Getting your first loan? Here's what you need to know
When it comes to buying your first home, there are many daunting tasks to tackle. One of those tasks is securing your first home loan.
Before you’ve found your dream home, start looking for your dream mortgage. Without finance, there's no purchase - so make sure you get it right.
Choosing your first home loan
Fixed or variable? Packaged or unpackaged? A big lender or a small one?
To pick your home loan, there are three main things to think about:
- Your priorities
- Where rates will move
- The products
To navigate the myriad mortgage products on the market, you need to have your priorities clear. It's rare that one deal will be clearly better than all the others - instead, it's all about what's best for you.
You may be after low ongoing fees. Perhaps security against future rate hikes may appeal to you, or maybe you're more interested in capitalising on the next rate cut.
Firstly, remember that a mortgage is a long term commitment. It's incredibly unlikely that your life circumstances will stay constant over your entire mortgage term. Think realistically about how your life might change over the next five or 10 years - you might have ongoing health concerns that will make rate repayments harder, or go from a double income household to a single one. A new addition to the family will seriously change your finances, as will a career change.
Figuring out your priorities doesn't just mean figuring out your priorities for today. It means figuring out what your priorities will be a decade down the track.
With a variable loan, your interest rate will change each month, according to how your bank responds to changes in the Reserve Bank's overnight cash rate. With a fixed loan, you lock in a single rate for a set number of years - anywhere between two and 10. Your choice will be in large part informed by your personality and your priorities - some are more comfortable with variance than others.
As Mark Bouris writes, both fixed and variable options come with their own risks. Pick a variable loan, and you'll be paying more when the Reserve Bank increases the cash rate. Go with fixed, and you'll miss out on any rate cuts.
While nobody knows for sure which way rates will move, we're currently at a record low cash rate of 2.5%. For some, this means that fixing is a better option, financially speaking, as many expect the only way for rates to move is up. Fixed products will also make it easier for you to budget, as you'll know exactly how much money you need to put towards your mortgage each month.
However, 75.34% of all home loans written up in June were variable, perhaps due to the generally lower rates offered on variable loans than fixed ones.
And of course, it's not just the rate that matters, but the product and the bank's conditions. Often, fixed rate loans do not allow you to make extra repayments on the months that you have a bit of spare cash, or will charge you a fee to do so. You may also face a "break fee" if you sell your house before the end of the term and repay the entire loan, or if you change your loan.
The Consumer Action Law Centre recommends that borrowers consider their opt out fees upfront, rather than waiting until your circumstances change.
There's also the option to split your loan type, with a partially fixed loan. For example, if you know your budget is generally likely to be tight but that you occasionally get substantial injections of cash, from bonuses or short term contract work, you may want to choose a 50% variable and 50% fixed loan which limits your exposure to future rate hikes but still allows you to make extra repayments occasionally.
Of course, there's more to picking a home loan than just picking the type. There are also lenders, packages, fees and discounts to consider. Online comparison websites like finder.com.au can help with this task.
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But if you're struggling to sort out what is best for you, it might be time to bring in some help.
Mortgage brokers
A mortgage broker is someone who specialises in home loans and will negotiate with lenders on your behalf to arrange your loan. A good mortgage broker will help you select the best loan and secure it with your lender. But be careful - a mortgage broker often receives broker's fees or commissions by credit providers, which can influence what loan they recommend to you. So even if you do use a broker, you should still shop around for the right loan - and the right broker.
Questions you should always ask your broker:
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- How do you get paid?
Unfortunately, a broker will not always act in your best interest. Determining where they get their money from may help you identify any conflicts of interest. - Who is on your lending panel?
If your broker only has access to loan information from a few banks or lenders, you're not getting the full picture and could miss out on a good deal. If you know of lenders they don't, do some independent research. - What is your average client like?
Make sure you get a broker that specialises or at least has a good deal of experience with first home buyers - long term investors will have very different needs. - What are your license details?
Your broker should have an Australian Credit License, with their number displayed on official paperwork. Don't be afraid to google them and ask about professional indemnity insurance in case anything goes wrong. - What are some difficult deals you've pulled off?
Your mortgage broker should be open and honest about their previous dealings - remember, they're there to help you, so make sure you're going with someone with experience and confidence.
Knowing what you can afford
A large part of picking the right home loan is about knowing what you can afford. You might have saved up enough to make a 10% deposit on a $500,000 home, but that doesn't mean you can afford to make the monthly repayments on a $450,000 loan. There are a number of calculators available to you, including apps like tapMortgage and Approve Me.
tapMortgage can help you calculate your stamp duty, transfer fees, first home concessions and mortgage repayments. You can sort out the potential savings you would make with different repayment schemes or the total interest you'll pay on your loan. Approve Me is another app which can help you decide whether you can afford your prospective loan repayments. It even has a process for obtaining home loan pre-approval.
Knowing what you can afford is the most important part of choosing your first home loan. While many decide on how much they have for a deposit, the area they'd like to live in and even the kind of home they want before thinking about their mortgage, many experts recommend figuring out how much you can afford to pay each month before considering any of the more glamorous aspects of buying your first home.
Once you think you know what kind of loan suits you best, and you've gotten an idea of the kind of property you're after, it may be worth getting a mortgage pre-approval. While it's not a watertight guarantee you'll be approved for the loan of your choice, it's your best bet.
Running into trouble
No matter how well you prepare, there's always the risk of something going wrong. Unexpected costs and events can severely hamper your ability to repay your loan. If you think you're at risk of default, here's what you can do:
- Communicate with your lender.
Don't think your lender just won't notice if you stop making your loan repayments. Be clear with them about what's happening - they may be able to stop the process that will end in you defaulting on your loan and getting evicted from your home. - Enquire about hardship variations
A hardship variation is an amendment to the terms of your loan contract which may temporarily make your loan more affordable by decreasing your monthly repayments but increasing your overall loan term. For new loans, you should be able to apply for a hardship variation no matter what your loan size is. If they don't approve your hardship variation application, your lender must provide a reason. - Check your insurance
Depending on the reason for your default - loss of income, a health issue or a sudden death in the family, you may be able to claim cover that will assist you in paying off your loan. - Consolidate and refinance
Be wary of refinancing your loan to reduce your payments - like with a hardship variation, this is likely to only be a short term fix. Beware of hidden costs and fees. - Selling or renting
If you absolutely can't continue to repay your home, you may have to consider selling your property to pay off your loan. This is a long term fix, with its own major costs. You may also face extra fees for breaking your loan contract early. If you have alternative accommodation available - a parent's house, for example, you may consider moving back there temporarily and renting out your house. Again, this comes with its own costs, like the expense associated with hiring a property manager. - Seek help
If you run into financial trouble, you're not on your own. There are free and low cost services available to help those under financial stress, like financial counsellors and legal advisors.
Of course, the best way to avoid running into trouble with your first loan is to plan ahead carefully and choose wisely in the first place. Be honest with yourself about your payment abilities, and consider your mortgage as carefully as you're considering your first home purchase.