A mortgage is a necessary part of buying a home for many Australians, but it can be difficult to understand what you can actually afford. However, with home loan interest rates on the march, it’s more important than ever to know your budget inside and out so you can cover your mortgage repayments and factor in a buffer for rainy days.
Key to this process is understanding how your mortgage repayments work, the common terminology used by lenders, and how to accurately calculate your costs.
Mortgage Fees and Costs
If this is your first time shopping for a mortgage, the terminology can be intimidating. It also can be difficult to understand what you’re paying for—and why. Here’s what to look for when reviewing your mortgage costs and fees:
Principal: Principal is the amount of money you borrowed on the mortgage. A portion of each payment will go toward paying this off, so the number will go down as you make monthly payments. In Australia we have what is known as interest only loans. These are much cheaper than principal and interest loans—especially at first—
Interest rate: This is essentially what the lender is charging you to borrow the money. Your interest rate is expressed as a percentage and may be fixed or variable. The RBA has been raising rates through much of 2022, spelling the end of Australia’s historically low cash rate, which at the beginning of 2022 sat at .1% It was not uncommon for borrowers to secure loans beginning with a two.
Package fees: Certain loans will come with a package fee, especially if there are a number of bells and whistles attached, such as an off-set or credit card.
Upfront fees: Applying for a mortgage and buying a property can be expensive. Make sure you factor in application fees, conveyancing fees, any government charges, and mortgage registration fees.
Ongoing fees: You may also need to factor in fees if you switch to another lender, pay off the loan too early, redraw or miss a repayment.
Home and contents insurance: Home and contents insurance protects you and your lender in the case of damage to your home. Contact your local insurance agent to get a quote or access a range of free quotes online.
Mortgage insurance: Also known as lenders mortgage insurance, or LMI, this protects the lender in case you default on your mortgage, and you will need to factor this in if your deposit is less than 20%. Try to avoid this as much as possible as the insurance can easily add thousands, sometimes tens of thousands, to the cost of your loan.
Stamp duty: Last but not least, we come to stamp duty, a levy that is imposed by each state as a percentage of the purchase price of the property. For example, in Victoria, it is calculated on a sliding scale and starts at 1.4% if the property is valued at $25,000 and reaches as much as 5.5% if the property is valued at or above $960,000—which is most properties in Melbourne. Stamp duty is a controversial tax, adding tens of thousands of dollars to state coffers with every purchase, and NSW has since added an alternative option for homeowners to pay an annual land tax instead of the hefty up-front slug.
Estimating How Much You Can Afford
How much you canafford depends on several factors, including your monthly income, existing debt service and how much you have saved for a deposit. When determining whether to approve you for a certain mortgage amount, lenders pay close attention to your credit score, you assets and your liabilities.
Keep in mind, however, that just because you can afford a house on paper doesn’t mean your budget can actually handle the payments. Beyond the factors your bank considers when pre-approving you for a mortgage amount, consider how much money you’ll have on-hand after you make the deposit. It’s best to have at least three months of payments in savings in case you experience financial hardship.
Along with calculating how much you expect to pay in maintenance and other house-related expenses each month, you should also consider your other financial goals. For example, if you’re planning to retire early, determine how much money you need to save or invest each month and then calculate how much you’ll have leftover to dedicate to a mortgage repayment. Ultimately, the house you can afford depends on what you’re comfortable with—just because a bank pre-approves you for a mortgage doesn’t mean you should maximise your borrowing power.
What Is the Best Mortgage Term for You?
A mortgage term is the length of time you have to pay off your mortgage. The most common mortgage terms are between 20 and 30 years. The length of your mortgage terms dictates (in part) how much you’ll pay each month—the longer your term, the lower your monthly payment. That said, you’ll pay more in interest over the life of a 30-year loan than a 20-year one.
To determine which mortgage term is right for you, consider how much you can afford to pay each month and how quickly you prefer to have your mortgage paid off.
If you can afford to pay more each month but still don’t know which term to choose, it’s also worth considering whether you’d be able to break even—or, perhaps, save—on the interest by choosing a lower monthly payment and investing the difference.
How to Get a Lower Mortgage Payment
There are several ways you can secure a lower monthly payment on your mortgage:
Choose a longer term
Have a larger deposit
Choose a lower-priced property
Secure a lower interest rate
How to Choose a Mortgage Lender
You have many options when it comes to choosing a mortgage lender. Banks, credit unions and online lenders all offer mortgages directly, while mortgage brokers and online search tools help you compare options from different lenders.
It’s important to make sure you feel comfortable with the broker or company you’re working with because you’ll need to communicate with them frequently during the application process—and in some cases, after the loan closes.
You may want to start with the banks or other institutions where you already have accounts, if you like their service. Also, ask your network of friends and family, and any property professionals you’re working with, for referrals. However, be aware that as rates rise, it’s important to lock in the lowest rate you can and to keep reviewing it. Many borrowers stop shopping around once they secure a loan, and end up paying a ‘loyalty tax’: that is, because they don’t pressure their bank to lower their rate in line with introductory offers, they end up paying a lot more than they need to.
The advice and information provided in this article is general in nature and is not intended to replace independent financial advice. Apex Conveyancing encourages readers to seek expert advice in relation to their own financial decisions - for a recommended mortgage broker please contact us - we can point you in the right direction.
This article first appeared in www.forbes.com
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