Assessing finances
You should carefully assess your financial situation and desired
standard of living to calculate a loan amount you think you can
comfortably afford. Remember to plan for future commitments or
changes in circumstances.
To decide on your financial limit, first calculate the deposit and
repayments you can afford.
Don’t forget to include other costs such as:
-
Loan
establishment fees
-
Legal and
conveyancing fees
-
Government
charges such as GST and stamp duty (payable on the mortgage and
the transfer of property)
-
Property
inspection fees
-
Moving costs
-
Insurance
(building and contents)
-
Immediate
repairs required, and
-
Furniture you
may need to buy.
Lending Criteria
Eligibility requirements vary between financial institutions, but
lenders generally use two criteria to work out how much they will
lend you:
The lender will calculate a maximum loan amount. However, as an
informed borrower, you are the best judge of what you need and can
realistically afford. As a guide, aim to spend no more than one
third of your gross income on loan repayments.
The Deposit.
Depending on the lending institution and type of loan, a deposit
equal to a certain percentage of the purchase price will be
required. While most minimum deposits are five percent of the
purchase price, in some cases an institution may lend 100% of the
purchase price, requiring no deposit at all. If you are borrowing
80& or more of the purchase price, lenders generally require you to
pay for mortgage insurance, which means an additional fee.
Some lenders require proof, through bank statements, that a certain
amount of the deposit came from your own savings.
Mortgage Insurance
Mortgage insurance or mortgage guarantee insurance usually applies
if you are borrowing more than 80% of the purchase price. This is
usually in the form of a one off premium paid at the time of
settlement. Mortgage insurance does not protect your interest. It
protects the lender in the event that you default on the loan and
the amount still owed is greater than what is received from the sale
of the property. It is important to note that if you default and the
mortgage insurance is paid out, the insurance company will pursue
you to repay the debt. Under the Consumer Credit Code a lender can
require you to tale out insurance.
Consumer Credit Insurance
Consumer credit insurance is an option to safeguard you if loan
repayments cannot be made because of sickness, accident or
unemployment. Carefully consider the costs of the insurance to
determine if the benefits are worth the outlay. Also, study the
terms and conditions for any restrictions or limitations, such as a
three-month limit on coverage.
Under the Consumer Credit Code it is against the law for a lender to
require you to take out this type of insurance.
Consumer Credit Code
To ensure fair dealing and to protect your interests, all lenders
must comply with the Consumer Credit Code. The Code regulates all
credit for personal, domestic or household purposes. Under this Code
lenders must provide:
-
A statement
outlining the borrower’s rights and obligations.
-
A pre-
contractual statement setting out certain financial information,
which must be included in the contract document
-
Comparison rates
for loan options
This not only protects you, but also helps you to compare products
and make an informed choice.
Choosing a Lender
It usually takes some time to find the right home. This gives you
the opportunity to organise your finances and apply for a loan. Most
lenders will approve a loan in principle, allowing you to be
confident of your spending limit when searching for a property. This
Approval is usually valid for 6 to 12 months and needs to be renewed
after this period. The loan is then formally approved once a
purchase has been made. Choosing the right home loan is as important
as choosing the right home.
Researching and understanding the home loan market will assist you
choosing the most suitable loan.
There is intense competition among lenders who offer a variety of
packages, options and methods of payment. The loan that appears to
be cheapest because it has the lowest interest rate may not be the
cheapest option in the longer term when fees, ongoing charges, and
penalties are included. Also, it may not have the flexibility and
added extras of some other loans.
Quick Tip:
Below are the main types of lenders:
-
Banks
-
Non-bank lenders
such as
-
Credit unions
-
Building
societies
-
Mortgage
Originators
Many lenders conduct their business through the Internet, on the
telephone and even by visiting you at home or place of work. A
mobile lender can only visit you at your home or place or work if
you invite him/her to do so.
