A borrowing strategy is an intelligent approach to finding your first mortgage or refinancing to purchase a new home.
The best loan consists of far more than the cheapest interest rate. Tracking down the most suitable deal for your circumstances is difficult and time consuming. It can take hundreds of hours to research all your options – and that’s just not practical.
The best way to navigate the complex world of mortgages is to use a broker. We don’t charge you any fees but are paid by the lender that wins your business. A strict code of conduct ensures we work only in the borrower’s interests.
Here are eight observations to help you formulate your borrowing strategy. And if you’d like some assistance, please do not hesitate to contact me.
No lender is the same
Lenders don’t have identical risk profiles or products. So, don’t be surprised when you get a variety of responses when you approach each one for a loan.
Common trap
The lowest interest rates often come with the most inflexible loans. Be careful not to trap yourself in an arrangement that’s more expensive than the saving on your interest rate.
Seek flexibility
Flexibility is essential in a mortgage because your circumstances are likely to change over the years. For example, you may want a loan that will allow you to pause payments during ill health or maternity leave.
Creative accounting
An offset account – or transaction account – that links to your loan is a popular strategy. Money in this account continually minimises interest charges even though you can withdraw funds and make deposits. In the long term, an offset account can save you thousands of dollars.
Loan-to-Value Ratio (LVR)
This is the fundamental principle of your mortgage agreement. Usually, a loan will be 80% of the value of your purchase, which is based on the fact that you’ve put down a 20% deposit.
Lenders Mortgage Insurance (LMI)
If you borrow more than 80%, your lender may ask for this insurance. It’s expensive and is designed to protect the lender if you default on your loan. It can be a better strategy to save more and ensure your deposit is 20% or more to avoid this cost.
Fixed Rates
This term reflects the cost of borrowing money. When your rates are fixed, then the cost of your borrowing is stable. Your mortgage repayments will be consistent. When rates are low, many borrowers ask the bank for a fixed rate. Be aware that fixed rate loans may however have other clauses like the inability to pay back the loan early.
Variable Rates
Your payments can go even lower if the cost of borrowing falls further. That’s a win for you. But all coins have two sides: rates can go up, and when that happens, it can hit your cash flow. Talk to your mortgage broker or lender about the best option for your circumstances.
This article is provided for general information only and does not take into account the specific needs, objectives or circumstances of the reader. Before acting on any information, you should consider whether it is appropriate for your personal circumstances, carry out your own research and seek professional advice.