What to Consider when Applying for a Home Loan

Here are some things to think about before buying a home or renovating your current residential property.

Many Australians are considering buying or renovating due to the surge in the Australian Real Estate Market for both home sale prices and rental pricing. Applying for a home loan can be difficult for both first-time homebuyers and those looking to upgrade due to the possibility of continued interest rate increases.

This implies that being ready is crucial. To help you get the keys to your ideal house sooner, we have identified nine considerations you should make before filing the crucial loan application.

1. Your capacity to borrow

It’s wise to lay the foundation beforehand, ascertain your existing financial status and the maximum amount you are able to borrow.

This is dependent upon multiple elements, such as your earnings, expenses, outstanding commitments, and credit rating.

Your borrowing capacity can be estimated by speaking with a lender, a mortgage broker, or online calculators, especially that every homeowner has unique circumstances, so what works best for one person might not be the best option for someone else.

2. Your credit score

Your credit score is used by lenders to determine your creditworthiness.

In 2024, with microlending and digital finance receiving more attention.

You may find out your credit score in Australia by contacting one of the major credit reporting agencies and asking for a free copy of your credit report. You are legally entitled to one free report per year from each agency.

Regularly checking your credit report and correcting any errors you discover is a wise practice. SavvyShield, offered by Credit Savvy, safeguards your credit score against potential impersonation for personal financial gain.

3. Interest rates

Conducting thorough research on potential fluctuations is crucial when assessing your monthly repayment capacity. 

Bankwest’s Fixed Home Loan is recommended for those contemplating stability in interest rates and repayments. Homeowners can select a fixed rate period ranging from one to five years, aiding in budget management and ensuring consistent repayments. However, careful consideration is advised before opting for a fixed-rate loan, as breaking the agreement prematurely may incur fees, and certain restrictions, such as limitations on additional repayments, may apply.

4. Additional costs

There are other costs besides the cost of your ideal house. Don’t forget to account for prospective mortgage insurance, stamp duty, conveyancing costs, and inspection fees. 

These expenses can quickly pile up and have an effect on the total amount you need to borrow. With that said, these unpleasant surprises can be avoided by accounting for expenses other than the deposit, such as government taxes, which are important to be aware of up front when purchasing a home.

On another note, when you purchase your first home, you may qualify for stamp duty exemptions or concessions based on your situation and where you reside.

5. Loan features

Home loans are not made of the same material.

Is an offset account necessary? Would you wish to be able to make additional payments without incurring penalties? Make sure the loan you are thinking about aligns with your needs and offers the flexibility you desire.

6. Current equity

The equity in your property might be a big help to individuals who want to upgrade.

You may be able to borrow against the increased worth of your property to pay for any upgrades or renovations. 

Talking with your lender or broker could be beneficial as they can guide you through the process and provide you with an estimate of how your finances will look after.

7. The ratio of your loan to value (LVR)

The amount you want to borrow in relation to the property’s worth is known as the LVR.

A lower LVR frequently translates into better interest rates, and it might even help you get out from under the lender’s mortgage insurance. 

Moreso, the greatest strategy for obtaining a reduced LVR is to maximise your deposit. Customers will probably require a 20% deposit to avoid paying lenders’ mortgage insurance when applying for a home loan.

8. Your financial objectives

Your available loan options and rates may differ depending on whether your objective is to purchase an investment property or a residence, as investor loans often have higher interest rates than owner-occupier loans.

There are a few factors to consider, such as which areas have high renter demand and the different interest rates available for investors compared to owner-occupiers, but those looking to invest in a rental property could find financial advantages in doing so.

9. Your existing mortgage

It’s a good idea to examine your home loan if you currently have one.

Changing your loan can occasionally result in significant savings and enable the addition of features more appropriate for your present need.

Seeking assistance from a mortgage broker or lender can offer clarity and personalized guidance tailored to your unique circumstances. They possess the expertise to navigate the extensive array of loan choices, ensuring you secure a suitable deal tailored to your needs.