Hey, fellow financial mavericks, I want to share a quick bite-size piece of information about your home loan, or, if you’re looking to dive into the property market as a first home buyer, then here are some of the mortgage terminology to help you understand what you’re getting into.

Buying a home and financing your new home is one of the biggest purchases of your life and is both exciting and nerve-racking. Firstly, it takes enormous amounts of your income to pay and smash down the home loan, however, it’s also one of the most rewarding things to see you owning your own home, whether it’s your first home or building an investment portfolio.

UNDERSTANDING MORTGAGES: THE BASICS

A mortgage is essentially a loan that helps you buy a property. When you take out a mortgage, you’re borrowing money from a lender (usually a bank or mortgage company) to purchase a home. The twist? The home itself serves as collateral for the loan. This means if you fail to make your payments, the lender has the right to take ownership of the property through a process known as foreclosure.

THE PLAYERS: LENDER AND BORROWER

In the mortgage world, the lender is the financial institution lending you the money. You, the homebuyer, are the borrower. Lenders evaluate your creditworthiness based on factors like your credit score, income, debts, and employment history. This evaluation helps determine how much they’re willing to lend you and at what interest rate.

YOUR MORTGAGE: THE KEY COMPONENTS

Let’s break down the basics of what a mortgage is, including terms like interest rates, principal, what amortisation means, and what it means when you look to refinancing.

So let’s start with:

Principal: This is the amount of money you borrow to buy a home. For example, if you buy a house for $500,000 and make a down payment or deposit of $80,000, your principal would be $420,000.

Interest Rate: The lender charges you interest as a cost of borrowing money. Interest rates can be fixed (remaining the same throughout the term) or variable (changing with market conditions). The rate impacts your monthly payment and the total cost over the life of the loan.

Amortisation: This refers to the process of spreading out the loan payments over a set period, typically 20 to 30 years for mortgages. Each payment includes a portion that goes toward the principal and a portion that goes toward interest. In the early years, a larger part of each payment goes toward interest; later, more goes toward reducing the principal.

Lenders Mortgage Insurance (LMI): Insurance added onto a home loan where your deposit or down payment is less than 20%, which is there to protect the lender if you default on the loan.

Government & Property Taxes: Whenever you purchase a property in Australia, the government charges you stamp duty and other costs, which you can either pay the amount owing at time of settlement, or, you can add the govt costs into your home loan.

Refinancing: This is the process of replacing your existing mortgage with a new one, usually to take advantage of lower interest rates. Refinancing can reduce your monthly payments or shorten your loan term, but it may involve additional costs like settlement fees.

Monthly Payments: Your monthly mortgage payment typically includes:

- - - Principal repayment: Reduces your outstanding loan amount.
    - Interest payment: The cost of borrowing the principal.

Long-term Costs: Over the life of the mortgage, you’ll pay back the principal plus the total interest accrued. A higher interest rate or a longer term means more money paid in interest.

For instance, a $420,000 mortgage at 6% interest over 30 years will cost less in monthly mortgage repayments, however you will be paying more in total interest than the same mortgage at 6% interest over a 25 year period. With a lower loan term, you will be paying higher monthly payments, but in total lower interest costs.

Generally a more extended loan term, helps make the repayment more manageable.

THE MORTGAGE PROCESS: STEP-BY-STEP

- Pre-Approval: Before house hunting, you may want to get pre-approved for a mortgage. This gives you a better idea of how much you can afford and shows sellers you’re serious.
- Find a Home: Once pre-approved, you can shop for a home within your budget.
- Apply for a Mortgage: After finding a home, apply for a mortgage. You’ll need to provide detailed information about your finances.
- Underwriting/Assessment: The lender reviews your application, verifies your financial information, and assesses the property’s value.
- Approval & Settlement: If the loan is approved, you’ll sign the loan documents, your solicitor or settlement agent will assist you in finalising the loan contract and then once settles, the home is yours!

TIPS FOR SUCCESSFUL MORTGAGE MANAGEMENT

- Understand Your Budget: Know what you can afford monthly,, to avoid financial stress.
- Improve Your Credit Score: A higher credit score can secure a better interest rate, saving you money in the long run.
- Save for the Deposit/ Down Payment: The bigger your deposit payment, the less you have to borrow, and the less you pay in interest and possibly mortgage insurance.
- Use a Mortgage Broker: Work with a mortgage broker research for you on who is going to offer you the best deal, based on your own personal financing position. Your mortgage broker will offer you a product comparison, highlighting a few lenders rates, terms and features and benefits.

Understanding these quick basics, helps in making informed decisions about buying a home and choosing the right mortgage. It’s essential to consider both the monthly affordability and the long-term financial implications when selecting a mortgage type and term.

CONCLUSION

Navigating the world of mortgages can feel overwhelming, but armed with the right information, you can make decisions with confidence. Remember, a mortgage is one of the biggest financial commitments you’ll make, so it pays to understand the basics and consider your options carefully.

As your financial and mortgage coach, I’m here to guide you through this journey, ensuring you feel empowered and informed every step of the way.

Understanding your home loan is about more than just signing papers; it’s about taking control of your financial future and making the dream of homeownership a reality.

If you want to know whether your home loan is working effectively for you and your personal finances contact me at karen@harkenfinance.com for a chat.