Finance Property How to choose that important first mortgage
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How to choose that important first mortgage

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You finally found the right property, put in an offer, and, lo and behold, the keys to the home are now yours.

Next comes the sobering realisation that you are facing a good 25 to 30 years in debt servicing your little parcel of dream real estate.

It sounds daunting, but it need not be.

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Interest rates are at historic lows, and, in reality, the hardest part of home ownership is getting your foot on the ladder.

A Mortgage Choice survey, for example, found that one in three (33 per cent) of first homebuyers surveyed said they wished they had looked around more for a property before buying, while only 4 per cent of buyers regretted taking on extra debt after committing to their new home loan.

Here is how to make sure you’re not among the small minority who do.

Don’t just focus on the interest rate

Falling interest rates are good but you should consider other things. Photo: Shutterstock
Falling interest rates are good but you should consider other things. Photo: Shutterstock

There are some incredibly good deals on the market — some well under 5 per cent — but the interest rate is only the first factor to consider.

“Buyers should ask themselves what they want from their home loan,” says Mortgage Choice spokesperson Jessica Darnbrough.

“Do they want to be able to make additional repayments from time to time? Do they want to offset the interest on their loan by putting their entire wage into a transactional account?

“When you know what you want from your mortgage, you will be able to choose a mortgage that meets your needs.”

Finder.com.au’s money expert, Michelle Hutchison, is a big fan of 100 per cent offset accounts.

“Putting funds into this account will offset interest owing on the home loan, while still keeping your money separate from your actual repayments,” she notes.

“Having access to that money at any point is vital for those new to the property game.”

Understanding the principles

If you choose an interest-only loan, at least know what you are getting yourself in for.

This type of loan is increasingly common, but essentially requires buyers to do little more than pay off the interest each month, meaning you are not chipping away at the actual debt.

“Interest-only loans work best for investors who have no need to pay down their principal debt and those owner-occupiers who have other expenses, including renovations, or those who suddenly face a change of circumstance, such as one person losing their job,” Ms Darnbrough says.

Ms Hutchison advises owner-occupiers to pay off the principal and the interest at the same time, as this will help them to own the property outright a lot sooner.

“However, our research suggests around 14 per cent of recent or prospective first home buyers are purchasing for investment, and in this particular scenario it can be a good option to choose interest-only repayments, as this not only reduces the cost of owning the investment property but also allows the whole repayment to be tax deductible,” she said.

Don’t rule out a broker

Paperwork not your thing? Speak to a broker. Photo: Shutterstock
Paperwork not your thing? Speak to a broker. Photo: Shutterstock

Wading through reams and reams of mortgage documents is a time-consuming process, so if it seems a little overwhelming it may be worth turning to the services of a broker.

Brokers, according to Ms Darnbrough, will look at the overall cost of the loan.

“Sometimes the lenders offering the cheapest rates aren’t the cheapest on the market,” she says.

“Some lenders will charge significant fees, such as loan application fees, break costs, ongoing servicing fees and so on, so that they can offer a lower interest rate.

“So, in other words, a lender may not be able to afford to charge such a low interest rate, so they recoup their money through hidden fees and charges.”

Property Investor and broker with Mortgage Choice, Stephen Zamykal adds that brokers bring a level of knowledge to the table that is impossible to gain through a few weeks of at-home research.

“Not only are they familiar with various lenders, products and policies, but it is also their role to educate their clients on what benefits the client and not what benefits the lender — not always the case if dealing directly with a bank,” he notes.

Mr Zamykal urges first homebuyers to ask how their broker will be paid before signing up to ensure they are being paid the same from the various financial institutions they are recommending.

“Commissions should not influence loan product selection,” he added.

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