seven keys to finding the right home loan

SEVEN KEYS TOFINDING THERIGHT HOME LOAN

HOMEBUYERSFINANCE.COM.AU PAGE 1

INTRODUCTION

Do you dream of owning your own home? For the vast majority of Aussies, home ownership is only achievable by taking out a home loan.

Unlike 30 years ago, homebuyers today have varied and often, complex needs. Navigating the maze of different lenders and types of home loans is challenging.

While most people invest a lot of time and effort into finding their ideal home, a surprising number don’t approach the process of choosing their home loan with the same level of care and attention.

Researching home loans may be considerably less exciting than visiting open inspections, but the reality is that your mortgage is likely to be the biggest financial commitment you will ever make – get it wrong and you can potentially be faced with:

– unnecessary financial constraints and restrictions on your lifestyle.

– extreme financial pressure and mortgage stress over the long term.

– an unhealthy work-life balance as you struggle to meet overly high repayments.

Doesn’t sound appealing does it?

Fortunately you can avoid all this by taking the time to find the right home loan for your needs and circumstances and by getting high quality advice from reputable providers.

By making an informed and researched decision on your home loan, you can accomplish your goal of property ownership while still living a normal life and achieving a rewarding work-life balance.

You shouldn’t have to give up holidays and socialising, nor compromise on your family’s needs to meet your monthly repayments, in fact if this is what you’re doing, it’s proof that you’re in the wrong home loan.

This e-book aims to help you avoid the many traps and pitfalls that we’ve seen people experience when they are trapped in the wrong home loan.

We hope that by understanding the seven keys, you will feel more relaxed, confident and financially savvy about the process of choosing a home loan, so you can make the choice that’s right for you.


Mortgage stress is a reality for all too many Australian families.

If you don’t want to find yourself among the ranks of those struggling to meet their monthly repayments, it’s crucial that you are honest with yourself about your current financial situation and your expectations for the future before you make the decision to apply for a home loan.

HOW MUCH CAN YOU REALLY REPAY?

The maximum amount a financial institution will lend you is not necessarily the amount you should borrow. Lenders base their calculations on a theoretical estimate of the cost of living

compared to your income, level of debt and number of dependants. Maybe some people can live comfortably within these financial limits but everyone has different lifestyle needs and expenses. When deciding how much to borrow, look at how much you would be comfortable repaying, not how much you can get from the lender.

For example, say you take out a $420,000 home loan over 30 years with an interest rate of 7.3%. Your monthly repayments (principal and interest) would be approximately $2,877.

Before you agree to a loan under these terms, take some time to really consider whether you can

afford to repay that amount each month by looking at the following:

– Are you already spending that much on rent?

– Are you putting aside that much in savings?

– Are you willing to permanently cut out some of your lifestyle expenses so you can meet your repayments?

– Will you have enough left over to cover essentials like utilities and insurance?

– Will you still be able to save and have some left over for holidays?

– Do you have expenses that are likely to increase in the future (for example school fees or medical needs)?

KEY #1

KNOW YOUR FINANCIAL $ITUATION


Many people realise after it’s too late that they should have waited before taking out a home loan and put their focus into saving a bigger deposit for a future purchase. Evaluating what you can really afford now can help you realistically gauge your options and understand what your life will be like with a mortgage.

Your income and expenses are not the only factor you will need to take into account when evaluating your financial situation. You also need to be aware of what your credit file says about you.

WHAT IS YOUR CREDIT FILE?

Any time you have applied for credit of any kind (including a mobile phone contract)

your details will have been added to a credit file. This file contains details of any defaults, judgements, bankruptcies or current enquiries and it is one of the first places a lender will look when assessing your application.

Credit files exist as proof of your ability to manage your financial liabilities effectively (or otherwise!). If you’re planning to apply for a home loan in the foreseeable future, it’s well worth getting a copy of your credit file so you can be forewarned of any potential hurdles.

Even if you haven’t had any defaults, your credit file can still trip you up. One common situation that we have seen first hand is when potential borrowers make too many enquiries. Each

time you seek preapproval from a home loan provider, a note will be placed in your file. Too many of these enquiries within a short space of time and you may find that some lenders don’t take you seriously.

Being informed about your current financial situation and how you appear to lenders is an essential first step to finding the right home loan for you.

It can help you negotiate more confidently and keep a realistic perspective so you don’t end up taking on more than you can handle.

Once you have a clear picture of your financial situation you can start talking to lenders and brokers to find out what loan is right for you.

THE MAXIMUM AMOUNT A FINANCIAL INSTITUTION WILL LEND YOU IS NOT NECESSARILY THE AMOUNT YOU SHOULD BORROW.

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If you’ve ever been to an open house or an auction you’ll know there are usually three types of people there:

1. nosy neighbours2. dreamers3. serious buyers

If you want to move from the dreamer category to being a serious buyer, preapproval will get you there. Without preapproval you won’t be able to really know whether or not you can afford a particular property and for many people, this uncertainty becomes a barrier to bidding at an auction or feeling comfortable to approach real estate agents.

There are a number of advantages to getting a home loan preapproval. With a preapproval you can be confident about your borrowing capacity and you get much of the application process out of

the way early on, so you can focus your energy on finding your perfect home.

What some borrowers fail to realise when they get a preapproval is that preapprovals are conditional. If you want to avoid any surprises when settlement comes around, make sure you are aware of all the terms and conditions of your preapproval before you make an offer or a bid at an auction.

To avoid any potential issues, there are a few questions you should always ask your lender or broker:

– Are there any further verification requirements before I settle?

– Will the funds be used to pay out other loans or credit cards? If so does this mean I won’t have access to these funds after settlement?

– Do I need to finish a probation period at my new job?

– Do I have to show further evidence of savings?

– Is my approval subject to employment verification checks?

– Is my approval subject to a lender’s valuation?

– What are the responsibilities of the other parties to the loan?

– What is the expiry date on my preapproval?

Remember, if your financial circumstances change at any time after the preapproval has been granted, speak to your broker straight away. Any changes in your circumstances could affect your preapproval.

Once you have that preapproval, you are one step closer to your dream home and you can start looking and bidding on properties with confidence.

KEY #2

GAIN CONFIDENCE WITH A PREAPPROVAL


While it’s never too early to start researching and educating yourself about your home loan options, when it comes to applying, it’s important not to rush the process.

Applying for a home loan on impulse can lead to long-term regrets. No matter how many incentives are dangled in front of you, taking time to learn how home loans work can help you understand the fine print and make an informed decision. While two home loans might look the same or be from the same bank, the reality is that no two loans are the same.

From qualifying criteria to interest rates, features and the structures of different home

loans, make sure you fully understand what you are being offered before you decide on a lender and product.

If you’re planning to use an existing property to secure your home loan, it’s worth taking a bit of extra time to educate yourself on loan to value ratio and how it impacts your individual circumstances.

LOAN TO VALUE RATIO (LVR)

The loan to value ratio (LVR) is one of the most important factors lenders use when deciding how to structure and price your home loan. LVR comes into play when you use a property to secure your home loan. It is calculated as

a percentage based on the amount you borrow divided by the market value of the property used to secure the loan.

Depending on your LVR you can access some great interest rates or alternatively find yourself excluded from certain loans. The type of property you are using to secure your loan also plays a part as lenders will treat residential, commercial, rural and even inner city apartments differently.

Be particularly wary if you are planning to use a small apartment to secure your loan. Apartments that are smaller than 50 square metres are often viewed as higher risk by lenders and to manage this risk, they

KEY #3

TIMING ISEVERYTHING


may offer a lower percentage of the market value, which the applicant can borrow.

Some types of apartments may not even be considered as acceptable security.

There is a large amount of variation between different lenders when it comes to what will and won’t be accepted so it pays to get expert advice.

PREAPPROVAL TIMEFRAMES

It’s important that you don’t submit an application for

a preapproval until you are ready to start looking. If you don’t find a property within the preapproval time limit you will have to start again from the beginning and too many preapproval applications can adversely impact your credit file.

If you have a property in mind already, make sure your preapproval expiry date exceeds your settlement date.

On the other end of the spectrum, waiting until you have made an offer and rushing

to secure finance in the cooling off period is never a good idea.

You could be rushed into making a bad decision and if you run out of time to gather your required documents, you could potentially lose your deposit.

The most appropriate time to submit a preapproval application is once you are ready and prepared to seriously start looking. After it has been approved you will usually have three months in which to find and purchase your property before it expires.

YOU COULD BE RUSHED INTO A DECISION AND IF YOU RUN OUT OF TIME TO GATHER YOUR DOCUMENTS, YOU COULD POTENTIALLY LOSE YOUR DEPOSIT.

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ASK THE RIGHT QUESTIONS

Nobody enjoys dealing with pushy sales people but when you are trying to find the right home loan, unfortunately there are some advisors out there who put their own agenda before the benefit of their clients.

It’s crucial to find someone you trust who can offer you reliable, personalised mortgage advice and who has your interests at heart.

If the person you are dealing with is constantly pushing one product, doesn’t take time to listen to your situation, learn about your financial goals and talk through your concerns, they are probably not someone whose advice you should take.

While it’s good to deal with someone who knows their product inside and out, make sure the conversation is focused around you and your needs so you can learn which product is going to be right for you personally, not what the advisor wants to sell you.

To ensure the product you are discussing meets your needs the conversation should focus around you.

Here are seven points we would suggest discussing when you are speaking to a loan advisor or broker about their products on offer:

1. What you want to achieve through property ownership.

2. What lifestyle and entertainment expenses you want to maintain.

3. How you like to do your banking.

4. How you like to access your funds.

5. Your real purpose for borrowing.

6. How long you intend to keep the property.

7. What changes you may experience in the future, either through employment or other foreseeable changes to your expenses.

By thoroughly discussing these points, you can avoid ending up with a loan that has pointless features you’re never going to use, or that is missing some vital features you need.

KEY #4

ASK THE RIGHT OUESTIONS


Researching all the different lenders and products takes time, patience and the motivation to read countless product disclosure statements and compare all the options.

As well as this you will need to be thorough with key lenders so when the time comes to apply, they are clear about you the applicant, your borrowing purpose, how you will service the loan, and the security to be mortgaged.

Many people, understandably, don’t have the time or the inclination to go through this process so they either take the first loan that they can get (never a good idea!) or they use the services of a broker.

A broker will do all the work for you, they can explain the most appropriate options in clear language that you will

understand and they already have relationships with lenders, making the application process much smoother and quicker.

Here are some of the benefits of using a broker to find your home loan:

– you can get access to a number of different products, some that you might not be aware of

– a broker understands how home loans work so can help you find the one that fits with your lifestyle, goals and current situation

– a broker can steer you in the right direction and advise you to seek further legal advice when required

– a broker can help you avoid paying more for features you won’t need

– brokers have relationships in place with the leading

financial institutions, which can help you get your loan processed more smoothly

– when you deal with a broker, you only have to deal with one person rather than multiple people

– a broker can help reduce stress considerably

– brokers are required by law to stay up to date with current developments and industry changes – this means you can avoid being tripped up by out of date or inaccurate advice

Many people opt to use the services of a mortgage broker. When you’re dealing with a home loan, any mistakes could make you feel distressed until you rectify the situation.

If you want to save time, reduce stress and avoid potential problems, a broker is a good way to go.

KEY #5

USING ABROKER


MANY PEOPLE, UNDERSTANDABLY, DON’T HAVE THE TIME, OR INCLINATION, TO GO THROUGH THE PROCESS SO THEY EITHER TAKE THE FIRST LOAN THAT THEY CAN GET (NEVER A GOOD IDEA!) OR THEY USE THE SERVICES OF A BROKER.

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The world of home loans is very different now to the way it was when your parents got their first mortgage. The average borrower these days has very different needs and expectations than in previous generations and this is reflected in the different products and features that are now available.

Depending on your personal circumstances and future financial goals, you now have a vast array of options available to you.

Understanding what is out there can help you decide between products so you can find the home loan with the most appropriate features for you, and also avoid taking out a loan with costly features you aren’t going to use.

Here are some of the options you will have available to you when you take out a home loan:

– Low document loan. Great for people who are self employed and don’t necessarily have pay slips to present as evidence of income.

– 100% offset account. This allows borrowers to place their savings in an account they can continue to use for transactions. The money in these accounts then offsets the interest they would otherwise pay on the home loan.

– Redraw facility. This allows borrowers to make additional repayments to their home loan, with the option of taking these additional payments back out again in the future if they need to.

– Fixed rates. Rather than a variable rate that will fluctuate

as the interest rate rises and falls, a fixed rate home loan keeps it at a steady rate, giving borrowers stability and certainty over repayments over a set period of time.

– Loan portability. This is a feature that caters for borrowers who know they will be moving from one home to another in the future.

Regardless of what options you choose for your home loan, your lender will have some expectations of their own before they approve you for a loan.

Be aware that fulfilling these expectations can often seem like jumping through a series of hoops as you provide all the documentation they need to satisfy them that you are not going to expose them to any undue risk.

KEY #6

KNOW YOUROPTIONS


Your home loan shouldn’t be a set and forget process. To be sure that you’re getting the right rates and the most appropriate loan for your circumstances, you need to regularly review your existing loan and research other products in the market.

Change is an inevitable part of life, and financial, family and housing changes can mean that your once perfect home loan is no longer completely meeting your needs. This can lead to frustration and financial headaches.

If you have been in the same home loan for a few years, it is probably

worth speaking to a broker to see if it is still competitive and evaluating whether it still meets your family’s needs.

Here are some common reasons people decide to refinance and review their existing home loans:

– they’re seeking a better rate than their current home loan

– they want to save on total repayments made over the long run

– they want to consolidate their debts to increase their disposable income

– they want to access cash for investment purposes

– they want to access cash to renovate their home

– they’ve made the decision to purchase an investment property.

Whatever your reasons, a reputable mortgage broker can help you evaluate your current loan and explain what options are available to you.

Once you have secured your loan and bought your property it’s not the end! Regularly reviewing your home loan can help ensure you are getting a competitive interest rate and structure suitable to you, no matter how your life changes.

KEY #7

REGULARLY REVIEW YOUR EXISTING LOAN


CONCLUSION

By now you should have a solid understanding of the seven key factors involved in finding the right home loan for you. Hopefully you are feeling more confident about finding and applying for a home loan and getting on the path to buying your dream home or investment property.

Whatever your personal circumstances or property goals, the right advice can help you achieve them sooner and protect your financial future.

At Home Buyers Finance we can help you further delve into the details of the available home

loans, so you can find the loan that is most appropriate for your circumstances.

Our brokers are experienced, reliable and we will take the time to go through your situation and your needs to identify the right product for you.

Don’t become another mortgage stress statistic!

Call us today for a complimentary consultation to discuss your situation and take the first step towards making your dream of owning your own home a reality!

PLEASE NOTE: This article is general information only, and is not advice. You should not rely on it as advice. We recommend you speak with a credit licensee or authorised credit representative, licensed financial service provider, registered accountant or tax practitioner, or lawyer for any credit, financial, tax, or legal advice.

HOMEBUYERSFINANCE.COM.AU

1300 996 997

[email protected]

Australian Credit Licence 388438

Level 13, 200 Queen StreetMelbourne VIC 3000

24 Stanley AvenueHawthorn East VIC 3123

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