Image credit: Pixabay
Few things to consider if applying for Home Loan!
When it comes to home loan, there are a lot of things to consider along with careful preparation and it can be very confusing. So we have put together few basic tips together if you are considering for home loan for the first time.
Information below is for guidance purpose only and not the financial advice. Each Banks process may vary and always consult with your financial advisor.
1. Income
Needless to say that the higher the income the more the home loan you can secure.
Similarly a couple with two full times jobs on same pay scale is likely to have more borrowing capacity than the couple with one full time & one part time job.
If you are a couple looking for the maximum home loan, it is often recommended to wait until both of you have full time jobs for a considerable period before applying for a home loan. This way you may not have to give up on few luxuries in your dream house like kitchen upgrades, nice flooring, stylish bath area, fancy lights, bigger rooms or backyard etc.
It is also recommended that you minimize the expenses for considerable time before applying for a home loan. Most banks take in consideration of your expenditures for past 6 months and calculate how much you can save to determine the home loan.
2. Save, Save & Save
Save, save and save now to avoid paying more repayments, interests and Lender Mortgage Insurance(LMI) in future. It has often been seen that, once your repayments for the home loan starts then it’s very hard to save.
Specially LMI, which is something you could avoid if you could accumulate 20% of the house/land price.
How does the repayment & interest work?
If you are considering the home loan for the very first time, then it is very important to know how does the repayment & interest work.
Usually you can make repayments weekly, fortnightly and monthly.
But what most first time home loan borrowers may not realize is that even after the weekly, fortnightly or monthly re-payment, depending on the bank and the interest types, the interest on remaining loan is then added to your loan on monthly basis.
For an example, lets say your monthly repayment is $1200 per month but the interest (annual interest which is when divided monthly) is $900.
So you are basically only paying $300 per month towards your loan.
3. Lender Mortgage Insurance(LMI)
Lender Mortgage Insurance(LMI) is the fee that the lender charges you if your home loan deposit is less than certain percentage (e.g. 20%) of the home loan. So you may be able to borrow from the financial institute or a bank to buy/build but this fee will be added on top of your home loan.
So LMI is an insurance that a lender (a bank or financial institution) takes out to insure itself against the risk of not recovering the full loan balance should the borrowers, be unable to meet their loan payments.
It is really important that you save enough for at least 20% for the home loan deposit before you consider for the home loan if you want to save LMI.
LMI is calculated as a percentage of the amount borrowed. The lower the deposit the higher the LMI. It increases as the Loan to Value Ratio(LVR) and loan amount increases. LVR of more than 80% is considered to be a higher risk to the lender. Hence the borrower is required to pay for LMI.
Different lenders have different rules about when LMI is required. When you apply for a home loan, the lender will help you determine if LMI is required. They should also let you know what the approximate cost of the LMI will be.
LMI protects the lender – it doesn’t protect you at all.
LMI is different to Mortgage Protection Insurance.
Most Lenders charge LMI on Land Loan and separate/extra LMI again on the Construction Loan if the deposit is less than 20%.
4. Mortgage Offset Account
For the first time borrower, it is very important to keep the Mortgage Offset Account in mind while considering a home loan.
An offset account may help you reduce interest on your home loan and pay your home loan off faster.
It is an account(savings or transaction account) which is linked to your home loan account and it offsets the balance against the balance of your home loan. This means you pay less interest on your home loan as you’re only charged interest on the difference between the total loan balance and the amount offset. Over time these savings can really add up and also reduce the time it takes to pay off your loan.
For example, if you have a home loan balance of $300,000 and have $25,000 in your offset account you’ll only pay interest on a home loan balance of $275,000.
However not all the offset accounts are the same, depending on the type of loan you choose, you might want to consider a full offset(100%).
So it is certainly recommended that you check with your bank or your financial institution if your loan is eligible for an offset account.
Redraw option:
Some banks may also offer the redraw option on your home loan account. With this option, you will be able to make extra payment on your home loan and these extra payment will reduce interest on your home loan similar to offset account. You will also be able to redraw this amount if you are in need of some extra cash.
5. Interest Only Payment
Interest-only home loan is the type or a period when you pay only the interest on your home loan hence this type of home loan seems more attractive and affordable because the repayments are lower compared to the repayments on principal and interest loans.
But interest-only loans could cost more because the amount of loan will remain the same as it does not reduce during the interest-only period, which means you will pay more interest over the life of the loan, compared to a principal and interest loan.
Also repayments will increase at the end of the interest-only period. When the interest-only period ends you’ll have to start repaying the principal and the interest – and, with less time to pay it off, your repayments are likely to be a lot higher.
Disclaimer:
The information contained in this section are for general information and guidance only and based on the residential area in Melbourne. The actual process may vary depending on the banks and financial institutions.