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10 Critical Factors to Consider When Assessing a Mortgage

Moneymagpie Team 22nd Nov 2023 No Comments

Reading Time: 6 minutes

Securing a mortgage is a significant step for anyone towards achieving homeownership. It is a journey filled with excitement, aspirations and, inevitably, many critical decisions.

However, choosing the right mortgage – particularly in Australia’s dynamic and volatile real estate landscape – can be overwhelming because it involves considering different factors, from fluctuating interest rates to balancing principal and interest repayments. Each of them requires a decision that shapes your financial trajectory.

In this post, we will look at some of the critical factors that require careful consideration when assessing a mortgage in Australia. Whether you are a first-time homebuyer embarking on the exciting journey of property ownership or a seasoned investor exploring refinancing options, this article aims to shed light on the key elements that should influence your decision-making process.

  1. Use a Mortgage Broker
  2. Interest Rates
  3. Loan Types and Structures
  4. Loan Term and Repayment Frequency
  5. Loan-to-Value Ratio (LVR) and Deposit Size
  6. Fees and Charges
  7. Lender Reputation and Customer Service
  8. Loan Features and Flexibility
  9. Government Incentives and Grants
  10. Your Finances

1. Use a Mortgage Broker

Navigating the complexities of the real estate market can be a daunting task for many homebuyers. Therefore, it can be worth engaging the services of a mortgage broker.

These brokers act as intermediaries between borrowers and lenders, leveraging their expertise to help find a mortgage that suits the individual needs and financial circumstances of the borrower. They have access to a wide range of loan products from various lenders, enabling them to provide a comprehensive comparison beyond what an individual might achieve independently.

Mortgage brokers such as Get a Better Rate can offer valuable insights into different mortgage structures, interest rates and terms and provide general guidance throughout the application process. Additionally, they can streamline the paperwork, saving borrowers time and effort.

Although mortgage brokers may charge fees, the potential cost savings and the convenience they bring you may prove very beneficial.

2. Interest Rates

Interest rates play a pivotal role in shaping many of the decisions people make around mortgages.

Subsequently, it is important to understand the difference between variable and fixed interest rates. Variable rates fluctuate with market conditions, providing flexibility and exposing borrowers to interest rate movements. By contrast, fixed rates offer stability, locking in a set interest rate for a specified period – thus shielding borrowers from market fluctuations.

Whichever one you choose, can significantly impact the overall cost of your homeownership. However, while interest rates are crucial, borrowers should also pay attention to comparison rates.

Comparison rates include both the interest rate and any associated fees, providing a more accurate representation of the total cost of the loan. Comparing loans based on their comparison rates ensures a more holistic view of the financial commitment you would be required to make.

Consider your financial goals, risk tolerance and the current economic climate when deciding between these two options.

3. Loan Types and Structures

Interest rates are one thing. But it is also important to determine the type of loan that best aligns with your financial strategy.

Overall, there are two main types of loans available – principal and interest loans and interest-only loans. Principal and interest loans require you to pay both the borrowed amount and interest, which helps you gradually build equity in the property. On the other hand, interest-only loans allow borrowers to pay only the interest for a specified period, which provides short-term affordability. However, it’s essential to carefully consider the long-term financial implications of choosing an interest-only loan.

To find the right loan for you, it’s important to explore the features offered by different loans. For example, offset accounts and redraw facilities can have a positive impact on the overall cost and flexibility of the mortgage. Offset accounts are savings or transaction accounts that are linked to your mortgage – which can reduce the interest payable. At the same time, redraw facilities allow you to access additional payments made towards the loan.

4. Loan Term and Repayment Frequency

The duration of your mortgage, also known as the loan term, plays a significant role in determining the total amount you’ll repay. While longer loan terms may result in lower monthly repayments, they often lead to higher2820 overall interest payments. Conversely, shorter loan terms may have higher monthly repayments but result in substantial interest savings over the life of the loan. 

It’s vital to assess your financial capacity and goals to determine the most suitable loan term for your situation. You should also consider how often you want to make repayments. Although monthly repayments are standard, some lenders offer fortnightly or weekly options. Making more frequent repayments can help reduce the interest paid over time and may align better with your budgeting preferences.

5. Loan-to-Value Ratio (LVR) and Deposit Size

The Loan-to-Value Ratio (LVR) is another important factor to think about when taking out a loan. A lower LVR can result in better loan terms and interest rates, making it a more favourable option.

To calculate the LVR, you simply divide the loan amount by the property’s value and multiply by 100. For instance, if you want to borrow $400,000 to buy a home worth $500,000, your LVR would be 80%.

When it comes to the Loan-to-Value Ratio (LVR), banks typically consider a value of at or below 80% to be ‘low risk’. However, if the LVR exceeds 90%, they deem it as ‘high risk’ because should there be even a small decline in prices within the local property market, it could result in your loan amount being higher than the value of your home. 

Saving up for a substantial deposit can offer several benefits, including a lower LVR and access to a better interest rate. In Australia, a deposit of at least 20% of the total purchase price will prevent you from paying for Lenders Mortgage Insurance (LMI), which protects the lender if the borrower defaults. Avoiding LMI can result in significant savings for you.

6. Fees and Charges

It is important to understand the upfront costs associated with any mortgage application, as this informs you of the actual cost of taking out a mortgage. Typically, upfront costs include application, valuation and legal fees, which you should factor into your budget to avoid surprises during the home-buying process. 

Additionally, it is also prudent to consider the ongoing fees linked to the loan, such as annual fees, service fees, and account-keeping fees. Although these fees may appear small individually, they can accumulate over the life of the loan, eventually affecting its overall affordability.

7. Lender Reputation and Customer Service

When looking for a potential mortgage lender, it is important to do your research to get a feel for their reputation. Some of the best ways of doing this are by reading customer reviews online and looking at testimonials and ratings to get an idea of the experiences of other borrowers. It is also vital to find a reputable lender who has a history of fair and transparent practices to ensure you enjoy a positive borrowing experience.

Customer service is another factor to consider when evaluating lenders. Try to find a lender who communicates clearly, is easily accessible and is responsive throughout the loan application process and the lifespan of the mortgage. Overall, a lender with excellent customer service should promptly address your concerns and provide valuable support to make the borrowing process smoother.

8. Loan Features and Flexibility

One feature of a loan that some overlook is whether it allows extra repayments without penalties. This facility can help you repay your loan faster and substantially save you on interest charges.

In addition, when seeking a loan, ask the provider if it comes with a repayment holiday option that allows you to temporarily pause your repayments during challenging financial times.

You should also consider the portability of the loan in case you ever wish to move or upgrade your property. A portable loan enables you to transfer your mortgage to a new property without a need for refinancing. At the same time, determining whether there is flexibility to change the loan structure or switch between fixed and variable rates can be advantageous. 

9. Government Incentives and Grants

If you are a first-time home buyer, it would be worth exploring the various government incentives and grants available to you.

One of the most common programs is the First Home Owner Grant (FHOG), which varies by state and territory but can provide financial assistance to eligible buyers. To take full advantage of this program, you’ll want to research the specific requirements and benefits applicable to your location. 

Another way to reduce the upfront costs is to investigate any stamp duty concessions and exemptions offered by your state or territory government. These concessions can significantly reduce the amount you’ll need to pay when purchasing your first home, so it’s worth looking into them.

10. Your Finances

As excited as you might be in doing so, once you have found a mortgage that might be suitable, it is vital to take the time to really understand if you can afford to commit to it financially.

Doing this involves having an honest conversation with yourself. Ask questions like can you afford the current repayments or any future increases that might occur? Can you afford to make repayments if you or your partner lose your job? Will you be able to fund holidays or other lifestyle purchases?

If the answer is no, then it’s seriously worth reconsidering whether purchasing a property right now is something you are in a position to do.

Conclusion

Choosing the most suitable mortgage for you involves thoroughly assessing several factors to ensure it aligns with your financial goals and circumstances.
By considering interest rates, loan types, repayment structures and other critical factors, you can make an informed decision that sets you on a path to financial stability and homeownership.
Just don’t be afraid to seek professional advice, and remember to compare multiple lenders and carefully read the loan’s terms and conditions before committing to any mortgage agreement.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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