Once you tie the knot and can’t wait to spend the rest of your life with your significant other you’ll want to think about taking the next major step – buying your first home. You’ll have a place that you can call yours and you can even start to think more seriously about starting a family if you haven’t already.
Buying your first home is undoubtedly an exciting time but it can also be rather daunting. If you thought planning a wedding was challenging then just wait until you dive deeper into the process of buying a home. One of the more complicated steps is applying for a loan. Here we have put together a first-time buyer’s guide to home loans.
Before you start looking at homes, you’ll first want to know how much you can borrow. Lenders will look at your income and credit history to calculate a maximum loan amount. Other factors like your debt to income ratio and deposit also play a role in how much lenders are willing to lend.
Being pre-qualified means that a lender has determined how much you will likely be approved for based on your financial situation. Meanwhile, being pre-approved means that a lender has actually approved a specific loan amount. You don’t necessarily have to borrow the full amount but you’ll have a much better idea of the homes that are within your range.
A deposit is a key step in buying your first home. Lenders typically require deposit s to help offset their risk. You should start saving as much as you can for a larger deposit for several reasons.
If you put down less than 20% of a property’s purchase price, you’ll need to pay an additional cost called Lenders Mortgage Insurance (LMI) – A one-time payment designed to protect a lender in the event of a foreclosure. Putting down a smaller deposit also means that you’ll have to pay more in interest over the long term.
A common question first time home buyers have is whether to choose a variable or fixed-rate loan. Variable-rate loans are directly tied to the RBA cash rate, meaning that the interest rate on the loan will move up or down. Variable-rate loans typically provide the most flexibility in that you can make extra repayments at no cost if you have a sudden windfall. But if interest rates increase, you’ll need to pay more each month.
Fixed-rate loans are exactly what they sound like – Loans that have a fixed interest rate. Even if the RBA cash rate goes up, you’ll still be paying the same amount. However, fixed-rate loans typically have limits on extra repayments and redraw facilities may not be offered.
Another option you can consider is a split rate loan which lets you fix a portion of the loan and leave the rest on a variable rate. These types of loans can be a good option for you if you want the stability of a fixed rate but want some of the additional features that variable loans have such as offset accounts.
If you’re looking to buy your first home, consulting with a mortgage broker is a good first step. A broker can evaluate your financial situation and advise on which home loan option is right for you.
Kym Wallis, the founding director of Higher Ranking has over 15 years of advertising sales, digital strategy, and business development experience. He is currently working as Digital Adviser for Acclaim Rewards AU.