First home buyers guide to mortgages

If you’re a first home buyer, having your finances organised and a loan pre-approved before you start looking for your home can help you save time and avoid disappointment. Here’s our quick guide to what you need to know.

How much deposit do you need?

Most mortgages are based on a 20% deposit on the price of the property, with the bank or financial institution lending you the 80% to get to the final sale price. While it is possible to have a lower deposit, these usually come with additional expenses such as a higher interest rate and lenders mortgage insurance.

But is that deposit really enough?

Don’t forget that the price of the property is not the only thing you’ll have to pay for when you buy your home. There is also the cost of legals, stamp duty (which can be considerable) and the cost of moving, setting up your services and any new furnishings or improvements you’ll want to do. Make sure you put all of these into your budget.

How much can you lend?

A good rule of thumb is that the repayments of your mortgage should not exceed more than 35% of your combined family income each month. This ensures that you won’t feel mortgage stress. However, just because the bank tells you how much you can loan, don’t feel obliged to spend it all. Make sure you are comfortable with the repayments, and you’ve considered other costs and how those repayments will affect other lifestyle choices (such as holidays, having children, work options).

The different types of mortgages

There are two main types of interest rates on mortgages. One is a fixed rate, and the second is variable.

A variable rate is the most common. It provides some flexibility in that if interest rates fall, you will pay less each month and it may help you to pay off your loan sooner, although if interest rates rise, so too will your mortgage payments.

A fixed rate mortgage is great for those who want to stick to a budget or who fear that interest rates may rise in the future as it will protect you from increases. (although equally you won’t receive any interest rate drops and it may affect your ability to pay off your loan early).

Splitting your home loan so part of it is fixed and part variable is also possible with some lenders. Speak to your financial adviser or accountant to identify your best option.

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