If you’re in the market to buy a home, you may have come across the term “mortgage.” A mortgage is a loan you take out to finance the purchase of a property. In Australia, mortgages are a popular way to buy a home, but they can also be quite complex. In this blog, we’ll walk you through everything you need to know about mortgages in Australia, from how they work to how to apply for one.
What is a mortgage?
A mortgage is a loan that you take out to buy a property. The property acts as security for the loan, meaning that if you can’t repay your mortgage, the lender can sell your property to recoup their losses.
Mortgages typically have a term of 25-30 years, and you’ll make regular repayments over this time to pay off the loan.
How does a mortgage work in Australia?
You can choose from a few different types of mortgages in Australia. The most common types are fixed rate, variable rate, and split loans.
Fixed-rate mortgages have a set interest rate that stays the same for a fixed period, usually up to 10 years. This means that your repayments will remain the same for that period, which can be helpful for budgeting.
However, you won’t benefit from any interest rate drops during that time.
Fixed-rate home loans usually offer fewer options and features than variable-rate home loans. For instance, you may not have the option to access redraw during the period your loan is fixed. Additionally, it’s worth mentioning that if you choose to pay off or refinance your home loan before the end of the fixed term, you may incur break costs, which can amount to a considerable sum.
Variable-rate mortgages have an interest rate that can change over time, which means that your repayments can go up or down depending on the interest rate. Variable-rate mortgages are generally more flexible than fixed-rate mortgages, but they can be more difficult to budget for.
Variable-rate home loans often provide the flexibility to make extra repayments towards your loan to pay it off more quickly. Moreover, such loans may also allow you to redraw these additional funds if required in the future. In addition, many variable-rate home loans come with an offset account feature, potentially decreasing the interest you need to pay over time.
Split loans are a combination of fixed and variable-rate mortgages. You can split your loan into two or more parts, with one part on a fixed rate and the other on a variable rate. This gives you the flexibility of a variable-rate mortgage while also providing some stability with a fixed rate.
When a part of your home loan is fixed, it can safeguard you against the risk of interest rate hikes, but you wouldn’t benefit if interest rates drop. With a fixed-rate loan, you’ll always know your exact repayments for the fixed term.
On the other hand, the variable portion of your home loan provides the flexibility to make unlimited extra repayments, enabling you to pay off that part of your loan faster. In addition, depending on the type of variable rate loan you select, you may have access to features like redraw and an offset account, which can potentially offer you benefits. You may also reap the rewards of a decrease in interest rates, but it’s important to note that your repayments will increase if interest rates rise.
How many times my salary can I borrow for a mortgage in Australia?
The amount you can borrow for a mortgage in Australia will depend on a few factors, including your income, expenses, and credit history. As a general rule of thumb, most lenders will let you borrow up to five times your annual income for well-qualified homebuyers, but this can vary depending on the lender and your individual circumstances.
Applying for your first mortgage can be complex, but you can do a few things to make it easier. Firstly, you’ll need to have a deposit saved up – this is typically 10-20% of the property’s value.
Typically, aiming for a deposit of 20% of the total house value is considered a good practice. However, it is still possible to secure a loan with a smaller deposit, but you may be required to take out Lenders Mortgage Insurance (LMI), which would incur an extra cost for your loan. In addition, it may take longer to repay the loan with a smaller deposit. You’ll also need proof of your income, expenses, and credit history. It’s a good idea to get pre-approved for a mortgage before you start house hunting, as this will give you a better idea of how much you can afford to borrow.
What do I need to qualify for a mortgage in Australia?
To qualify for a mortgage in Australia, you’ll need to meet a few requirements. Firstly, you’ll need to be over 18 years old and have a regular income. You’ll also need to have a good credit history and be able to provide proof of your income and expenses. Finally, you’ll need to have a deposit saved up – typically 10-20% of the property’s value.
In conclusion, a mortgage is a popular way to finance a property purchase in Australia, but it’s essential to understand how they work and what you need to qualify for one. By doing your research, getting pre-approved, and working with a reputable lender, you can find a mortgage that’s right for you and your budget.