Entering into a mortgage is a big decision and for most people it is likely to be the biggest amount of debt that they will take on in their lifetime. This can make getting into the mortgage market for the first time a somewhat daunting experience.
Be sure to read through this post to understand what mortgages are all about so you know what to ask when the time comes.
What is a Mortgage?
A mortgage loan (mortgage for short) is a loan between you and a financial institution where the loan is secured by a property. The financial institution owns the property until the debt (and in most cases the interest on top of that debt) is paid back in full, within the originally agreed time frame. When the debt has been eliminated, the property is passed to you.
Common Mortgage Questions
How much money can I borrow?
Knowing what you are able to borrow allows you to set yourself realistic goals. Most people are normally able to get a good indication of how much they can borrow by using an online borrowing capacity calculator. I have found one that displays a nice graph so you can test it for yourself (Borrowing Capacity Calculator)
Once you have a rough idea of what your borrowing capacity is you will be in a better position to shop around when the time comes to speak to a mortgage consultant.
How much money do I need?
The most important question which you need answered is “How much money do I need?”. You should work this out prior to meeting with mortgage sales people, as they will likely want to saddle you with the maximum amount of debt that you are able to afford.
I have included a calculator from Free Mortgage Calculator so that you can see how much that dream home is likely to set you back each month.
Powered By Free Mortgage Calculator
My big tip: Make sure you have done a budget based on the repayment numbers you come up with. Don’t forget that you have a whole raft of other expenses on top of any mortgage you decide to take out. Check out my earlier post – How to create a budget
What type of mortgage is best for me?
Each person will have different requirements when it comes to selecting a mortgage product. I cannot tell you which is the best for your particular circumstance but I can list off some of the more common types of loans.
When I first got into the mortgage market I went for a Capital and Interest loan. Generally speaking this type of loan is for people who are interested in buying a home to live in as their primary residence. With this type of loan, you borrow a sum of money and then pay it back over a defined period of time (normally 25-30 years) with interest on top along the way.
Another type of loan which is common with investors is known as an Interest Only loan. With interest only loans, the borrower pays just the interest on the borrowed sum and the principal remains the same. At the end of the loan the borrower is expected to pay back the entire principal amount.
Fixed or Variable interest
There are normally to main types of interest options you can get on a loan Fixed or Variable. Variable loans have an interest rate which can move up or down at any time. Normally you are able to make additional repayments into a variable loan without any consequences.
Fixed interest is offered by the lender to the borrower as a set interest rate for a period of time – E.G. 5 years at 5% – This means that no matter what happens your interest rate will stay at 5%. When the fixed period of time is over most loans revert to the standard variable rate. Most fixed loans will penalise you for making additional repayments by hitting you with a fee if you pay more than the minimum amount.
When I got my first loan I decided to split my mortgage into 60% variable and 40% fixed. The reason for this was that at the time interest rates were at about 7.5% and all the “experts” said the standard variable rates were going above 10%. I knew that if it went to 10% that I was going to struggle to meet my repayments and so I decided to hedge my bets by splitting the loan.
Do I need mortgage insurance?
The rules around mortgage insurance vary from country to country. In many cases you will be required to have mortgage insurance if you do not have a large enough initial deposit. The mortgage insurance is taken out to protect lenders from losses in the case of a borrower defaulting on a mortgage loan.
Generally speaking the larger your deposit, the smaller the mortgage insurance that will be required.
Should I use a mortgage broker?
I am in two minds on mortgage brokers. The reason for this is that while there are many good mortgage brokers who will go the extra mile to help you. There are also the sharks when want nothing more than to sign you up to the bank which gives them the most commission for your business.
What I did and what I tell a lot of my friends to do, is once you know how much you need to borrow, go out and speak to as many different financial institutions as possible and play them off against each other to try and get yourself the best deal possible. Remember, you are doing them a favour by doing business with them, not the other way around.
What will lenders want from me?
The most common things I found lenders wanted to see from me prior to approving a loan was:
- Proof of stable income from my employer
- Proof of residency
- Demonstrated ability to save
- Details on other debts (loans or credit cards)
What is a good deposit size?
Any deposit is better than no deposit. Each financial institution will have different rules on what they will accept as an adequate deposit, some will even lend the full amount with no deposit. Since the global financial crisis, requirements on deposits have increased markedly (at least they have in Australia).
When I was applying for a loan in 2008 I had saved up a 20% deposit, this meant that I didn’t need to have mortgage insurance as a part of my package and it also meant that I was able to negotiate a better deal.
I almost forgot about offset accounts!
One thing I have found extremely useful with my mortgage is having an offset account. An offset account is just like a normal bank account, but any interest you accrue from this account is deducted from the interest on your mortgage and is not payed into your bank account. This has the effect of reducing the amount of interest which accrues on your loan each month while still enabling you to get access to your funds.
The best part of this type of account is that the interest is calculated at the same rate as your loan, making it far more cost effective than using a traditional savings account. Most offset accounts allow you to add or remove money at will, making this a handy place to park all that spare cash you have lying around.
Getting a mortgage is a big deal, make sure to speak to as many people as possible to learn from what they did well and also what they feel they did poorly. If you need help making financial decisions consider speaking to a qualified financial advisor who should be able to point you in the right direction.
Lastly – as with any big investment, be sure to read the fine print. So many times I have listened to friends and co-workers alike complaining about fees which they didn’t know about because they didn’t read the fine print. If you struggle with reading technical legal documents, consider speaking to a solicitor and getting them to explain exactly what it all means.
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