Applying for and taking out a mortgage is fundamental to many Australian households. Given the current state of the global economy, many individuals cannot afford the steep purchase prices of a good home upfront, so they turn to large loans. Through mortgages, people can pay off the price for a long time frame. A home loan typically happens on a 25- or 30-year term, and regular payments will be required monthly. Mortgages are also secured against your property, so if you’re unable to pay the loan, your lender will require you to sell the property instead.
How much do mortgages cost?
The total amount you’re required to pay on a mortgage consists of three aspects: the principal, the interest rate, and other applicable fees. The principal essentially refers to the amount you’ve borrowed, while the interest rate depends on the bank. Any fees or charges also depend on the home loan provider, but here’s a simple guide to understanding where your money goes.
Home loan providers offer varying interest rates. Since mortgages are long-term loans, even the smallest interest rates can make a difference in the total amount you’ll end up paying. With this in mind, it’s important to negotiate a low-interest rate. To further understand home interest, here are the two types of rates home loan lenders usually discuss:
- Interest rate: This refers to the base rate of interest your provider will charge you. For the total cost, they will compute this percentage according to your remaining home loan principal. The cost will then reveal how much you need to pay in pure interest costs monthly.
- Comparison rate (APR): This type includes the interest rate, ongoing and upfront fees, as well as the payments you’ve already made. This reflects the total annual cost of the loan, reduced to a single figure.
Additional fees or charges
As you plan your home purchase, know that there are many home loan fees you need to be aware of. Unfortunately, some lenders charge more than others, so be wary of them! Here are some of the most common loan fees:
- Account-keeping fee: This home loan fee is charged by lenders monthly, which helps cover the administration cost of loan maintenance. This may be referred to as a “service” fee, but some providers charge this instead of an annual fee.
- Redraw fees: The redraw refers to an agreement where you will be able to redraw some of any amount of loan payments in advance. Should your home loan come with a redraw facility, there may be fees associated with this before processing.
- Application fee: Mortgage applications can be difficult, so some lenders will charge you fees for processing your application.
How do I take out a home loan?
Before applying for a home loan, the first thing you need to consider is getting a home loan pre-approval. This approval ensures that you will be able to borrow up to a specified amount, which can then give you an idea of what type of house you can afford.
People are also encouraged to join home loan sign-ups, as these are incentives that usually offer discounts on your loan. This is only in the short-term, however, but savings on costs is better than nothing!
Lastly, never choose the first home loan you come across with, nor drive blindly into the real estate market. To derive well-informed decisions, you must do your research!
Purchasing your first home is exciting, but the processes can be gruelling. For one, the real estate market prices are steep—being able to afford your dream home may be difficult. Through mortgages, however, you’ll be able to afford it or even more—so long as you fully understand how they work!
For the best possible outcome of your mortgage application, consult a financial manager today. We offer the best service in Perth, as we make finance easy! Ask us how—reach out to us today!