What to consider when applying for a home loan in 2021

When it comes to property, there are rarely any simple answers to seemingly simple questions.

What’s the best property to buy?

How much should I look to spend?

These seem like pretty straightforward queries, but each has a response that depends wholly on the questioner’s individual circumstances.

It depends on your budget and it depends on the outcome you’re aiming for in the long-term.

Same goes with the question, which are the best suburbs to buy in?

Do you want all the facilities (shopping malls, schools etc) to be in your suburb or are you willing to travel?

What type of dwelling are you considering?

And on the question of how much you should spend, well, how long is a piece of string?

Home loans are no different, the rate you want and the rate you may get offered depends on what security to loan ratio you’re borrowing at as well as the product you want among other things.

Start by asking yourself, what mortgage features and benefits are important to you?

You might be the sort of borrower who benefits from an offset account, particularly if you’ve got good cash reserves that you’re able to use it to offset your interest payable monthly.

Keep in mind, offset accounts normally come with package home loans and these have annual fees ranging from $250 - $395. This annual fee can equate to you needing to maintain a running balance of up to $10,000 in your offset account before any interest savings come into play.

A redraw facility might be worthwhile for you, if you’re not going to have significant cash reserve but would still like to pay extra into your mortgage and then have the ability to take some of it back out again in the future if need be.

On the flipside of all of this, there are loans with very limited features that come with a lower interest rate and have little or no fees attached to them. These are perfect for someone who just wants to buy a forever home and payoff their mortgage quickly.

Check how your home loan compares

Perhaps there are circumstances that make a fixed rate for a certain period attractive for you, especially if you need certainty in your loan repayment.

Maybe you are about to start a family or change jobs and the repayment certainty will help you sleep at night – knowing what you’re paying each month for the next “however many” years, regardless of rates movement, could be very valuable.

There are a lot of considerations to make when choosing the right home loan, however, borrowers seem to be fixated on just the interest rate. When the key question to ask is:

Can I borrow what I need in-order to afford a home in today’s market?

Don’t get me wrong… interest rate is very important as that’s what you actually pay but it’s not the only thing, if it is, don’t get your home loan from one of the big 4 because there’re 20+ other lenders with better rate offer.

How to decide which home loan's best for you?

Going to one of those comparison websites and sorting by ‘lowest rate’ isn’t the smartest way to pick a home loan product for most Australians. There are far broader considerations to take into account.

The biggest one being serviceability, especially if you aspire to buy more than one property.

What repayment can you afford to pay now? You may budget $1,000 per month on living expense, the bank on the other hand, links your living expense to how much you earn.

And how much more can you afford to borrow in the future? If you want to upgrade or buy another property.

When deciding between fixed or variable loans, do you value certainty or is flexibility more important?

Rates are historically low right now but factor in future rate rises should they occur, will you be able to afford your new repayments without financial hardship. Don’t rely on your lender for a repayment breather, maintain an emergency fund that will cover all your expenses for up to 6 months.

If you already have a mortgage, find out how you can beat the banks at their own game here.

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This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.