You’ve found the house of your dreams. You’ve prepared your deposit. The only thing left to do is contact a lender and secure a mortgage.
But don’t leap into it just yet as taking a little more time to secure a low mortgage rate could save you thousands of dollars over the long term.
With that in mind, here are five top tips for first-time homebuyers seeking the best mortgage rates.
If you are a high-risk borrower, which means there’s a higher-than-normal chance you will miss payments or default, you’ll be charged higher rates. This price increase helps to offset the increased risk. If you’re low-risk, on the other hand, you can expect much better rates.
Lenders will look at a number of different criteria when calculating your risk, including:
Unfortunately, you can’t change your age, and while it would be nice to snap your fingers and get a higher-paying job, it isn’t going to happen. However, you can improve a few of those things, and depending on your circumstances, it might only take you a few weeks.
Less debt makes you a more viable borrower in the eyes of the home loan lender. It will also help to improve your credit score.
It all comes down to something known as a credit utilisation ratio, which compares your total available credit to your debt. If you have $10,000 in credit card limits and $8,000 in debt, your ratio is 80%, which is high.
Mortgage lenders calculate your income vs your expenses to see how much you have left over. They want to know that you can pay the mortgage now and under extreme circumstances (such as an increased interest rate, higher expenses, or reduced income).
You can’t always increase your income, but you can reduce your expenses. So, go through your bank statements and get rid of things you don’t need, such as subscriptions for products and services you don’t use.
There are three main credit reporting agencies in Australia: Experian, Equifax, and Illion. Different lenders use different agencies, but you can get a free credit report from all of them. Check for mistakes and misunderstandings, such as defaults on accounts you don’t recognise and missed payments you definitely didn’t miss.
These oversights could cost you a few dollars on your mortgage payments. In the worst-case scenario, it may lead to an outright rejection.
Clearing credit card balances is a great way to improve your credit score, but if you cancel those cards, it could have the opposite effect.
Again, it all comes down to your credit utilisation ratio. $20,000 in available credit and $10,000 in total debt is 50%. Clear the debt and it drops to 0%. Cancel the credit card and you lose the available credit as well as the debt, thus offsetting those effects.
Making on-time payments and avoiding new credit accounts won’t deliver rapid improvements to your credit score, but if you fail to make a single payment or make too many new applications, your score will take a hit.
There are many home loan lenders out there, and their interest rates, maximum loan amounts, and other essentials can differ greatly.
Don’t make the mistake of going straight to a lender that you know and then accepting their offer. Compare multiple lenders and get several quotes.
The standard deposit for a home purchase in Australia is 20%. You can get home loans with a lower deposit, but they may incur an additional charge in the former of Lender’s Mortgage Insurance (LMI), which protects the lender if you default.
20% should always be your goal, therefore. But don’t stop there. If you can afford to pay more, do so. After all, the higher your deposit, the less you need to borrow, and the less you borrow, the less you will repay.
It’s hard to convince yourself to spend all that extra money now just so you can benefit in a couple of decades. But it’s not just about the long-term benefits. A smaller mortgage will also reduce your monthly payments, saving you cash in the short term.
Just don’t forget that there are other costs to consider, as well as mortgage payments to cover. So, don’t leave yourself short, and make sure you still have savings for a rainy day.
The easiest way to increase your deposit is to buy a cheaper house. It’s very easy to get carried away when looking for a new home, especially if it’s your first. You want the best house that your money can buy, but that often means aiming too high and thinking about getting the biggest house with the bare minimum deposit.
It creates a large responsibility, and it could leave you short after factoring closing costs, stamp duty, and other fees into the equation.
Your very first house doesn’t need to be the house of your dreams, especially not if it means emptying your savings and leaving you one demotion, medical issue, or other economic crisis away from a default.
Finally, getting a professional mortgage broker on your side can make a massive difference. Contact one of our lending specialists and we can guide you through the home loan process, helping you to secure a competitive interest rate from a reputable lender.
The home-buying process is complicated, long, and oftentimes frustrating. There’s a lot to think about, from finding the right home, calculating deposits, and considering credit scores to paying moving companies, checking local schools, and dealing with the endless home loan paperwork. Let us make that process easier for you. Speak with us over the phone today, or apply online.
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Bill has over 26 years of experience working in the finance industry. He has worked across a number of different businesses including Home Loans, Personal Loans, Collections and Insurances. Bill's passion is to utilise his knowledge and experience in the industry to assist clients in meeting their financial goals.
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