Choosing the right mortgage is not just important for your needs, but could make the difference of thousands of dollars in the long term. There are so many products from so many financial institutions all with differing interests rates and a plethora of features and fees. So where do you start? Aside from seeking help from a financial advisor (which may be a very wise decision), there are some ways to begin narrowing down which loan is right for you.
Purpose and requirements of the loan
First consider the purpose of the loan. If you are a homebuyer intending to live in your property you will require a home loan while investors need a residential investment loan. The next step is to decide what type of loan will best suit your needs. For example, do you want the flexibility to pay off more than your scheduled payments or offset your mortgage against your regular transaction account thereby saving on interest expense? Would you like a credit facility on your account for personal purposes such as purchasing a new car or making home improvements? Would you prefer a fixed or variable rate? If you and your spouse intend to start a family in the future will you need a period of time where you will be able to reduce your repayments? Over what term (how long) do you intend to repay the loan?
Be familiar with the features of several loan products. Keep in mind too that many banks will also allow you to split your loan amount over more than one type of loan to meet your needs – this can be useful if part of your loan is for investment and you need to claim your interest payments as a tax deduction. The following lists of features are typical of those offered by many loan products (most of which incur one-off or ongoing fees).
Additional repayments: Making extra payments when you can save thousands and cut years off your loan.
Portability: If you move house, this feature will allow you to keep the same loan. This may incur a fee but will still be less than establishing a new loan.
Redraw: Allows you to have access to any additional payments you have made above the normal scheduled repayments.
Credit facility: Rather than take out a separate loan for personal finances such as renovations a credit facility on your loan increases the credit limit on your existing loan. This is subject to approval and other lending criteria.
Repayment holiday: By building up extra funds in your loan account you can take a break from making regular repayments for as long as there are extra funds in your account to cover them.
Parental Leave: Lets you to reduce your repayments by up to 50% for up to six months. Conditions will apply.
Mortgage offset: Links your mortgage with your transaction account so that every dollar in your transaction account offsets the interest calculated on your mortgage.
Income to loan account: By depositing all your income into your loan account you can save in interest calculated on your mortgage and still access cash or pay bills by setting up automatic transfers into other transaction accounts (held with the same bank).
Consolidation of accounts: An account which merges your transaction, savings and credit accounts may simplify your banking and save you interest on your loan with every dollar you deposit into the account while still giving you access to funds through the usual facilities.
Refix: Allows you to enter into another fixed loan rate at the end of your current fixed rate period.
Long term expenses
Try to prioritize your preferred features in a loan (some banks have online questionnaires to help you with this) and calculate the long term costs of the options you are considering. If you make the most of the features of the loan, will you save more than if you chose the loan without the features even though its interest rate is slightly lower? This may depend on how disciplined you are with budgeting, your family’s lifestyle and your future plans. Think about these things as well in order to forecast as accurately as possible your ability (and limitations) to repay your loan.
Word of Advice: A mortgage is a guarantee or pledge to repay the loan you take to buy real estate. The word mortgage comes from a French word ‘mort’ (death) and means ‘agreement until death’. Keep this in mind when reading the terms and conditions of the mortgage you are entering!