GUEST POST: What the banks don't tell you - advice for first home buyers
By Guest Blogger Paul Feeney, Founder, Map my PlanEverywhere you look, everyone is talking housing affordability. From young renters claiming they’ll never be able to afford a house to the media cycle debating whether Sydney and Melbourne are in ‘housing bubbles’.
But don’t be put off by the fearmongers. There are some ways you can keep costs to a minimum if you’re about to take out a loan for your first home. The thing is, the banks aren’t likely to tell you about them – and here’s why.
Save above and beyondFrom the lender’s perspective, the larger the loan the better. Big loans take you longer to pay back, which means you’ll pay them more interest.
To reduce the size of your mortgage – and all that interest you’ll pay – it’s best to go in with a larger deposit. If you can, save more than the standard 20 per cent of the purchase price. Yes, it might mean delaying your plans but you’ll be putting yourself in a better financial position in many ways.
There’s a second reason to save more. A buffer of 10 per cent or so will cover the extra upfront costs of buying a home – things like stamp duty, registration and legal fees, inspections and taxes.
Some lenders will let you take out a loan with less than the 20 per cent deposit – sometimes as little as 5 per cent. If you go down this path, you’ll be required to take out lenders mortgage insurance (LMI), which protects the lender in case you default on your loan. The cost of LMI depends entirely on your situation, but you can expect it to be somewhere between 3 and 5 per cent of the loan’s value.
The decision to take out LMI is ultimately up to you – but remember you’ll end up paying much more to the lender in the long run.
Don’t get lost in the fine printThere are so many mortgage products out there from so many different lenders. Wading through all the fine print might seem like a nightmare – but trust me, it’s one you want to endure. Use this checklist of things to watch out for to make sure you’re getting the best deal:
- Interest rates: Some loans will catch you out with cheap introductory rates that shoot upwards after the first few months. Choose a loan with rates that stay competitive over the course of the loan.
- Fee-free ad hoc payments: Look for loans that don’t charge you to make extra repayments. These will help you pay off your mortgage faster.
- Refinance penalties: Some lenders will charge you astronomical fees to switch providers if you find a better deal down the track. Make sure yours doesn’t, or you may be stuck with them.
- Packaging: As with other purchases, the more you buy from one lender the more discounts you’ll be able to negotiate. You might be able to bundle insurance or fee-free credit cards with your mortgage.
- Consolidation: Did you know some lenders let you consolidate other debts – like credit cards and personal loans – into your home loan? This lets you take advantage of your home loan’s (usually much lower) interest rate.
With commitment comes responsibility, and that’s why it’s even more important to have a plan for the future. You can create your own roadmap to reach your financial goals with Map My Plan. Start your plan today – it’s free.
About the AuthorPaul Feeney is Chief Mapper at Map My Plan, a free online financial planning tool that helps Australians take control of their financial future.
Keep an eye out for more details on a CGU sponsored webinar by Paul Feeney coming soon!