Researching all the various home loan options is a daunting process. To make things easier, we decided to engage a broker. The first stage was determining how much we could borrow and obtaining pre-approval so we knew our house and land budget. We met with our broker and discussed our financial situation and what we thought we wanted to borrow. He then ran the figures and presented a range of options / providers for us to choose from.
Things to consider:
- How much can you really afford?
This is an obvious one, but it’s really important to really think about it. With interest rates at record lows it is easy to over-commit. Our broker gave us an indication of what was a feasible amount for us to borrow taking into account our current lifestyles / careers. We also considered the future, which is crucial, given a home loan is generally for 30 years (a very long time)! We wanted to be able to manage our mortgage even if one of us were to lose our job or have to stop work. So we based our borrowing capacity accordingly. For some, it’s nice to have certainty, so a fixed interest rate is an option. We decided on a variable rate of 4.17% with Bankwest. Our broker has diarised a time to contact us to discuss our options in a year, so we can always change banks depending on the competition.
- Mortgage Insurance
If you have to borrow more than 80% of the house value you will need to pay mortgage insurance. For example, if the house is valued at $500,000, a 20% deposit is $100,000. Fortunately we were able to save our 20% deposit to avoid mortgage insurance. Another way around paying mortgage insurance is having your parents, if they’re in a position to do so, go guarantor.
- Offset Accounts
An offset account is a great way to save interest over the term of your loan. Basically the amount in your Offset account is “offset” against your home loan.
For instance, if you have a loan with $500,000 owing and an Offset Transaction Account with a credit balance of $20,000 and 100% offset, you will only pay interest on your home loan on a balance of $480,000. Over the term of the loan you will save over $64,000 and take 1 year 9 months off your loan!
Our offset account is used as our savings account and our transaction account. All of our mortgage repayments and direct debits for bills come from this account.
- Pay your mortgage weekly instead of monthly!
This reduces the length of your loan and the interest paid!
Everyone’s situation is different so a budget is a personal thing. However, I’ve found it helpful to know how other people budget, so I will share what we have decided to do.
As indicated above, an offset account is a really powerful way to reduce the length of your loan and the interest paid. Whilst we were saving our deposit for our home, we had online saving accounts earning interest. Now that we have a mortgage we have decided to combine our savings into the offset account to really make the most of the account.
- Work out a weekly budget. We decided we would have $400 per week each. So combined $3,200 a month for food, petrol and other personal expenses.
- We decided to still keep our existing individual transaction accounts and continue to have our wages paid into these accounts.
- So each month (monthly pay sucks!) that I am paid, I leave $1,600 ($400 per week) in my personal account and transfer the remainder to the offset account. The OH is paid fortnightly so he keeps $800 in his transaction account a fortnight and transfers the remainder into the offset account to be used for mortgage repayments, bills and the remainder to accumulate as savings.
- All house related bills plus the mortgage are then debited from the offset account and the money left in our personal transaction accounts is left for food and personal expenses.
I know it would probably be more beneficial to have all our money in our offset account and use it for everything instead of having our individual transaction accounts, but so far what we have in place is working for us. We have also considered getting a rewards credit card and using that for all purchases and keeping “our” money in our offset account and then clearing the credit card each month before interest is charged. This means more money in our offset account for longer and we would be accumulating rewards / frequent flyer points. We might look into this option further down the track J