How does your loan-to-value ratio affect your borrowing capacity?Read more
For many first-time buyers, the homebuying process is a daunting task. Aside from scouring listing sites for the perfect property, attending auctions, and researching the market, you need to ensure that your finances are in check to secure a home loan. Good thing that you do not actually have to do all these by yourself. A mortgage broker can take the burden of looking for the perfect home loan off your back.
In this digital era, many first-home buyers overlook the advantage of using mortgage brokers. While most homebuying questions nowadays can be answered in just a few keyboard taps and mouse clicks, relying so much on search engines could potentially mean losing a great home-loan deal.
Brokers play a vital role in your homeownership journey, and it is a must for you to choose your broker wisely, just as you would with your home loan.
When looking for brokers, you need to make sure that they have a license and are accredited under the National Consumer Protection Act.
They should also be a member of a reputable industry association such as the Mortgage and Finance Association of Australia, the Mortgage Industry Association of Australia, or the Credit Ombudsman Service.
How do you start looking for a broker? One way is to go directly to brokerage firms that have a roster of experienced brokers. Some consumer-oriented websites, like Your Mortgage, can also help you reach out to the right brokers.
Word-of-mouth referrals from friends and family can also assist you in finding the best broker to work with. These recommendations can help you get a better sense of your brokers' work ethic and experience: Are they punctual and organised? Do they show in-depth market knowledge?
Here are some of the qualities you should look for when finding a mortgage broker:
When you get a mortgage broker, you are, in essence, hiring them for their services. And as with any job application, you should ask them certain questions that will help you get to know them more.
One of the first things you need to ask your brokers about is their network of lenders. This will show you how diverse and wide your options are going to be. It also shows which lenders trust them to present their offerings to potential clients.
It would be best if you also ask them about how they are getting paid. Generally, most brokers offer their services for free while others, especially those under an agency, might charge you with a fee.
Brokers get commissions from lenders. There are two types of commission: upfront and trailing. An upfront commission is a payment made by the lender to a broker once a borrower seals the deal.
Brokers can still get paid after finalizing a loan deal through trailing commissions. Lenders will continue to pay the broker recurring commission as long as you stay with your current deal, and you do not fall into arrears.
This is where a potential conflict of interest can arise. Brokers might promote particular mortgage products or lenders without considering your needs because of a generous commission that awaits them after the deal. While it is always imperative for brokers to prioritise your needs, there could be a few bad apples who only care about the money they would make out of the deal.
Here are some of the other questions you can ask your brokers to get to know them more:
The power of mortgage brokers lies in their network of lenders and home loan products. In a very competitive space, it is a massive disadvantage for buyers to miss out on the better deals available in the market.
Before helping you submit your home loan application, mortgage brokers determine the best deal by performing several checks on your finances.
One of the essential things brokers check is your credit score, which serves as a report card that allows lenders to get a glimpse of how you are as a borrower. If your broker thinks your credit score is not at an ideal level, he or she might advise you to settle other financial obligations on time.
Brokers use an excellent credit score to get the upper hand when negotiating with banks for better offers.
Brokers also need to know your sources of income. If you are employed, you need to be at least six months in your current position to have a higher chance of getting approved for a loan. Brokers can easily find the best deals if you have a stable source of income.
If you are a self-employed, part-time, or casual worker, the process gets a little complicated. Lenders often see these types of employment as riskier, and they could offer you an expensive deal. However, a mortgage broker can help you find the right lender and the ideal home-loan product for your situation.
Identifying what you need and what you want is crucial for brokers when comparing home loans.
Brokers will be able to help you identify which home-loan features you might need. These features can help you save money and provide flexibility as you make your repayments. Some of the features you might want to consider are the following:
An offset account acts like a high-interest savings account. It helps you save by accounting your savings against your loan balance. This means that you will not be paying interest on the entirety of your home loan, but only on a particular portion not covered by your offset account. The funds you save in your offset account are not considered extra repayments.
This home-loan feature is often confused with offset accounts. While they both help you save in the long run, redraw facility works differently. It allows you to make additional payments to your loan that you can withdraw in the future. Extra repayments mean shaving off the principal amount of your loan. Some lenders charge fees for redraws.
Also known as security substitution, the portability feature allows you to keep the loan when you sell your home or your investment property and purchase another. This feature can sometimes be complicated, given that the values of your current home and your target property are considered. Mortgage brokers can explain the restrictions of this feature.
A mortgage that allows you to make additional repayments can lead to significant savings over the long term. It will slash the total amount of interest you pay over the life of the loan. Some lenders charge a fee for additional repayments. However, your mortgage broker can help you find a lender that provides this feature for free.
A line of credit allows you to borrow against the equity of your home. If the value of your home has increased considerably and you need some extra cash, this feature is the answer.
Knowing the pros and cons of fixed and variable rates is also part of comparing home loans. Will it be ideal for you to have your rate fixed for a period of five years? Or will it be better to have a rate that follows the market movements?
A fixed-rate home loan locks your mortgage repayments into an unchangeable rate over a certain period of time, usually up to five years. Once the fixed-rate contract lapses, the standard variable rate applies. Fixed rates provide certainty, allowing you to easily organize your budget and stay on top of your repayments. They also protect you from sudden rate hikes that usually happen when the housing market is on fire and wages are skyrocketing.
On the other hand, a variable-rate home loan follows the movement of cash rates. When the Reserve Bank of Australia lowers the cash rate, you effectively get a reduction in your interest rate as well. Variable-rate home loans give you more flexibility, allowing you to make extra repayments and making it easier to switch loans.
If you want to get the best of both worlds, your broker might suggest getting a split loan. This option reduces the risks on each interest type and provides you with both security and flexibility. A split mortgage is particularly useful when the interest-rate cycle is uncertain.
Mortgage brokers also consider the associated fees when comparing home-loan products. For this, they use the home loan's comparison rate. This rate combines the interest rate and all the other upfront and ongoing fees and charges of the home loan. In simplest terms, a comparison rate tells you the true cost of the loan. Brokers use this rate to compare home loans more efficiently.
Mortgage brokers are the perfect people to seek help from when buying a home. They are not merely agents who sell you with home loans — instead, they are life partners who are committed to help you achieve the Great Australian Dream.
Experienced brokers make the process of loan application fast, and increase your overall chances to get approval from your chosen lender. They can understand your unique circumstances and work with whatever you have to find a mortgage that suits your needs.
Good mortgage brokers will be there to guide you all throughout the process of buying a home, from loan application all the way to settlement day.
How does your loan-to-value ratio affect your borrowing capacity?Read more