A Beginner's Guide to Home Loans

Buying or constructing a house is an expensive affair. In this article, you will learn how to prepare yourself before taking out a home loan. 

Preparations

Consider your family's financial status to help you determine if you can repay the loan. Ask yourself if you have adequate money to provide for your family once you start making loan repayments. Remember that you require some money to pay a deposit. If you do not have a stable source of income, consider starting a small business to complement your earnings. 

Credit Status

Visit your bank and check your credit score. Your banker will evaluate various factors such as your debt repayment history, current debts and types of credit to determine how much the bank can lend you.  

Mortgage Broker

A mortgage broker is an individual who connects mortgage borrowers to mortgage lenders. A mortgage broker can make it easy for you to secure a home loan. However, it is best that you work with an independent broker rather than a broker who works with a specific financial institution. Your mortgage broker will link you to lenders with low interest rates and flexible repayment terms. He or she will also bargain the interest rates, help you apply for the loan and reapply for you if your application is rejected. 

Type of Home Loan

If you require the loan to construct a house, you should take out a construction loan. Construction loans are released in phases to prevent borrowers from misusing the funds. There are various types of mortgages, including the following listed below.

  • Variable rate: The interest rate on these loans is determined by the cash rates set by the Reserve Bank of Australia. As such, the interest rate can either move up or down.
  • Fixed rate: These loans have a fixed rate regardless of changing cash rates.
  • Mortgage offset: Your loan account is linked to your savings account. Any cash on your savings account is used to offset the loan without accruing any interest.
  • Shared equity: The bank charges low or no interest on a portion of the home loan in exchange for a share of the property's appreciation.
  • Honeymoon: You will pay a low interest rate during the first six to twelve months. After that, you pay standard rates. 

Finally, choose a house that is likely to appreciate over the next few years. In such a way, if you are unable to repay the mortgage, you can sell the house and still make some profit.

When taking out a home loan, make adequate preparations, verify your credit status, hire a mortgage broker and choose a loan with favourable repayment terms. 

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