How to Decide What Mortgage Size Is Right for You
First-home buyers are often caught between being practical with a mortgage, or throwing caution to the wind and living like royalty in the moment. When it comes to search for your first home, it’s important to get it right the first time. Join us as we explore the mortgage basics and tips for choosing the right mortgage amount.
What Is a Mortgage?
When you are taking on a mortgage, you are taking out a loan to purchase a property specifically. Too many borrowers believe that because banks don’t call a mortgage a ‘loan’, it is somehow different at its core. The truth is, you’re taking out money that you will eventually have to pay back.
With that in mind, it’s essential that you know how much you should borrow for a property. Not how much you can borrow, but how much you should borrow.
It can be tempting to max out your bank account, your credit, and your banker’s nerves to get the biggest and best house possible. Is this the smartest thing to do? Most of the time, not really.
Types of Mortgages
The type of mortgage you choose can make a huge difference in the price that you pay. Here are the most common types of home loans and some of their most important characteristics.
- Variable Rate Loan. The interest rate that you pay on this loan changes based on the rates of the Reserve Bank of Australia. Variable rate loans also have convenient features including offset accounts, redraw facilities, and an extra repayment facility.
- Fixed Rate Loan. The fixed rate loan locks in your interest rate for a predetermined period of time, usually one to five years. Most of the time, the fixed rate will be above the current variable interest rate, however, in today’s market, the fixed rate is actually lower than the variable. In general, fixed rate loans are good for people who are on a budget or do not want to follow the central reserve’s interest rate fluctuations.
- Interest Only Loan. Interest only loans are usually of interest to investors as the interest expense can be tax deductible. You pay less money, but you are only paying off the interest on the loan, not the principal. Most of the time, banks will only allow this type of loan for up to five years and the assessment criteria can be more stringent . After that, a borrower will have to begin paying down the principal.
- Guarantor Loan. People use this type of loan to get around paying mortgage insurance while still borrowing more than 80% of the purchase price of the property. For the privilege of breaking the 80% rule, the borrower must find a suitable guarantor, most of the time a parent, who is willing to put their property up as extra security on your behalf.
- Low Doc Loan. If you are a freelancer or a self-employed person, you may have fewer documents to evidence your income. This is a higher risk for a bank, and under normal circumstances, your application for a mortgage could simply be denied. However, the low documentation loan allows people without standard application papers to get a mortgage, albeit at a higher interest rate and with more fees.
- Line of Credit Loan. If a home needs renovations after it is purchased, some banks will allow a line of credit loan or a top up of an existing mortgage. This is also known as a home equity loan.
- Non-Conforming Loan. These are similar to low doc loans, but they are meant for people with bad credit. They usually have the highest interest rates of any loan package on this list.
The Average Mortgage Size in Australia
The Australian Bureau of Statistics (ABS) found that the average size of a mortgage in Australia as at November 2018 was $384,700.
There was a lot of variation based on location, however. In general, bigger cities create bigger mortgages because people want to be close to convenience, technology, and industry.
Let’s take a look at some of the average mortgages by state, according to ABS:
Averaging out all of the variant rates, the average mortgage repayment in Australia is $1,755 monthly according to the 2016 Census of Population and Housing. Here are the median monthly mortgage repayments by city:
|City||Average Monthly Mortgage Repayment|
Where to Buy Property in Sydney
Due to this year’s interest rate cuts and price corrections, it has become cheaper to buy than rent an apartment in Sydney. In fact, there are suburbs where mortgage repayments are cheaper than rents.
More people are now considering buying their own homes, and the reason for this is that, as CommSec senior economist Ryan Felsman stated, “Home loans are back to levels of the 1950s. People are sitting on the sidelines, cashed up and ready to go, waiting for the property market to stabilise.”
According to Domain, these are the top places in Sydney where it’s more affordable to buy than rent properties:
|Suburb||Property Type||Weekly Mortgage Repayment||Weekly Rent||Difference between Buying and Renting|
For the complete list of places in Sydney where it’s more affordable to buy than rent properties, check out their article.
How to Choose Your Mortgage Size
- Choose an Interest Rate. Even a few tenths of a percent can make a huge difference in your monthly repayment and interest payable during the life of the loan. Try to reduce this number as much as possible.
- Work Out Your Home Loan Repayments. A mortgage calculator is a quick and easy way to find out how much you will pay monthly on a mortgage considering your interest rate and other factors.
- Take into Account How Much You Need to Borrow. Does your home need renovations before you can move in? Is there an insurance payment to consider? What fixed fees need to be paid? All of these (and more) factor into how much you need to borrow, not just the amount to pay for the property itself..
- Consider the Charges and Fees. There will be charges and fees for the privilege to buy a home. These fees can be quite hefty — up to 6% of the price of the home.
Before you sign the papers on any mortgage, make sure that you consider the best practices above. Get the right type of loan, consider how much you have to borrow, and be realistic with your financial situation.
We’ve curated the questions every first-home buyer has asked us. Check out all the answers here. Don’t hesitate to call us when you are ready to talk about getting a mortgage.
Recently, Shore Financial was named the 4th top brokerage in Australia by Mortgage Professional Australia! We could never have done it without our amazing clients. Every day we go to work energised by our mission to help them achieve their goals. So it’s only right to dedicate this recognition to them. Thank you.
Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your home loan.