Top 5 Home Loan tips for first home buyers

These tips were originally presented by Regan from Rate Detective on the Sky News Channel show Your Money, Your Call.

1 - The Lowest Rate Is Not Always the Best

Extremely low-rate home loans do not have the flexibility that is required by many home owners. If you would like to make extra repayments or have facilities such as a line-of-credit attached to your home loan, then simply choosing the loan with the lowest rate might be a mistake. Loans with these and other non-standard features usually carry higher interest rates and fees than basic loans. But the trade-off you get with the added flexibility can make a loan with a higher interest rate a smart choice.

2 - Shop Around

Competition between the major banks and other non-bank lenders is still high despite the recent credit-crunch. Purchasing a home is one of the biggest financial decisions you will make in your life, so take the time to research and compare the offerings from both bank and non-bank lenders. This way you will be able to find the mortgage with the right blend of features and low rates and fees. Over the course of a mortgage, even small monthly savings can add up to a big sum.

3 - Ask For a Discounted Rate

Lenders often offer discounted interest rates to those borrowing larger amounts of money. These "Professional packages" were originally offered to home buyers with jobs regarded as low risk such as Doctors, Dentists, Lawyers and Accountants. Nowadays, these packages are available to anyone with sufficient income and assets.

Lenders can offer rates that are usually between 0.5% to 0.7% below the standard variable rate depending on the lender and also how much money you are borrowing. If you are feeling rich and want to borrow more than $1m you may be able to negotiate even bigger discounts. But don't despair if you are not borrowing that much, as some lenders offer discounts for loans as small as $150,000.

4 - Plan for the future

Planning on having starting a family in the next few years? Your family might have to subsist on a single income while your children are young. Many young families make the mistake of not factoring in the financial impact of having children in their repayment calculations. Plan for any contingencies now, before you purchase your new home rather than when it's too late.

In a similar vein, make sure you can handle any future interest rate rises when calculating how much you can borrow. By borrowing slightly less and keeping a buffer between your income and the size of your loan repayments, you may save yourself from much heartache in the future.

5 - Avoid mortgage insurance by having at least a 20% deposit

In the great housing boom of the last decade, lenders were willing to lend new home buyers more than 100% of the value of their home. If you decide to borrow more than 80% of the value of your new home, the lender will ask you to take out Lender's Mortgage Insurance (LMI). Mortgage insurance is designed to protect the lender if the homeowner defaults on their loan and the outstanding money to be repaid is greater than the value of the home. Unlike many other types of insurance it is not designed to protect you and merely becomes another cost in the home buying process. If you want to protect yourself please consider income protection insurance.

For example, if you have a $50,000 deposit for a $400,000 home and a loan of $350,000, your lender will require you to pay over $4,000 in mortgage insurance. You may be financially better in this case to wait and save for the full 20% deposit ($80,000) before purchasing your home.

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Published on March 3-th, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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