What is the difference between Variable and Fixed rates?
The advantage of having a fixed interest rate is that it guarantees your repayments stay the same throughout the term of the loan and gives you protection against rate increases. A fixed mortgage also allows you to budget more accurately while your repayments stay the same. The disadvantages are that when interest rates decline you will miss out on the savings because your rate will stay unchanged. Fixed rates are also normally higher than variable rates because you’re paying for the security that the rate won’t move for the set period of time.
A variable mortgage rate generally follows the Reserve Bank of Australia’s official cash rate. When the cash rate falls, your variable rate is likely to decrease as will your repayments. Variable interest rates are generally lower than a fixed interest rate, however the main disadvantage is that if the cash rate increases so will your repayments. This results in your repayments most likely differing month-to-month depending on whether the lender increases or decreases their rate which makes it difficult to budget.
What is a low doc?
The advantage of a low doc or low documentation loan is that these types of loans are available for people who are unable to provide the usual paper work required when applying for a loan.
Most of the time, the borrowers do not have to provide pay slips and tax returns however they must state their income and be able to prove that they can meet the repayments. This loan is good for people who own their own business and are unable to provide the necessary papers that prove a steady income. The disadvantages of this type of loan is that the interest rate is higher than a regular home loan and you may be charged additional fees such as risk fees.
As this type of borrower may be seen as a higher risk to lenders they may be asked to provide other assets such as a car to be security against the loan. You will be limited to which lenders you will be able to secure a loan through, however Finance Detective will handle all that for you.
How much of a deposit is needed?
The minimum deposit necessary will depend on the type of loan you need. As a general rule, 20 percent of the value of the property that you wish to purchase should be the amount of your deposit. The larger the deposit you have the better your application will look to lenders, this also follows that the amount you borrow will be less.
Home loans also require what is called a Loan to Value Ratio or an LVR. The LVR is the amount of money you can borrow as a percentage of the value of the property. As an example, if the loan you required had an LVR of 90%, you would need to save at least 10% as a deposit. So to purchase a property valued at $450,000 you would need a $45,000 deposit.
What to consider before applying for a home loan
Before applying for a loan there are a number of things that you should consider first such as:
- Repayments should be no more than 30 percent of your income.
- When calculating how much you can afford to make in repayments, ensure that you give yourself a 2 percent buffer for rate increases.
- Ensure that you have saved a deposit and can show a saving history of at least the last three to six months by depositing the savings into another linked account. This should show a regular increase of your balance every month, also ensure that you have saved for the establishment fees and other upfront charges.
- Keep a copy of all the documentation required, such as pay slips to prove your income, bank statement to show your savings, bills or rental receipts to prove your credit history and identification.
- Make sure you’re well aware of the fees and charges as well as the ongoing costs. Also ensure that you have allows for the other costs incurred in purchasing a home, such as lenders mortgage insurance and stamp duty.
- Also make sure you read and understand the product disclosure statement.
What additional costs are involved with loans?
Checklist of costs involved
Along with application fees, mortgages have other costs that are involved with the process. Finance Detective has put together a checklist of the costs that you can expect to encounter when applying for your home loan. Going through this checklist ensures that you are able to include these costs in your final calculations.
- Application fee/up-front cost
- Ongoing fee
- Additional repayment fee
- Late payment fee
- Break costs
- Mortgage discharge fee
- Redraw fee
- Re-fix fee
- Switching fee
- Portability fee
Here are a few reasons why you may want to consider refinancing
- The ability to negotiate a better interest rate
- Home loan packages have become more sophisticate and beneficial to the borrower
- The loan will be repaid over a far shorter period of time
- Refinancing offers you the opportunity to consolidate your debt into one easy repayment each month. This means you can combine credit cards, personal loans and any other debt you may have, this will then reduce your minimum monthly payment and interest rates.
- It can also mean using the equity in your home to finance a renovation or free up some capital for property investment.
What ever your circumstances, speak to one of our expert consultants about a complete finance health check today on (08) 9289 7777.