Having a knowledge of how mortgages work in Australia is beneficial especially if you are a first-time homebuyer. So in this guide, we will help you familiarize yourself with mortgages using simple terms as well as cover different points to help you get started.
What Is a Mortgage?
A mortgage is a kind of loan that assists you in buying a home. Most people borrow money from a lender (such as a bank) since they don’t have the entire cost of a home to save up. In return, the lender holds a legal right to your property as security. So, if you don’t repay the load, the lender might take your home.
Due to mortgage’s lower interest rates, it’s sometimes more affordable than other loan kinds like credit cards or personal loans. So, if you want to start your home-buying journey, getting a mortgage is a good choice.
How to Calculate a Mortgage
Being familiar with how much you should repay each month for a mortgage is helpful, so here’s a guide on how you can calculate your mortgage:
- Principal: The amount you borrow from the lender.
- Interest Rate: The percentage the lender charges for the loan.
- Loan Term: The length of time you agree to repay the loan (e.g., 25 or 30 years).
The simplest way to calculate your mortgage repayments is to use an online mortgage calculator. But if you’re curious about the math, here’s a basic formula:
M = P x (r/12) x [(1+r/12)^n] / [(1+r/12)^n – 1]
Where:
- M is your monthly repayment.
- P is the loan amount (principal).
- r is the annual interest rate (in decimal form).
- n is the total number of monthly payments.
If you’re unsure about how much you can afford, speaking to a mortgage broker or financial advisor can help.
What Are Interest Rates?
The interest that was released by the Reserve Bank of Australia (RBA) influences how much you will be paying on top of the amount you borrowed. However, you also remember that lenders can adjust their rates based on market conditions.
- Variable Interest Rates: These can change over time, meaning your repayments might go up or down.
- Fixed Interest Rates: These stay the same for a set period, giving you consistent repayments.
What Is Refinancing a Home Loan?
Refinancing means replacing the current home loan with a new one and sometimes you also change a lender. The goal of most Aussies refinance is to save money and get a much lower interest rate or better loan features.
Why Refinance?
- Lower Interest Rates: Save money by reducing your monthly repayments.
- Access Equity: Borrow against the increased value of your home for renovations or other needs.
- Better Loan Features: Switch to a loan with perks like offset accounts or flexible repayments.
How to Refinance a Home Loan
1. Evaluate Your Current Loan
The first step when it comes to refinancing is determining whether you need it or not. For instance, you can ask yourself, am I still happy with my interest rate? Did my financial situation change? If rates drop or your income increases, then refinancing can help you save money and help you pay off your loan faster.
2. Compare Lenders
Do your research and compare rates, fees and features from different lenders. Keep in mind to not only focus on the interest rates but also look at all associated costs.
3. Calculate Refinancing Costs
Before you apply to refinance, you have to make sure that you have extra savings first since refinancing is not free. You have to pay for application fees, property valuations, as well as discharge fees if you’re going to switch a lender.
4. Apply for Refinancing
When you’re done choosing your new loan, you have to submit an application. Then, your lender will have to verify your income, expenses, and property value to ensure that you can afford the repayments.
5. Settlement
After approval, your new lender will have to pay off your old loan and then you will start making repayments on the new one.
Final Thoughts
Mortgages are not difficult to understand especially if you know how it works. So whether you’re tracking interest rates, figuring out repayments, or thinking about refinancing, make sure that you do your homework and get professional help.
