The true cost of a home loan depends on many different factors, some of which are out of your control.
When you get a home loan, you know you’re going to have to pay the principal and interest, but there’s more to the picture than it would appear.
When it comes to the overall cost of the home loan, the biggest factor that you have the most control over is the size of your deposit, and for many prospective home buyers, saving this deposit is the hardest part of buying a home. There are many ways to save up your deposit, and you have to decide whether you’re going to save a specific amount, regardless of how long it takes to do so, or save for a certain period of time and then move forward with the process, regardless of the exact amount you have saved. For an owner-occupied property, you have to have a minimum down payment of five per cent of the purchase price of the property, and if that amount is less than 20 per cent, then you’ll be required to get Lenders Mortgage Insurance, which protects the lender in case you default on your home loan. You can either roll this cost into your loan repayments over your loan term or you can pay the costs upfront. There are lenders mortgage insurance calculators
to help you work out how much insurance will cost.
The bigger the deposit you have, the less you’ll have to borrow from the bank for the loan. And since the interest is calculated on the size of the home loan, you’ll end up paying less over the term.
When deciding how much money you have to spend on a home, it’s important not to forget how your deposit fits into your overall home budget. Declan Murphy, managing director of QuickSelect, says that first homeowners generally don’t go overboard with their budget, but “they often think they can get more for their savings than they can, they are not as conscious of having to have a deposit, or that when they look at their spare cash that the lender buffers this to reflect potential interest rate increases.”
The more cash that you have upfront, the less risky you are as a borrower in the eyes of your lender.
The most obvious impact on the amount you’ll end up paying for your home loan overall is the amount you’ll pay in interest. This amount, of course, varies based on the interest rate given to you by your lender. This rate depends on a number of factors, such as the type of the loan, whether the rate is fixed or variable, the fees involved in servicing the loan, and also your current debts and credit record. The different rates that you see advertised can be confusing and make it tempting to go for the lowest rate possible, but sometimes with lower rates you’re giving up flexibility and features of a mortgage with a higher rate. A difference in a portion of a percentage point may only represent $20 a month and not break the bank, but a combination of a rock bottom interest rate and a large deposit can make a real difference when it comes to the actual cost of your home loan, whereas a minimal down payment and a high interest rate could end up costing you thousands upon thousands of dollars by the end of your amortization period.
When you’re looking at interest rates, you may assume that you’re being a responsible consumer and compare the rates on different home loans
using the comparison rate. After all, that’s what it’s for, right? The comparison rate is the actual percentage of your loan amount that you end up paying, once all fees and charges are included. But the comparison rate doesn’t necessarily give you what you need to compare apples to apples because it’s based on a particular set of criteria, including amortization period and loan amount. Make sure that you read the fine print and consult a mortgage broker to know that you’re comparing like to like.
There are also costs that go along with a home loan that aren’t exactly hidden, but usually don’t factor into the calculations done by most borrowers when they think about buying a home. A full breakdown of these costs
includes solicitor’s or conveyancer’s fees, title searches, and various other items that are due at the time that you sign all of the papers and get the keys to your home. While different solicitors might charge slightly different fees for their services, pay close attention to what they’re offering. Buying a home is expensive, but this is not the time to go to the lowest bidder. The settlement process can be a headache if not done properly, and you want an experienced professional to do the job. If you can, get a recommendation from someone you trust.
There’s a good chance that the biggest fee that you’ll have to pay at settlement is your stamp duty, which can blindside home buyers if they’re not prepared. The amount of this tax varies largely based upon the state in which you live, and on factors such as whether or not you’re a first-time home buyer, are buying for property, your residency status, and the size/value of the property being bought. There are concessions in place that apply to the stamp duty, but they’re not available in all provinces or to all buyers. There are concessions for building a new home, being a first-time home buyer, or being a pensioner but you have to check with the particular state where you’re buying to see if you qualify.
If you’ve been renting a home before buying, as is the case with many first home owners, then it may be tempting to compare your rent payment to your home loan payment. That comparison isn’t accurate, however, as being a home owner means a lot of incidental charges that aren’t covered by your home loan payments, and many landlords will include those costs into your rent amount.
Some of these incidentals include things such as heating and cooling your home, depending on the climate in your area, as well as maintenance costs, which again, vary depending on where you live.
Experts tout the importance of saving a certain percentage of money each year specifically reserved for home repairs and unforeseen costs. That percentage is anywhere from one to five per cent of the value of your home each year for home maintenance and repairs, based on a number of factors, such as the age of the home, whether or not previous home owners took good care of the property, and weather conditions. You probably won’t use that reserve every year; some years will only require new filters in your furnace, for example, or replacing the weather stripping around doors or windows. Other years will require much more extensive maintenance, such as foundation repairs, or the replacement of your roof.
Remember: your monthly payment is not your bottom line! Thinking of all of these things when you buy your home today will benefit your finances in the future.
Talk to a professional
A mortgage broker
will help you to consider some of these additional costs when it comes to purchasing property, especially if it’s your first time and you don’t know what to expect.
“We will always look at the long term plan, not just the first purchase,” Murphy says. “First home owners are so focused on the initial purchase they can’t see beyond it; we do to ensure the steps to the next purchase are in place as early as possible.”
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan