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Home Loans: Hot tips for borrowers

23 Quick Home Financing Tips

finance information articles
If you are thinking about buying a home, these hot tips will help to ensure that you keep more of your cash in your pocket both before you take out your loan and once your mortgage is in place.

1. Be prepared for the costs

If you're planning on buying a home, you have probably accumulated a deposit. But have you also allowed for the other costs associated with a home purchase? Here are some of the main ones.

  • government stamp duty
  • conveyance and legal fees
  • building and pest inspections

Then there are the costs directly associated with the mortgage. Some or all of these may also apply to you ...

  • loan application fee
  • valuer's fees
  • stamp duty on the loan
  • mortgage insurance
  • mortgage registration fee
  • switching fees

Don't be surprised if you have to fork out at least $20,000 in fees on a $400,000 home purchase - more if you are required to have mortgage insurance.

2. Extra payments

If you want to minimise the interest that you pay on your mortgage and reduce the amount of time it will take to repay, the best strategy is to pay more than your required mortgage payment each month.

The actual result will vary as interest rates change, but it's safe to say that for each and every extra dollar that you sink into your home loan you will save around double that in interest over the term.

Next time you get a pay rise, allocate some of it to increasing your monthly repayment. If you've had a windfall or have some spare cash, paying it into your home loan will also be a worthwhile investment.

Before you follow this strategy, however, check with your lender that your mortgage contract won't penalize you with additional fees if you make the extra payments.

It's not unusual for some of the more basic mortgage loans or fixed interest loans to be less flexible.

3. Look for discounts

Higher income earners should check with their broker or lender to find out if they qualify for a professional package discount.

Professional package discounts offered by many lenders and could save you as much as half a percent in interest.

Many financial institutions also offer relationship discounts - offering lower rates to customers who are prepared to transfer some of their other finance, insurance or financial planning need to the institution providing the home loan.

4. Beware of the honeymoon

Introductory interest rates are offered by mortgage lenders to encourage people to choose their product. They are a marketing tool that makes it easier for people to afford a mortgage.

Honeymoon rates look very appealing because the interest can be as much as a couple of per cent below the normal home loan.

After 6 to 12 months, depending on the offer, your introductory interest rate will revert to the lender's regular rate.

Whilst the honeymoon rate may make it easier to slip into your loan in the short term, a home loan is generally a long term proposition so you need to understand how the rates compare after the discount is over and whether the flexibility of the loan is in any way diminished.

5. Fixed rates

Attractive when interest rates are rising, fixed interest rate loans offer considerably less flexibility than a mortgage loan with a variable interest rate. 

Fixed interest rate loans are generally quite inflexible, may not accommodate additional payments and may even charge high penalty fees if you need to refinance or want to pay the loan out early.

Fixed rate home loans are for those seeking the certainty of a fixed regular monthly payment as opposed to the fluctuations typical of a variable loan. Examples would include those on tight budgets and real estate investors.

If you are simply wanting to second guess future increases to interest rates by locking into a fixed interest loan you are taking more than a bit of a risk.

Attempting to forecast interest rates, even 2 or 3 years down the track, would require something like a crystal ball. The risk of getting it wrong increases significantly when you fix your interest for a longer term.

 

6. Having trouble finding a home loan?

If you're having trouble getting a loan through the mainstream lenders due to employment status, credit history - or even residency, there is a non-conforming home loan market to turn to.

Whilst non conforming home loan interest rates may be a bit higher at the outset, there is usually a provision that you revert to a lower rate after a set period of time.

7. Caution the key in current housing market

Without any guarantees as to where interest rates, property values and the world's economies are heading, it's wise to be cautious when committing to a long term financial commitment.

Here are some things to consider

New loans:

  • when working out what you can afford to repay, calculate the amount of your repayments if your interest rate was 2% higher
  • make as big a deposit as possible. You should aim for a loan-to-valuation ration of no more than 90%
  • get your other debts in order before jumping into a mortgage
  • don't bank on big short-term property gains to justify your purchase. Any investment in real estate needs a long term view.
Existing loans:
  • additional instalments on your loan will have a big impact on your home equity and is a good hedge against rates going up or a drop in property values.
  • fixing the interest on some of your loan is another good hedging strategy, so long as you understand any restrictions that may apply if you want to discharge the mortgage early.
  • as you start to accumulate equity in your home, think very carefully before using that equity for more borrowings. A rate increase down the track could present problems for you if you're not prepared.
  • if you are considering using your home equity, use it to consolidate your other higher interest loans before you think about using it for spending.

8. Fees and charges

It's not unusual for a mortgage loan to attract periodical fees and admin charges.

So you shouldn't consider interest rates alone when comparing home loans, you'll need to look at the total cost of borrowing.

This is reflected in the 'comparison rate' that lenders are required to publish in relation to the home loan advertising.

9. Keep your mortgagee honest

Don't assume that the monthly statement that you receive from your lender is always correct. Double check every statement, line-by-line, and you will be surprised at what you might find!

10. Apples with apples

You can't rely on interest rate comparisons to find the best home loan. Fully featured, flexible home loans are more expensive for the lender to administer and will therefore cost you more. When doing a comparison between loan options, make sure that the interest rates that you are comparing are for loans with all the same features.

11. Mobile mortgages

If you see yourself in a position where you might need to move home in the not-too-distant future, you might give some thought to a loan that will allow you to transfer your mortgage without the need to refinance the loan.

This can potentially save you a fortune in refinancing fees - but keep in mind that your existing loan amount will be a factor in your future purchases.

12. Redraw?

If you have paid extra payments on your mortgage, you may find the need to access the additional that you have paid (and the interest you've saved). This redraw facility is available on many loans - but not all.

There is a cost attached to loans with a redraw facility so, if it's not something you'll use, you may be better off with a more basic loan with a lower interest rate.

13. Research

Unless you are intending to utilize the services of a mortgage broker, you should be prepared to compare many, many lenders, each offering a lot of choices. So don't be rushed into the first home loan that looks good.

14. Keep the ATO on side.

Property investors can enjoy considerable tax deductions on rental properties but the ATO is not your friend if you over-claim. Things like depreciation, travel expenses, repairs, etc are all deductions for the investor - but there are some traps and limitations that could land you in hot water with the ATO.

Operating an investment property is akin to running a business. It's highly recommended that you use a professional accountant to advise you on all tax matters relating to your property.

15. Comparison rates

Comparison rates that are advertised by lenders are great for comparing the total costs of one loan over another but they don't take into account the differences in features, benefits or flexibility of the loan.

When you are looking at cheap loan offers, be absolutely sure of what you are getting for your money.

 

16. Brokers

A broker can help you find the right loan, compare loans, advise on loan options, prepare and submit your loan documentation and a whole lot more - saving you considerable time and money.

You should choose a broker carefully however to ensure that you are getting what you expect. Ask the broker to provide a list of the services that he will provide together with the costs of those services and how they are to be paid. In most cases the broker will be paid by the lender in the form of commission.

You should also ensure that your broker gives you a clear, written explanation of the product that is being recommended to you and why he/she has recommended that product over others.

The broker should disclose all commissions that will he or she will receive from the lender including both initial and ongoing 'trail' commissions. If the broker is to earn trail commissions, you may want to ask for a written undertaking of the ongoing service that you can expect in return.

17. Keeping the books

You should always maintain a thorough record of all your payment receipts, bank and mortgage statements, other correspondence to and from the lender as well as a diary note of any verbal communication that you may have with bank staff. Most lenders are sizable institutions, dealing with massive numbers of customers, loans and transactions every day. This means that mistakes can be made, things get lost and staff are moved around - leaving you to explain your problem all over again.

By maintaining a record of everything, you will make your life a lot easier.

18. Not just banks

Before taking the leap, don't assume that the big 4 banks have the best deals - if you can meet their qualification criteria. Not so.

Non-bank lenders such as credit unions, building societies, originators, community banks, privately owned finance companies etc are all prepared to compete for your business. Their rates are often lower, their products more flexible with lower fees.

You may even find the service a lot more personal with a smaller institution.

19. Make it flexible

Nothing ever stays the same and your financial and other circumstances will continue to change over time.

It is a very good idea to make sure that your home loan offers the flexibility to accommodate your changing needs.

After all, 20 to 30 years is a long time.

20. When interest rates drop

If you are managing your monthly mortgage payments and your interest rate is lowered, you should consider maintainging your existing repayment amount, leaving the surplus to further reduce your loan.

This strategy is also a good defense against the impact of increasing interest rates down the track..

21. The extra dollars

When you save or invest money, you earn interest and pay tax. Paying textra money into you mortgage has a similar effect to earning interest - because you are reducing the interest you pay - but without the tax.

If your loan has the flexibility - and most do - consider shifting your savings into your mortgage account to reduce the balance and the interest. Just be sure that the redraw facility offered with the loan has the flexibility that you need should you have to get your hands back on the money.

22. Up the frequency

If you are paying off your home loan monthly, consider changing to fortnightly or weekly installments. It's surprising the difference that this simple strategy alone will have on the time it takes to repay your loan and the amount of interest that you'll pay.

23. No vices!

No, I'm not taking the moral high ground but, if you were to stop smoking, alcohol, gambling, etc, the extra money that you could pay off your home loan would have it paid out in a fraction of the time.


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