start house hunting. "It gives them a better understanding of how much they have," he says. Alternatively, consider signing any contract "subject to finance", although this is not usually possible at auctions.
Orrock adds that when buyers are working out what they can afford, it is important to factor in interest rate rises of, say, two percentage points.
"Nowadays borrowers need to allow themselves two percentage points above the current rate because interest rates can and do go up. You [must] be in a position where you can fulfil the repayment requirements and still live," he says.
And don't forget extra costs for stamp duty and the myriad fees such as application, valuation and inspections. ANZ estimates that you should allow about 5 per cent of the purchase price for this.
Borrowers who take out more than about 80 per cent of the purchase price are also required to pay mortgage insurance. Despite a common misconception, this does not protect the borrower, only the lender. In cases of default, the lender will sell your home and the insurer will then come after you for any difference between the sale price and the amount borrowed.
The borrower has no such protection options, but Orrock says you should consider income protection insurance and death and injury cover. This means if you fall behind in your repayments because you have lost your job or become ill, you won't lose your house as well.
Legal fees, according to the Victorian Law Institute, can be as much as $1000. It is possible to do it on the cheap, but Orrock doesn't recommend it.
"For 95 per cent of the population, a home loan is the biggest debt they will ever take on, and their biggest investment. It makes sense to go through the loan contract with someone who is qualified," he says.
"Don't just sit down at the bank and sign it. Take it away, read it and get expert advice, because you can rest assured that the bank or lender certainly knows what's in the contract."
By now you have found the right loan for you, found the perfect home and signed the contract, so it's time to sit back and enjoy, right? Wrong.
"The common goal for the first-home buyer is to get into that property, but
once you move in you have another goal: to pay the loan of in the shortest time
and with the least amount of interest to the provider, so your focus changes," says Montgomery.
About 10 years ago, banks started to allow fortnightly payments, instead of monthly payments. This is good news for consumers. The maths is straightforward.
"The 'trick' of making fortnightly payments could indeed cut five years off a 25-year mortgage," the Australian Consumers Association's website notes. "It's because there are 26 fortnights in a year - so if you make half a monthly payment each fortnight you're making the equivalent of an extra monthly payment each year."
Things to consider
Will you want to make extra repayments?
Do you want to have redraw access to any extra payments made?
Will you be looking to move within the next five years?
Can you benefit by having your salary credited directly to your loan account?
Do you simply want the lowest rate?
Have you considered ongoing fees?
Which lenders do you feel most comfortable with?
Have you considered consulting a mortgage broker?
Are you eligible for the first home buyers grant?
Source: InfoChoice.com.au
10 ways to speed up your repayments
- Pay fortnightly rather than monthly.
- Make regular extra repayments. If you pay an extra $10 a month off a $100,000 loan at 6.5 per cent over 25 years, the loan will be repaid 10 months earlier.
- Extra bulk repayments. For example, if you deposited a bonus of $1000 into a $100,000 loan at 6.5 per cent over 25 years, it would save about $4000.
- Off-set accounts. Link your savings account with your home loan and use the balance to reduce the interest on the loan.
- Pay the full repayment amount during the introductory honeymoon rate or following an interest rate cut.
- All-in-one facilities. These save interest on a loan by having all of your income credited directly to the home loan.
- Pay all your mortgage fees upfront.
- Make sure your loan is portable.
- Refinance. If you do not use all the "bells and whistles" on your home loan, it may be cheaper to switch to a basic loan.
- Professional packages (see story, page 8).
Source: Mortgage Choice
