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Mortgage

Information about secured, instalment based real estate loans

A mortgage generally refers to the loan taken out to purchase a house (ie. a home loan). It is a legal document on which a borrower (or "mortgagor") pledges a property (ie. the house and land) as security for a loan which is to be repaid in instalments. The pledge is cancelled only when the debt is paid in full. If the borrower fails to pay off the loan, the legal document gives the lender the right to take possession of the property and sell it. A guide to home loans (PDF 690 KB) also covers some important information to help you.

Determing the size of your mortgage

Borrowing the maximum you can afford enables you to buy a more expensive house. However, it also means your repayments will be higher, and if interest rates rise your repayments will rise even further. Make sure you have a plan in case interest rates rise and/or you run into financial difficulties (eg. loss of income).

Some lenders allow you to borrow up to 105 per cent of the value of a property. However, if you borrow more than 80 per cent, you will probably be required to pay higher interest and additional fees for mortgage protection insurance which protects the lender against repayment default. It is advisable to avoid entering an arrangement where your repayments will be more than 35 per cent of your gross income, especially if you are a low-income household.

Your initial deposit and future repayments are not the only home loan expenses you need to budget for. Other considerable expenses include:

• application/establishment fees charged by the lender;
• mortage insurance fees;
• government charges: mortgage and property stamp duties, registration and land transfers;
• future interest rate rises;
• legal/conveyancing costs; and
• inspection costs.

For more information on up-front fees and charges refer to "The costs associated with borrowing money".

Deciding on a mortgage provider

Cannex and InfoChoice are free, independent consumer websites which provide information about, and comparison between, a huge variety of lenders, types of financial products, rewards programmes and much more.

Finance brokers or mortgage originators can often access loans from a wide variety of banks and mortgage providers. As such they can help you evaluate many types of loans and identify the one that best meets your needs. You should ask finance brokers about the range of lenders they have access to.

To assist you in deciding which lender and ultimately which loan you will choose, ask each lender for a cost schedule that details the charges and costs you must pay both upfront and at closing. Look at the "comparison rate" of each loan you examine. A comparison rate includes both the interest rate and most fees and charges relating to a loan and therefore helps to more accurately identify the total cost of the loan.

Managing your mortgage

Make sure you make your repayments on time every time. If you miss a repayment due date, do not let this slip-up become a habit. In the early stages of your loan, your repayments are used mainly to pay off the interest. Therefore, it makes sense to increase your repayments during this time if you can afford it. Do not underestimate the power of making extra repayments. Modest extra repayments can cut tens of thousands of dollars off the interest calculated for the life of the loan and reduce your loan term. If you can, make repayments fortnightly instead of monthly, as the more frequently you make repayments the less interest you will pay. Plus, if you use this method, you will pay more off your mortgage per year than if you made monthly repayments.

Don't be fooled into paying someone thousands of dollars for advice on loan minimisation. You could wipe years off the life of your loan if you were to allocate this money to the loan instead. In fact, you should not have to pay for loan advice at all; your existing lender and most mortgage brokers will provide this advice free of charge.

Your mortgage should not be left to simply carry on. Re-evaluate your loan regularly, consider the possibility of refinancing, and research what else is available. If you intend to buy or have a bought a property with a friend or relative, put together a clear "entrance and exit plan", that details the amount each person has contributed to repayments, and what course of action to take should someone want out.

If you are a first home buyer, you could be eligible to receive $7,000 tax-free as part of the Federal Government's First Home Owner Grant scheme. (Read more about FHOG in WA; find out how to apply.) In addition to the First Home Owner's Grant, you may also be entitled to financial assistance under the state-wide Home Buyer's Assistance Account scheme.