Choosing the Right Home Loan

What to Consider Before Getting a Mortgage

Oct 13, 2009 Wei Yin Wong

Home buyers need to know how much money they can borrow, the necessary features of a mortgage and other possible benefits when choosing the right home loan.

With hundreds of home loan products in the market, choosing the right one can be tricky. The task is even more challenging for first time home buyers with little experience when it comes to house-hunting and finding the right mortgage.

Here’s a quick look at what home buyers should consider before getting a mortgage.

Know How Much Home Loan Can be Borrowed

How much loan a new home buyer can borrow depends on several lending criteria, including his income, ability to repay the loan, assets and liabilities, credit history and savings history. The lender needs to see all these to ascertain that the borrower has a sensible way of managing his finances before lending him a big sum of money to buy a house.

Home buyers can also make their own assessments to see if they really can afford to take up a certain mortgage. A home loan calculator, which can be found on most bank websites, is very useful here. It can calculate how much a home buyer can borrow and how much he needs to repay over the course of a certain period of time. However, do note that the figures provided are estimates only. Also, it’s a good idea to provide a buffer. Check whether it’s possible to make repayments if mortgage interest rates go up by 2%. If it’s near impossible, perhaps a smaller loan is a better option.

Determine Necessary Home Loan Features

Different types of home loans are developed for borrowers with different needs and financial situations. Think of the following features before getting a mortgage:

• Extra repayments. Are there plans to make extra repayments? This will help manage rising mortgage rates but some cheaper or fixed rate home loans have restrictions regarding this.
• Loan term. A mortgage can last for up to 40 years. A long loan term means lower monthly repayments but higher overall interest in the long run.
• Redraw facility. This allows the borrower to take out any extra repayments made on the loan. This is handy but should only be used with extreme care.
• Loan portability. Many home owners move houses each year and unless the mortgage lender provides loan portability – allowing home owners to take the loans with them when they move – moving can cost them big application fees for new loans and a lot of inconveniences.
• Loan flexibility. While it’s hard to look into the future, it helps if a mortgage comes with loan flexibility. Financial circumstances may change and therefore some loan flexibility is useful. For instance, a young family may want to consider a mortgage that offers a “pregnancy pause” on repayments if they are planning to have children.
• Interest-only loan. Interest-only loans, which allow borrowers to repay interest only for up to a number of years, are handy for those with limited money. The thing is, it won’t help in reducing the loan capital during the interest-only period.

Ask About Other Benefits From Mortgage Lenders

When choosing the right home loan, ask also about other possible benefits from mortgage lenders. Many lenders provide their borrowers with perks such as a fee-free transaction accounts or lower fees on credit cards or other loans. If a home buyer is also a shareholder in a mortgage lending company, he can also negotiate for a lower home loan interest rate. It can save the home loan borrower thousands of dollars in the long term.

Home buyers do need to do a bit of research when choosing the right home loan. First, they must find out how much they can borrow. Use an online home loan calculator. Then, they need to determine what features are necessary in the mortgage they eventually take up. Another thing to consider before getting a mortgage is to ask about possible benefits that the lender provides.

Found this article useful? Read also Managing Rising Mortgage Rates and Choosing the Right Property.

References:

ING Direct Home Loan Booklet. “10 Steps for Living With Your Home Loan” in Money Magazine. Australia: ACP Magazines, October 2008.

Choice.com.au Website – How to Choose a Home Loan

The copyright of the article Choosing the Right Home Loan in Mortgages/Loans is owned by Wei Yin Wong. Permission to republish Choosing the Right Home Loan in print or online must be granted by the author in writing.

Determine Necessary Features in a Mortgage

Know how Much to Borrow When Choosing a Home Loan