Mortgage ABCs
When you are looking at a new home loan it can feel like you’re learning a new language. You don’t just have to be a first home buyer to feel lost either – you could be a next home buyer or an investor who has applied for dozens of home loans, but unless you spend your days shadowing a mortgage broker to keep up to date with the latest loan products, specials, lender news and economic updates, then you’re going to need some help in applying for the right loan.
That is why you need to go right back to the beginning – before you can read and write you need to know your ABCs, and before you can understand and choose a home loan you need to know these ABCs:
State Custodians Mortgage Company Standard Variable Home Loan
Work with a lender who takes the time to explain the mortgage process to you if you’ve never been through it before.
- Interest Rate of 6.22%
- Comparison Rate of 6.45%
- Application Fee of $0
- Maximum LVR With LMI: 90%
- Minimum Borrowing: $150,000
- Maximum Borrowing: $1,000,000
A Mortgage
A mortgage refers to a mortgage loan which a lender has secured against the value of the property you are buying. The word mortgage actually has a French meaning which translates to ‘dead pledge’ which means that the property will be dead to you if you don’t repay your debt, and once you have repaid the loan, the pledge will be dead as you won’t owe anything else.
You can apply for a mortgage from a lender if you are:
When you approach a lender to apply for the funds you need to buy a property, you will be deciding on the following variables:
- The amount you want to borrow. You should make sure this is an amount you can afford comfortably in your current budget, as well as have a savings plan set up to cover repayments in an emergency. Also budget for your repayments if interest rates were to rise.
- The term of the loan. The longer the loan term you choose, the lower your monthly repayments will be, however, you can end up paying as much as 50% more in interest when you choose a 30 year loan term, as compared to a 25 year loan term.
- The interest rate at which you repay your loan. This is set by the lender, but you can shop around for the most competitive rate on the most inclusive loan.
- How you make your repayments. You can make your repayments weekly, fortnightly or monthly to correlate to your income schedule.
Most homes in Australia are bought using a mortgage loan, because unless you are lucky enough to have the available funds to buy your home outright, you will be saving for many years to afford the home you want. You’ll also need to be saving at a rate which outstrips inflation because the $250,000 house you want to buy now will be worth three times that much by the time you’ve saved that amount. Plus, while you are saving to buy a house, you can’t live in it, but when you use a mortgage to buy your home, you’re repaying your debt, building equity, and enjoying your property.
Borrowing Against Security
Home loans are the most affordable form of borrowing because of the security you are putting up against your loan. The property you are buying with the mortgage is security for the mortgage, so if you rare unable to make your repayments, your lender simply sells your home and uses the funds from the sale to cover the remaining loan amount you owe. Property as security is also low risk because the property market consistently increases in value over time, on average property doubles in value every 10 years, and so lenders offer a comparatively low interest rate on your borrowings.
Your home loan interest rate is also lower than other forms of borrowing because the loan term is so long. The lender doesn’t need to charge interest rates in their teens because they know that you will be repaying your mortgage well into your middle age. Over the term of an average 25 year loan, a lender will receive more than double the loan amount back in interest.
Even with a low interest rate a home loan can be a daunting financial undertaking, and when you start out at the beginning of a 25 or 30 year loan term you will often wonder how you’ll ever repay the whole amount. You can reduce your mortgage commitment by putting down a larger deposit amount.
For example, if you wanted to buy a home for $300,000 and you put down the minimum 5% deposit of $15,000 your monthly repayments over a 25 year loan term at 7% interest would be $2,014. However, if you put down a 20% deposit of $60,000 your monthly repayments would be $1,696. That is a saving of over $300 every week which would certainly inject some breathing room into your budget, not to mention you would save almost $95,500 in interest over the life of your loan.
Costs of a Mortgage
The cost of a mortgage loan is made up of three distinct elements:
- Interest. Interest is the cost of borrowing money, just like you pay to borrow a rental car or borrow a DVD from the video store. In the case of a mortgage loan, the interest is paid throughout the entire course of the loan.
- Settlement Fees. Settlement fees are the costs imposed by the lender on the borrower for setting up the loan. These costs include the lender’s legal costs, valuation fees, administration fees and application fees. The costs at settlement can sometimes be added to the amount of money being borrowed. If you are a first home buyer you can use your First Home Owner’s Grant amount of $7,000 towards these costs.
- Ongoing fees. Ongoing fees include such things as monthly or annual account keeping fees. These are fixed fees with the amount charged being dependant on the amount of money being borrowed, unlike the interest that is charged at the same rate no matter what amount is borrowed. However, you can shop around for a home loan with no ongoing fees.
Now you know your ABCs you can start comparing home loan types and features to make an informed decision about the right loan for you and your budget.
Related posts:
- Length of Mortgage – 10, 20 or 30 Years; Which One Is For You?
- Mortgage Arrangement Fees, a Necessary Charge
- Mortgages and Fees
- IMB Budget Blue Home Loan
- IMB Budget Home Loan
- Beat Home Loans Fixed Loan
- Homeside Fixed Rate (Interest Only Mortgage)
- Teachers Credit Union Fixed Option Home Loan
- CUA Basic Home Loan
- Mortgage House Loans
Top Home Loans
| Home Loan | Details | Interest Rate (p.a.) | Comp Rate^ (p.a.) | App Fee / Ongoing Fee | Max LVR | Min & Max Borrowing | |
|---|---|---|---|---|---|---|---|
 Loans.com.au - Dream Catcher | A home loan offer with a $0 application fee and one of the lowest available home loan interest rates. | 5.85% | 6.21% | $0 / $375 | 80% | $50,000 / $750,000 |
 
|
 Bankwest Online Home Loan | A low interest rate home loan with a $0 application fee and ongoing maintenance fees. This offer is exclusively available by applying online. | 5.97% | 5.97% | $0 / $0 | 80% | $100,000 / $1,000,000 |
|
 State Custodians Mortgage Company Standard Variable Offset Loan | Awarded Mortgage of the Year 2012 – this multi-award winner features 100% offset and a loyalty 0.25% rate drop after 5 years. | 6.02% | 6.23% | $0 / $345 | 95% | $150,000 / $1,000,000 |
|
 Illawarra Home Loans Bank Beater Home Loan | A low variable rate, beaten down even further by 0.05% p.a. after 5 years. | 6.07% | 6.35% | $0 / $345 | 90% | $250,000 / $1,000,000 |
|
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