For some, financing your home can be a confusing and complicated process. This is because so many considerations come to play. Buyers need to understand what is out there on offer as well as their individual financial circumstances.
The aim of this article is to provide some tips to securing the most suitable mortgage rate. Note that ‘suitable’ does not necessarily mean the lowest mortgage rate or the smallest down payment. It means the rate best suited to the buyer’s specific circumstances.
1. Strengthening your credit rating
First and foremost, are the fundamentals. To get the best rate possible, you need to be in the best position to do so. This means ensuring that you honour financial commitments - paying bills on time, having a saving regime in place and making wise financial decisions. Given the recent introduction of Comprehensive Credit Reporting, lenders are able to assess your financial behaviour in its entirety - including positive behaviours such as paying your bills on time. Hence, this is more reason to demonstrate your financial discipline.
For more information on these new reporting changes, please refer to our previous segment on Comprehensive Credit Reporting.
2. Fixed vs Variable Rate Mortgage Loans
Once you have covered off your bases by demonstrating sound financial behaviour, the next step may be to decide on the type of loan. There is two main types: fixed and variable loans. Fixed loans have a mortgage interest rate that is locked in throughout the duration of the loan, whilst for variable loans, this rate moves with the market. Those with a conservative risk appetite may find fixed loans appealing. Variable loans are for those that are happy to take on a bit of risk.
- You can budget with ease because of fixed future repayments.
- Interest rate rises would not apply to you.
- Interest rate drops would not apply to you.
- You may be limited in your ability to make additional interest repayments. These are typically not allowed in fixed rate loans. Even if they are, they would most likely be capped at a certain limit or they may incur additional fees.
- You have limited access to Redraw facilities for fixed-rate loans.
- Fixed loans are harder to refinance - break fees may apply.
Variable Rate Loans
- With variable rate loans, you can make additional repayments without any additional costs.
- You have unlimited redraws and can save interest through offset accounts.
- Ease of refinancing - there are less hurdles when it comes to switching loans.
- It is harder to budget variable rate loans - you have no control of economic conditions that influence interest rates.
- You would be susceptible to mortgage stress when you have low financial means to meet your mortgage obligations.
3. Size of down payments or deposit
Another relevant consideration is how much down payment you should put in. Most banks at the moment offer a 20% down payment or deposit. This means that they will loan out 80% of the purchase price.
With the rise in house prices, this may be harder for many prospective homeowners. The good news is that some lenders under certain circumstances would be willing to loan up to 95% of the purchase price. The caveat is that most of them require mortgage insurance and may demand higher mortgage interest rates.
Hence, whilst it does seem attractive, these loans put greater financial strains later on. Therefore, it would be prudent as a prospective buyer to be realistic as to whether you have the financial capacity to meet these payments down the track.
4. Special Programs
Furthermore, you may be eligible for a further mortgage rate discount, and Lenders Mortgage Insurance waivers as benefits in certain cases such as:
- If you are a current or former member of the Australian Defence Force,
- Medical professional
- Certified Practicing Accountant or CPA
- Lawyers and Solicitors
Generally, these programs will have certain conditions met. So it's best to consult an expert mortgage professional who can guide you through these options.
In need of a more competitive mortgage rate? At the LoanDolphin marketplace, lenders now bid to give you the best loan. Call a LoanDolphin representative now on 1800 855 919 for a quick chat.