Let us begin with a basic equation. The ultimate cost of your home loan will depend on

• the amount borrowed
• less your deposit
• multiplied by an interest rate
• Calculated over the length of the repayment period.

A large deposit and a short repayment period may lower your interest rate. This combination can drive down the cost of borrowing dramatically, and wise old owls advise planning toward that goal. The rest of us, who live in the real world, often begin with the stark reality of a small deposit, potentially as little as 5% of purchase price.

This can be a good idea or a bad idea, depending on the rest of the plan. A mortgage broker at OH Mortgage Solutions can help you work through your options. Having begun with a basic equation, it’s time to walk through the mortgage process from getting your financial house in order to making your mortgage choice.

Three Bits of Preparation Potential Home Buyers Should Do

Take Advantage of Special Incentives for First-Time Home Buyers

If you are a first time home buyer, make sure that you take advantage of the incentives that may help you maximize your deposit. The First Home Owners Grant (FHOG) is a tax-free government payment of up to $7,000 to anyone buying a first home in Australia. State and territory governments may offer additional bonuses and tax concessions. If you set up a first home savers account, the government will make a 17% contribution on amounts you deposit, up to $5,500 per year and subject to certain restrictions.

Check Your Credit Report

Lenders are really simple creatures. They just want reassurance that you can repay what you borrow. If you make them feel uneasy, they will raise your interest rate. You can maximize the buying power of your deposit with strong credit. Check your credit report, and if there are infringements, bankruptcies, credit card defaults or large unsecured debts, take the steps necessary to address the situation. You can get information about how to check your credit report at the Australian Securities and Investments Commission website.

Develop a Strong Track Record of Savings and Employment

A lender will also want to know about your assets and income. Even if you are not eligible for a first home savers account, you can improve your borrowing capacity by showing that you have a strong employment and savings history and actual savings of at least 5% of the purchase price of the property you intend to buy. Usually lenders look into your past 3 months savings from your income and contributions from other sources including family assistance, gifts, bonuses and incentives.

Now it is time to talk with a mortgage broker. Buying a home is a huge investment and should be part of a larger financial plan. A good mortgage broker, particularly one affiliated with a firm of solicitors, can help you put these decisions in the proper context of a financial plan. That is part of a larger conversation, though. For the moment, let’s focus on the mortgage process.

How to Get a Home Loan

Many potential home buyers work with a mortgage broker to be pre-approved for a loan even before they look at properties. It gives realistic parameters to the search process. You should be aware that there may be a mortgage application fee. Many institutions do not charge one, but for those who do, application fees may be as much as $1500. Make sure to ask about this.

As the first step in the process, a mortgage broker will help you to assess your borrowing capacity. This will have been greatly augmented by the preparation you have already done. If you are still coming up short in terms of the property you want to buy, consider looking for a guarantor for your loan. People have been known to ask their parents, but there may be other sources. If, for instance, your employer is asking you to relocate, a mortgage guarantee may be part of the package.

The critical acronym here is LVR, or loan- to-value ratio. If the loan you request is 90% or more of the value of a home in which you intend to live (the amount of your deposit is less than 10%), your lender will ask you to purchase a mortgage insurance policy to protect them if you default. This is an additional cost added to your monthly mortgage payment. That additional cost typically disappears at the 10% mark for owner-occupied properties. The threshold is typically 5% to 10% on investment properties. However, if the amount of your deposit is 20% or more of the property’s cost, you may discover that a whole new world of loans, structured in many different ways, opens up to you.

This is not your grandfather’s (or George Bailey of It’s a Wonderful Life fame’s) mortgage. Much financial creativity has been at work. These options include standard variable and basic variable rates, fixed rates, introductory, no-fee loans, split rate home loans, interest only, and line of credit loans. A sophisticated mortgage broker can help you explore these options.

Is a Low Deposit Loan a Good Idea?

Well, we’re back to the original question, aren’t we? The basic equation has four big variables: price, deposit, interest rate and repayment period. That makes room for some tinkering.

Advantages of a Low Deposit Home Loan

If you want to make a low deposit loan work for you, understand that you are signing up for active management. A smaller deposit may get you into a house faster. However, in the long run, it is likely to be more expensive in terms of interest rate and repayment period. If you can reliably anticipate that your income will rise or that your home will appreciate in value, you may be able to make extra payments or refinance your loan on more favorable terms. However, make sure that that you know what your current loan’s exit fees may be. Do this as soon as it makes sense, so that you can get into another kind of mortgage.

If you plan to renovate and flip an investment property, make sure that you understand the real estate market. This is not necessarily the place for amateurs.

Disadvantages of a Low Deposit Home Loan

The financial product is riskier, and we have had some unfortunate global experience lately with risky financial products. If you are not a sophisticated investor, and you just want a place to raise your family, a low deposit home loan may not be for you. Irrational confidence is not an investment strategy. Will saving for another year eliminate the need for mortgage insurance or improve your credit score? No matter how cramped your space, that may be a better way to spend the next twelve months. This approach may improve your financial profile for a host of purposes and lower your ultimate housing cost.

Now that you are balancing risk and reward, you are ready to get professional advice. You have enough information to consult with a mortgage advisor, like those at OH Mortgage Solutions. Schedule a free consultation to explore your choices. The professionals at OH Mortgage Solutions will be glad to speak with you and can be reached any time at www.owenhodge.com.au/mortgages or by calling 1800 770 780.

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