Most people buy a home with a combination of their savings, proceeds from the sale of an existing home and a loan from a bank.
Securing finance to purchase a property involves a number of steps and expenses.
Below is an explanation of a typical mortgage. However, care should be taken to read and understand the specific terms of your mortgage document and to obtain legal advice relating to the particular document.
What is a Mortgage?
When you borrow money from a bank to buy a home, the bank will hold a mortgage over the property as security for the loan. A mortgage provides security to a bank and is usually registered on the title to the property.
If a borrower defaults in making loan repayments or complying with the other obligations under the mortgage, such as insuring or maintaining the property the bank can call in the loan and sell the property to cover its costs and expenses.
There are a number of different types of mortgages, including:
Variable rate mortgage: where the interest rate varies over the term of the loan.
Fixed rate mortgage: where the loan has a fixed interest rate and repayments for a set period.
Low-start and high-start mortgages: where the loan allows your initial repayments to start low and increase over time, and vice versa.
Reverse equity mortgage: where lenders advance money to people in their retirement years and repayment is often deferred until the house is sold.
Finding a home loan provider
There are many mortgage providers in the market which offer different rates and products. You should identify what it is you want from a home loan and shop around in order to find the right home loan for you and your needs. The key issues to discuss with a mortgage provider are interest rates, loan features and fees.
There are a number of comparison sites which provide up to date mortgage rates and list the loans currently available in Australia. However, you might want to engage a mortgage broker to compare home loan providers and to find a home loan which suits your individual needs and lifestyle.
Once you have found a home loan and lender which you think might be suitable, steps can then be taken to submit a home loan application.
A potential borrower’s credit history will be scrutinised by a lender. If you have failed to pay off a loan or credit card debt in the past, a lender might reject your loan application. If you have previously defaulted, it is best to be up front with the lender and explain the circumstances as to why it occurred.
It is also important to ensure that all your expenses are declared and that you submit your home loan application with all the required documentation. Not submitting the right paperwork can delay your application being processed and can derail any property purchases.
A guarantee for you loan
If a home loan provider thinks that you might have difficulty repaying the loan, it might ask that a third party provide a guarantee to satisfy your loan agreement obligations if you default on repayments. It is often a family member or friend who will act as a guarantor.
Although a guarantee might help you to secure a loan, it is a significant responsibility for the guarantor and not something to be treated lightly. A guarantor should always obtain their own legal advice about the guarantee documents and the obligations being entered into.
Under the National Consumer Credit Protection Act 2009 a loan provider must provide information which is clear and easy to understand. A loan provider must also give you information about the relevant fees and charges associated with your home loan and a statement outlining your rights and obligations.
Buying a property can be an exciting time. However, with so many home loan providers and loan features on the market, it can be a complicated process to secure the right home loan for you. The better informed you are the more likely you will be able to secure a loan which meets your needs.