Several things need to be considered when it comes to finance for your new Hervey Bay property including— how to get pre-qualified for your mortgage, choosing the best lender for your circumstances and other vital financing decisions.
STEP 1: HOW TO GET A MORTGAGE PRE-APPROVED
The very first-step to buying a property in Hervey Bay is knowing exactly how much money your bank will lend you. Pre-qualifying for a mortgage involves the lender looking at your income, debts and deposit.
Before getting your heart set on a specific Hervey Bay property; your lender will require proof of income along with your credit history report to pre-qualify you for how much you can borrow. Once you have your finance options sorted out, take it to the next level by getting it in writing as a mortgage pre-approval (typically valid for 90 or 120 days) which also includes an interest rate guarantee.
Obviously, a mortgage pre-approval doesn’t guarantee that the lender will lend you a specific amount of money for any home of your choosing, as the value of the property must be worth at least the amount of money being offered. It’s customary for the lender to order an Independent Valuation before any money is advanced ensuring that the amount paid for the property is correct as the bank or lender is co-buying the property with you by lending you the money.
A mortgage pre-approval ensures that you know exactly how much money you can borrow and assists you with targeting houses within the price range that you can afford. Not only does this enable you to better focus your property searching efforts but it also eliminates both uncertainty and risk when financing your preferred property when you find it. Likewise, a pre-approval is useful if purchasing a property through an auction.
STEP 2: HOME FINANCE DECISIONS
Obtaining home finance or a mortgage often appears intimidating, especially for the first-time home buyer. After qualifying for a mortgage, there are several basic decisions to make before taking possession of your new Hervey Bay property— primarily the term (length) of the mortgage, type of mortgage, amortization and the interest rate.
For specific information on each of these terms, please read on. Also feel free to use the Mortgage Calculator to estimate your monthly payments.
Mortgage Term & Amortization
The mortgage term (length) and amortization period directly affects how much money you can borrow and dictates your monthly repayment amount as well as the maximum price of the property you can purchase.
Mortgage Term: This is the length of time a lender will lend you money for— generally six months to 25 years. At the end of the term, any outstanding amount must be paid in full or a new finance option (term) must be organised. Although tricky; choosing a mortgage term wisely simply means examining and understanding marketplace trends along with any potential risks associated with the various term options available. For example; if you chose a six-month term and the interest rate increased drastically; you may be able to afford the higher repayment amount.
Amortization: Not many people (if any) can pay off the entire principal of a mortgage in a 12-month term or a five-year term as the repayment amounts would be huge! Instead lenders assist borrowers by calculating or amortizing mortgage payments over a longer period (even up to 25 – 30 years). Rather than financing you for a single 25-year period, the payment schedule is calculated by periodic payments of principal and interest based on the longer time frame. You usually have the option to renew the mortgage and change the amortization based on your current financial situation and/or market conditions. A longer amortization period means lower repayments, but with more interest payable.
Typically, home finance payments comprise of two parts: a principal and an interest component— referred to as a blended mortgage payment paid on a regular basis (weekly, bi-weekly or monthly) over the mortgage term. The loan payment amount usually remains the same but the outstanding principal portion increases while the outstanding interest portion decreases.
There are many ways to lower the remaining outstanding balance resulting in paying less interest. Strategies include making extra lump sum payments or accelerating your payments by perhaps paying weekly or fortnightly instead of monthly— your lender can assist you with the finance strategy that best suits your circumstances.
Interest is the cost of borrowing money, fluctuates with the economy and are one of the largest contributing factors to how much you ultimately pay for your Hervey Bay property; both monthly and over the life of your mortgage! Your interest rate you choose at the start of your term may significantly affect your monthly mortgage payment amounts. There are two main types of mortgage product interest rates— a fixed rate or a variable rate.
Fixed-Rate Mortgage: (FRM) is a fixed-rate home finance loan whereby the interest rate does not fluctuate during the term of your home loan. The main advantage of this strategy is that you know exactly how much interest is being paid. In an economy where interest rates are increasing, this strategy is great but if interest rates are going down— you may be stuck paying more than the lower rate that becomes available. A crystal ball would be very nice!
Variable-Rate Mortgage: (VRM) is a home load where the interest rate changes (fluctuates) as market interest rates change. Your payment amounts will vary although some variable-rate mortgages do include a fixed rate for a specific period (usually one to five years). When the rate fluctuates, the amounts allocated to the principal and interest vary depending on the interest rate at that time. If the rate goes down, more of your monthly payment goes to paying off the principal reducing the term of your mortgage. However, if the rate increases it’s a completely different story as the interest due goes up with less paid off the principal. In some circumstances, lenders will allow borrowers to convert to a fixed-rate mortgage if the need arises.
Types of Mortgages
Conventional Mortgage: This is the most common type of mortgage where the lender will lend up to 95% of the purchase price of the property or lender valuation value (whichever is lower). A minimum of 5% deposit (20% preferred) is usually required.
Second (& Third) Mortgages: These are used when additional financing arrangements are required behind an existing mortgage and are typically secured by your property. These loans usually incur a higher interest rate with a shorter term than the first or conventional mortgage.
High Ratio Mortgage: If you don’t have 20% deposit to get a conventional mortgage, up to 95% of the property’s purchase price or appraised value may be advanced by the lender with this type of loan structure. However, the government insists that you take out mortgage insurance against default since you have less than 20% deposit but the additional cost of insurance is usually added to the loan principal.
STEP 3: CHOOSE A LENDER
There are various kinds of lenders and mortgages out there and it’s wise to go to at least three different lenders:
- Your Own Bank. They have your bank accounts, credit cards and investments so they should be motivated to give you a good rate.
- A Mortgage Broker. Mortgage brokers work with a lot of different lenders and will go to them on your behalf to find the best mortgage rate and terms. Usually, broker fees are paid by the banks, so it’s a good way to comparative shop without having to do all the leg work yourself.
It’s important to note that not all of these decisions have to be made before you start looking for a home; the crucial step is getting a pre-approval from a lender—then you’re ready to start the search! Details regarding term, rate and even which lender you use can be decided—and changed—after the actual purchase, all the way up until reasonably close to your closing date (the date you take possession of your new place). However, the more you understand about your options, the better prepared you will be when that magical day comes.
REAL ESTATE AGENT ROLE REGARDING FINANCE
- Keep Things Real: Taking into account any financial considerations to match what you want, with what you can afford and developing strategies to help you afford what you want.
- Be willing and able to take you through the real costs of owning a home – and help you navigate the mortgage and financing waters.
- Put you in touch with the very best home finance lenders and mortgage brokers in Hervey Bay.
Want More Information About Financing a Property?
*Read our helpful finance related blog posts for Buyers