Next up? Securing finance for your home. But with so much to consider – from pre-approval and proof of income to redraw and repayments – it can feel like a mountain to climb.

Below, Dan Hustwaite – Director of mortgage brokerage Aqua Financial Services – demystifies the jargon around home loans and interest rates. And unpacks the (sometimes tricky, but always satisfying) process of financing your first home.

 

Start now – by building your credit rating

The first step to securing finance for your first home isn’t walking into the office of a bank. It begins much, much sooner – and you can start today.

We’re talking about building your credit rating.

This is a measure of how ‘creditworthy’ potential lenders deem you: their measure of your ability to pay back a loan. Credit ratings are measured in both colour (green good; amber and red less so) and number (the higher, the better).

While there’s no ‘magic number’, Dan says, you’ll want your credit score to be at least 500 – ideally over 600. But it’s less about dwelling on the exact number, he explains, and more about developing good habits early: like avoiding unnecessary loans or credit card debt, and saving well.

“When banks assess your credit score, they’re also looking at you as a whole – at the savings you’re putting towards the purchase. They’ll examine how many credit enquiries (applications for finance) you’ve made – particularly small loans from payday lenders.

“If you’ve had a lot of credit enquiries, it indicates to the bank that you’re not managing your money. Which can have a massively adverse effect on your credit file.”

Still, credit enquiries aren’t always a hindrance to your credit rating. In fact, Dan assures, taking out loans in moderation – and paying them back regularly – helps you cultivate a healthy credit profile.

“One or two credit enquiries – for a credit card, mobile phone, utility account or even a car loan – are nothing to be afraid of. Providing, that is, you’re making payments on time.

“Now more than ever, banks share information between themselves. If you make a late payment on one credit card, it’ll show up when you come to apply for a home loan – even if that’s with another bank. This can seriously affect your borrowing capacity – and potentially put an end to your application, too.”

 

Pull your documents together for pre-approval

So you’ve saved a deposit, and your credit rating and finances are in good shape. Now, it’s time to fund your first home – and secure that all-important mortgage.

First up? Seeking pre-approval from a lender.

Pre-approval is when a lender conditionally agrees to finance you up to a certain amount. It lasts for a fixed, short-term period (usually between three and six months), and gives you a good idea of your borrowing power.

Getting pre-approved also helps speed up the process when you come to buy your first home. And provides peace of mind that finance is already in place – before you even start looking at houses.

“Pre-approval,” Dan divulges, “gives you the confidence that you’ll then be able to make an offer on a property. And makes your chances of securing the property stronger than someone without that pre-approval in place.”

For pre-approval, you’ll need:

• Bank statements to prove your savings
• A list of your assets and liabilities
• 100 points of ID
• Tax returns and payslips as proof of income

Ready to seek pre-approval? Excellent. But where should you go?

 

Choose the right lender – or better, a broker

There’s a wealth of different lenders available to finance your first home.

Traditional banks are one, of course: third-party home loan providers are another. All offer varying interest rates (which we’ll get to in a second!) and packages.

Needless to say, it’s important to shop around – something a mortgage broker can help with.

Mortgage brokers like Aqua Financial Services act as go-betweens: working with banks and lenders to arrange the right home loan for your needs. However, they also work closely with you – collecting and curating mortgages that fit your requirements to a tee.

“Good brokers,” Dan explains, “will never put a loan in front of you that isn’t suitable for your needs. We’ll help you understand the numbers behind the loans – particularly the interest rates, and their differences – and why we’re applying for them.”

But it’s not only at the stage of securing finance that mortgage brokers come in.

“Our role in this isn’t to speak to you the minute you’re ready to buy,” Dan says, “but much earlier on. We’ll set you up with a budgeting table, and ask you questions about where you’d like to live, and how much you’re looking to spend.

“We’ll let you know where you are, and what your savings need to look like to buy in your desired bracket. Once you’re ready to buy (or are close), we’ll provide different loan options – between four and seven – to suit you. We’ll then approach your chosen lender and put a pre-approval in place.”

 

Fixed vs variable rates: which one’s right for you?

Home loan interest rates come in two forms: fixed and variable. But what do they mean, exactly – and why is it so crucial to pick the right one?

Fixed rates lock your interest rate in for a specific period (usually anywhere from one to five years). For that length of time, your repayments won’t change – giving you stability and making it easier to manage your cash flow in the long term.

Variable rates are currently lower than their fixed counterparts. But as the name suggests, they’re subject to change.

This could be for a range of wider economic factors: such as inflation, or shifts in the Reserve Bank of Australia’s monetary policies. And, should rates rise or fall, your repayments will fluctuate accordingly.

“Variable rates give you flexibility,” Dan explains, “but not the same sense of predictability as fixed ones. At the moment, all the talk is of rates increasing, not dropping – so you have to understand that if you apply for a loan today, on a variable rate, it will likely go up.”

Still, variable rates offer plenty of benefits. Unlike with a fixed rate loan, you won’t incur fees to make extra repayments – so there’s no penalty for paying off your mortgage faster. Variable rates also offer features fixed rates don’t, such as:

• Offset accounts. Linked to your mortgage, these work like savings accounts. Any money you put into them will offset the balance of your home loan – meaning you’ll only pay interest on the difference, rather than the mortgage’s full value.
• Redraw facilities. These allow you to withdraw any extra repayments you’ve made on your home loan, should you need emergency cash.

Ultimately, whether a fixed or variable rate suits you will depend on your unique financial circumstances. So what’s a good interest rate?

According to Dan (and at the time of writing in May 2022) 4% p.a. constitutes a ‘good’ fixed interest rate.

For variable home loans – which are lower and offer more wriggle room, but liable to go up – around 2.5% p.a. is a competitive rate.

 

Paying off your home loan: how long will it take?

To this question, there’s no easy answer. After all, most home buyers – particularly first-time ones – won’t have the same loan forever. You’ll upgrade or upsize. And upscale to a different loan, perhaps with a different lender.

But, as Dan explains, there is a way to ensure your home loan remains viable throughout the period you have it for.

“If you’re not on a fixed rate, you should be reviewing your home loan every two to three years – at least – to ensure it remains competitive.

“As part of our ongoing service at Aqua, we do a pricing request to your existing lender each time we ring you for your anniversary. If we can get you a better deal with them, we’ll make it happen.”

 

In Part Three, we’ll be back with Dan to conclude our trilogy of articles for first-time home hunters. And guide you through the final step of your house-buying journey – the actual purchase!

Should you buy at auction or private sale? Will you have to pay stamp duty? Is there a ‘good’ time to buy – and if so, when?

Catch up with Part One, Saving for a deposit.

 

 

A quick note from us: the information in this article is of a general nature, intended to offer some helpful guidelines and tips. It doesn’t constitute professional financial advice – for that, Dan and the team at Aqua Financial Services can help!