Dissecting Mortgage: What You Need to Know Before Applying for a Home Loan

According to the most recent national survey released in 2016 by the Australian Bureau of Statistics, more than 2.8 million properties are owned with a mortgage. The number of properties owned outright is more than 2.5 million.

Record low-interest rates and better property market conditions are making investors more strategic with their approach. They are taking advantage of the 0.75 per cent cash rate as well as the scraping of the 7 per cent home loan buffer and seeking advice from the best brokers. Many buyers are getting pre-approved to move forward quickly in purchasing a property either for residence or investment without hesitation.

Understanding Mortgage Interest Rates

Housing Loan in Australia

Different houses, different mortgages

There are many factors affecting interest rates. One in particular is the purpose of the loan, either owner-occupied or investment loans. Investment loans often have higher rates compared to owner-occupied and can choose between principal and interest or interest-only repayments. Before choosing, it is important to know that interest rates are higher with the interest-only option.

The Reserve Bank’s cash rate, regulatory changes (like loan restrictions) and the lender’s cost of funding are also key factors influencing interest rates. Understanding interest rate conditions and fluctuations are necessary to avoid financial strain that may result in mortgage stress.

Two Types of Mortgage: Fixed vs Variable

There are two main types of home loans in Australia, fixed and variable. The difference between the two is predicated on the interest rates.

Fixed Rate

Fixed-rate mortgages have locked-in interest rates during the agreed term. Loans.com.au said one advantage with this option is that it gives people peace of mind. If interest rates increase, additional payments won’t apply. Fixed mortgages are ideal for investors who are following a budget plan all throughout. Fixed home loans will give you more room to breathe when adjusting to monthly loan repayments.

The downside is, rate increases won’t alter fixed repayments. Sadly, the same rule applies to reduced rates. Fixed home loans are cheaper at that current point in time. Most fixed mortgage packages don’t allow extra repayments and redrawing offset account.

Variable Rate

Variable rate home loans, on the other hand benefit from low interest rates and offer more flexibility like extra payments. Making extra repayments is one way to reduce overall cost. The more repayments you make, the less total interest you need to pay. People with variable mortgages can open offshore accounts to help them pay less interest. These offshore accounts are linked to eligible mortgages where people can deposit their salary and rental income. Lenders then charge less interest because they are not charging the full loan balance. Variable interest rates technically change when lenders decide to change them. However, there are key factors resulting to these changes like regulatory changes, decreased competition and an increase in cost of funding.

There is no telling when rates will increase and how long they will remain at that level. Variable rate loan however makes budgeting harder when intrest rates are high. This then may result to mortgage stress if people are unable to cope with this repayment issue.

Another option is to apply for a split loan – a mortgage part fixed and part variable. Opting for a split loan allows investors to take advantage of locked-in interest rates for a given period usually 1 to 5 years. After that, their loan turns to a variable rate loan. This gives investors more security and flexibility to manage the risks of interest rate fluctuations efficiently in times of economic uncertainty.

Choose the right Lender

Mortgage in Australia

Finding value in the mortgage struggle

Lenders offer different mortgage packages that suit various financial and personal preferences. Don’t get distracted by some of the ‘bells and whistles’ attached to many lender’s packages. Features such as having 3 offset accounts with easy re-draw and a $10,000 credit card may sound like a good thing, but if you don’t need those features, they will just cost you money somewhere else. When selecting a lender, the fundamentals always need to take priority, like low fees and competitive interest rates.

Lenders are complying with lower interest rates to stay competitive. A lot of investors are phoning their bank asking for rate reduction. They are not concerned to walk away and take their business elsewhere if their current lenders don’t meet them halfway.

Capitalise on Record Low Rates

Record low cash rate handed down by the RBA is expected to remain unchanged over the next couple of months. It is important to note that RBA’s interest rate does not dictate banks’ individual interest rates. Economists are optimistic that the cash rate will further reduce in the coming months, possibly down to 0.25 per cent by June 2020.  Investors are taking advantage of the promising lending environment. We’ve recorded an increase among first-time home buyers and first-time investors to enter the market.

Gallery Group has more than 400 specialists prepared to help first-time home buyers or property investors choose the best loan and find the ideal lender. Contact us today.