For most, getting a mortgage goes hand in hand with buying a home. But you just have to look at the number of products and lenders in the market to know that obtaining a mortgage is not always a simple task.
While mortgages vary between lenders and based on individual circumstances, there are seven basic steps in obtaining a mortgage. Here we outline these steps and considerations to help you on your way.
1. Determine your budget
First things first, you need to sit down and carefully map out your budget. Consider income versus expenditure and account for everything, including any regular fees or payments, additional forms of revenue and any shares or assets you hold in addition to everyday expenses. When you have carefully calculated your monthly or weekly budget, you should know exactly how much you will be able to put towards loan repayments.
Don’t just consider how much you can afford now, but over the life of the loan should your circumstances change. For instance, if you or your partner takes time off work to raise a child, will you still be able to cover your mortgage repayments with this reduction in income?
You should also factor in the other costs of buying a property when making your budget. These include stamp duty, legal fees, insurance and other associated costs, which can add up to approximately five per cent of the home’s sale price.
Remember to account for the cost of the deposit and Lender’s Mortgage Insurance (LMI), which will be an additional ongoing cost should you require it. LMI is a requirement from most banks if your loan is greater than eighty per cent of the property’s price (i.e., you don’t have enough for a twenty per cent deposit).
2. What type of loan do you want? Mortgage type and features
Next you must decide what kind of loan you want. Whether it’s a fixed rate loan, a variable loan, principle and interest, interest only or a combination of fixed and variable, whichever you choose should best suit your own individual circumstances. You must also consider what type of features you want in a home loan, such as redraw facilities, a 100 per cent offset account or free additional payments, as this may direct you to a certain type of loan and help inform your decision.
3. Choose a lender
Once you have an idea of what you can afford and what type of loan you want, you need to shop around and do some research. When you consider the thousands of products on the market from a variety of lenders, it’s easy to see how this is can be a time consuming process. However you should make sure you shop around to compare and get the best deal. If this is a little overwhelming, you can always enlist the help of a Mortgage Broker who will do this comparison and find you a suitable product and lender. Either way, pay attention to the interest rate being offered (that’s the big one) as well as any other features such as zero establishment fees or frequent flier points.
4. Submit your application
Once you’ve found a lender you want to go with, you’ll need to submit your application and attend an interview. You’ll be required to supply relevant documentation such as ID, bank statements and proof on income.
From here the bank will assess your situation and decide whether you are a suitable candidate and meet their criteria. This criteria generally includes proof of stable employment and income, your ability to meet loan repayments and your real savings. For example, most lenders like to see that you have at least five per cent of a home’s value in real savings in your account, as this shows you have the ability to save and manage your money.
5. Mortgage pre-approval
If this bank is satisfied you’re a suitable candidate, they will issue you with a certificate of pre-approval. This basically states that you have been approved for a loan when you do find a home (often subject to valuation). They will state what the amount is that you’ve been approved for, so you know the price point you need to be looking at in your property hunt. A pre-approval certificate is usually valid for a certain period of time, usually six to twelve months. If you’re getting close to or at the end of this period, you may need to re-apply or request an extension.
6. Get house hunting
Now that you’re been given the green light from the bank and know how much you can spend, the search for your dream property begins. It helps to research the average prices in different suburbs – with the amount you’ve been approved for in mind – so you know which areas will be suitable to look in.
7. The buying process and finalising the loan
While the buying process itself can be complex and time consuming, here we’ll stick to the process in relation to your mortgage. Once you’ve found the house you want and have made an offer, you need to contact your chosen bank to finalise the loan.
This is why getting pre-approval is a better idea than finding a property you want first and then applying for a loan. If you’ve already been approved, you don’t have to wait around while the bank reviews your situation and potentially miss out on your dream home.
Once the loan has been finalised and the property settles, it’s all yours! And you have decades of mortgage repayments to look forward to.
As always, it can help to speak to a financial advisor when dealing with money matters, especially if you’re purchasing a property as an investment.