Bricks and Mortar
When you buy a home you don’t just buy somewhere to live, you are making one of the most important – and possibly largest – investments you will ever make.
For several generations Australians have relied on the value of their homes as a key driver of their wealth, and while affordability has become an issue, Australia still enjoys much higher rates of home ownership than other countries.
The key to home ownership, of course, is the mortgage. With such large sums banks require significant documentation, and of course a decent deposit, before they will even think of extending you the money for your home-owning dream.
So, it pays to be strategic and to be prepared. ASIC’s MoneySmart website has some excellent advice for people as they get their finances in order.
“Finding smart ways to manage your money will help you save for a home,” says ASIC’s MoneySmart.
“The bigger your deposit, the less you have to borrow, and the more you will save in interest. Also, the bigger your deposit is, the lower your loan to value ratio (LVR) will be.”
Just remember that the LVR is the size of the loan divided by the purchase price, with you funding the balance with the deposit.
When the LVR is higher than 80 percent, which means the loan is funding more than 80 percent of the purchase, you will have to pay lenders’ mortgage insurance because the bank assesses you as a higher risk.
All of which means that its a really good idea to have as big a deposit as you can.
Also remember that there is a range of potential assistance out there if you are a First Home Buyer. There are conditions and it varies from state to state, but you might be able to access as much as $15,000, and have your stamp duty paid if the value of the house is under a certain threshold.
Choose your home loan
The mortgage market is extremely competitive and there are a large number of providers out there, ranging from the Big Four banks through to credit unions and building societies.
ASIC’s MoneySmart site reminds home buyer that if your home loan provider is not an Authorised Deposit-taking Institution (ADI) such as a bank, building society or credit union, from July 1, 2013, the amount a credit provider is able to charge in fees and charges is capped (that is, limited to a maximum amount) at 48 per cent annually (including all fees and charges).
Check your credit provider is licensed
ASIC also warns homebuyers to ensure that the credit providers and credit assistance providers (such as brokers) must be licensed with ASIC or be an authorised representative of someone who is licensed.
A check of ASIC’s Professional Registers can give you this information, and ASIC also has an Infoline on 1300 300 630.
The majority of people pay their mortgages on a monthly basis, but you may be able to pay fortnightly and save.
Others will chose to go on interest-only payments for a period, which means that the amount they owe on the loan stays the same and their equity in the property will stay the same.
Others chose fixed interest rates for certain periods of time, say three years or so, while others choose variable. A mix of both is possible and may be advantageous in certain circumstances.
In such a competitive market, many people also change mortgage provider and re-finance their loan to obtain better terms.
Homeowners who fall behind and get into trouble with their loans should contact their credit provider immediately.
As ASIC says: “A home loan is a major financial decision, so don’t rush into anything. Shop around when choosing a home loan and always review the contract closely before you sign up.”