Searching for a new home is an exciting time, especially considering that purchasing a complete house and land package is now easier than ever before. However, before you can move into your dream house, you’ll need to find a mortgage. There is a huge range of options available to you when selecting a mortgage and a variety of fee structures, lending organisations and interest rate options are on offer. We’ve put together a quick guide to help you select the mortgage option which best suits your needs.
Big banks versus credit unions
Banking institutions offer an assortment of home loan options and shopping around for the best rate and package is certainly important. Banks, however, are not the only financial institutions who can provide you with a home loan. When on the hunt for a lender, you might also consider taking a look at a credit union. While accredited to provide finance in much the same way as banks, credit unions, as well as mutual banks and building societies are very different organisations, as they are owned by their members. With members as shareholders, credit unions are interested in providing the best solution for their clients, as each and every member has an equal share in the interests of the business.
While credit unions provide a real alternative to lending from a bank, that does not necessarily mean your credit union can provide you with a better deal. It is important to investigate the fees, interest charges and even reborrowing options of any mortgage offering. Be that as it may, it is worthwhile approaching a credit union for their best home loan offer, as you may be pleasantly surprised.
In Queensland, as well as in some other states, there are also finance options available from the government, for those who cannot obtain finance from a bank or a credit union. You can find out more about that here.
Fixed or variable rate
When applying for a mortgage, you will be given the option of a fixed or variable interest rate. As with all loan options, there are both positives and negatives to each scenario. A fixed rate mortgage will allow you to lock in a set interest rate for a period of time (be that one, three or five years.) This can provide you some security in that your repayments will remain steady, and you won’t be unpleasantly surprised by any interest rate rises within the fixed timeframe. Generally, in order to secure that fixed interest rate, your rate will be slightly higher than that of the variable rate at the time of your loan agreement being signed. While you are protected from interest rate rises for the period of your fixed term, you are also unable to take advantage of any interest rate decreases which may occur.
Deciding which option to take will involve speaking to your chosen bank (or credit union) about the best interest rate they can offer you in both scenarios, before thinking long and hard about your financial situation. Can you afford to absorb an increase in interest rates, if they happen to rise within the next few years? Are you willing to take the risk on a lower interest rate in the immediate term, if there is a possibility this rate will rise? Would you prefer the security of a fixed interest rate, which is predictable and less risky, despite a slightly higher rate?
Beyond the selection of your financial institution and the interest rate you’re likely to pay, there are several variable options on a mortgage which may prove to influence your decision. These include:
- The length of the mortgage. Generally, a mortgage will be either 25 or 30 years. While the 30-year option will reduce your monthly repayments, it will also result in more interest to be paid over the length of the loan.
- Options to make extra repayments or pay out early. Some loans will penalise borrowers for paying out the loan early, whereas other will allow you to make extra repayments and pay your mortgage off sooner.
- Re-draw facilities. Many financial institutions will offer a re-draw option on their mortgages which allow borrowers to draw down on their equity and use this for things such as renovations, or other expenses, rather than take out another loan. This option could come in handy in the future, and is worth considering.
- Financial hardship. While you hope that it never happens to you, it is important to understand what conditions apply to your loan in times of financial hardship. Some lenders will allow borrowers to delay their payments (for a few months, generally) if they encounter unexpected financial hardship.
- Consolidation. Are you able to consolidate any of your existing debt, or things such as credit cards, into your mortgage? Many lenders offer the option of a credit card, for example, which does not attract extra annual fees beyond those already incurred in your mortgage. This kind of option can save you on extra yearly fees, while consolidation may mean that you reduce the interest on other loans that you are already paying.
For assistance understanding these, and other factors involved with choosing your mortgage, you may wish to consult a mortgage broker, as well as your solicitor and even a buyer’s agent. Once you’ve done the leg-work and found the right kind of home loan for you, you may decide to seek pre-approval from your lender, which will allow you to begin shopping for your new home with some degree of certainty. If you’re hoping to buy a new home, without all the fuss involved in sourcing land, finding a building, seeking council approval and the myriad of other conundrums you may encounter, get in touch with our team, and we can take care of it all for you.