The mortgage costs you didn’t know existed
Before you apply for a mortgage there are a number of things you need to consider.
Setting up a home loan can be quite expensive and there are many costs related to the purchase.
Please read on to find out what questions you should ask yourself before you apply for a home loan.
"Can" you or "should" you borrow?
If a bank tells you that you can borrow $500,000, does this mean that you should?
The banks can calculate your borrowing capacity, however only you can work out how much you should borrow. This is because:
- You may have a higher standard of living,
- The bank doesn’t know your future plans (e.g. starting a family), and
- Borrowing to your limit can put you at risk if interest rates increase.
What will the lenders take into account?
Your income is the most important factor that determines your borrowing power.
Every lender has different requirements, however most banks will look closely at your current financial commitments and debts when calculating how much you can borrow.
If you have other credit cards, personal loans or a HECS debt, this might impact your ability to manage your mortgage repayments.
It is essential to make sure that your income covers all of your current financial commitments and the new proposed loan.
Do I have to pay LMI?
By having a deposit that is 20% of the property value, you can avoid Lenders Mortgage Insurance (LMI).
If you are borrowing more than 80% of the property value, you will have to take out LMI and pay an LMI premium.
This can be quite a large cost that you will be required to pay on top of all the other costs associated with your home loan. The advantage of LMI is that you may qualify for a home loan with as little as a 5% deposit.
Why should I reduce my risk?
Make sure that your finances can cover any expenses that may arise if your circumstances change. These can include events such as interest rate rises, starting a family, illness or unemployment.
By setting up an emergency fund and continually making deposits into it, you will have a buffer to cover any unexpected costs that come up.
You may also consider taking out income protection insurance, life insurance and trauma insurance which can reduce your risk further.
What if my interest rates rise?
It is essential to assess the impact that an interest rate rise will have on your loan. Ask yourself whether you will realistically be able to afford your mortgage on your current income if the RBA increased interest rates.
You should be able to afford a rate rise of up to 2%, so a good tip is to add this rate to your current home loan and calculate whether you would be able to make these repayments.
If you can cover the rise then you will avoid falling behind with your mortgage.
What about the types of loans and interest rates?
The type of loan you choose and the current interest rates can affect how much you can borrow. The majority of lenders usually add at least 1.5% on top of their standard variable interest rate when calculating your ability to repay the loan. This is known as an assessment rate.
For example, if you want to borrow $500,000 and the current standard interest rate is 7%, a lender will add the 1.5% loading, and will assess your ability to repay the loan if the interest rate was to increase to 8.5%.
Some banks will reduce their assessment rate by the discount on their professional package. If your mortgage broker can negotiate a larger discount, then this will increase the amount that you can borrow!
Why do lenders include a buffer?
Many lenders will approve your mortgage application if you can afford your repayments at the assessment rate and have enough money left over to pay your current debts and living expenses. In other words you have no spare funds left after meeting your commitments.
Other lenders will require you to have spare funds left over after paying your debts. This is known as a buffer.
The lenders include this buffer because if your situation changes you can still afford the debt and any significant interest rate rises.
If your bank uses a buffer then it will greatly reduce how much you can borrow for a house.
What about a fixed interest rate?
Fixing your interest rate can help considerably.
When you are applying for a variable interest home loan, the lenders are assessing you at 8.5% (using our above example).
However, if your interest rate is fixed at 6% for three years, then some lenders will assess your repayments at the three year fixed interest rate instead of their assessment rate.
This can make a huge difference, allowing you to borrow much more!
You will need to consider that when the fixed rate expires that your loan will revert to the variable rate at that time. So you should consider this option if you expect your income to increase before the end of the fixed rate period.
If you think that serviceability may be an issue, please enquire online or call us on 1300 889 743. We can determine the best home loan suited for your situation.
Can you really live on the bare essentials?
A mortgage shouldn’t mean that your finances are stretched!
Your home loan should be one that you can comfortably afford, not struggle with!
A mortgage is a long financial commitment and you need to ensure that you will be able to afford it and still enjoy life.
Be realistic about what you can reasonably afford, given your current obligations and way of living. Don’t just rely on our assessment or the banks assessment of how much you can borrow.
Boost your savings and budget!
There are many things that you can do to boost your savings. The first thing you should do is set up a budget.
A budget will let you know how much of your money you are spending and where to make changes.
Another good idea is to set up automatic payments into a high interest savings account.
This means you will be making regular repayments and you don’t have to put much effort into it. The transfers are done automatically!
Don’t forget the associated home costs!
There are many costs of owning a home! Just like mortgage repayments, these will be ongoing and may even increase. These costs can include ongoing maintenance and repair costs, insurance, council and water rates.
Whilst these may not seem like large amounts, they do add up!
It is important to determine if your income will cover these costs, so that you can avoid falling behind with your repayments.
Together with your home loan repayments, these costs should not exceed 50% of your gross income as a rough guide.
Aren’t sure whether you can afford a home loan? Talk to one of our mortgage brokers for expert advice. Enquire online or call us on 1300 889 743 to speak to a mortgage broker.
What other expenses are associated with buying a home?
There are a number of other costs associated with property purchase that need to be taken into account.
- Loan application fees.
- Inspection fees such as building and pest inspection.
- Government fees such as stamp duty and land transfer fees.
- Legal / conveyancing fees.
- Removalist charges.
- Building and contents insurance.
- Connecting gas, electricity and telephone.
- Lenders Mortgage Insurance (LMI).
Be sure to take these expenses into account when saving for a property, particularly if you are first home buyer.
Don’t guess about what you can afford!
When searching for a new home, it is a good idea to get a pre-approval on your loan. Whilst online calculators are great, the only true way to find out how much you can borrow is to get a pre-approval before you start searching for a home.
This will save a lot of time and stress in the long run!
To find out more about getting a pre-approval for your home loan, please call us on 1300 889 743 or enquire online today!