When applying for a loan to buy your home, it is important to know just what you can and can’t do and what the costs are, before you sign up. Take this checklist with you and make sure you are satisfied with the answers.
1. What is the interest rate on this mortgage?
It's crucial you understand what you will be paying in interest over the life of the loan. If you have a ‘honeymoon' interest rate for the first year, be clear about what it will revert to after the honeymoon is over, and ensure you can comfortably afford the monthly repayments on this higher amount. Take into account potential rate increases driven by the Reserve Bank.
2. What fees do you charge?
For all loans, ask about application fees and other charges such as a low equity fee. For fixed interest loans, ask what fees apply if you want to lift the repayments, make lump sum repayments or repay the whole loan early.
3. What will be the total cost of this loan, including fees and interest, for the sum I am borrowing and the term I have chosen?
The lender will have to make an assumption about interest rates to do this calculation. But it will show you how much you’ll pay back in total. Ask for the fees to be shown separately from the interest. Also, ask for the total regular payment in a year if the interest rate were to be 1 per cent higher than now. That will give you some idea of the risk to your budget if rates rise.
4. Can I lock in an interest rate if I need to and what will it cost me to do so?
The interest rate of the mortgage you're applying for may go up or down between the time you apply and the time you close, so you might decide to lock in the rate for a specified period. Be sure to ask the lender if there is any fee for locking in the rate.
5. What are the lender’s guidelines for approving the loan?
The lender’s guidelines might relate to your income, employment, assets, liabilities and credit history, so be clear about what you'll be asked and make sure you have the documents to support your application.
6. What do I have to provide?
Speaking of documents, you will probably need to provide proof of income and details of your assets and liabilities to get a loan. Find out what documentation will be required in your particular situation by asking your lender and make copies ready.
7. How long will it take to process my application?
The approval process for your loan will vary from lender to lender. It often depends on how much business your particular lender is doing and how much business the market is seeing as a whole. When borrowers are knocking down doors all over town, loan approval will probably take longer. Just make sure you get a realistic estimate on how long your approval will take and use that estimate to determine when you should start house hunting.
8. Is there a minimum deposit required for this loan?
Depending on the amount of your deposit and the percentage it represents of the price of the home being bought, you might be charged different interest rates or quoted different loan terms. Loans at high loan-to-value ratios can cost more than loans with larger down payments. Still, customers with good credit or those who are willing to pay mortgage insurance may be able to borrow more than 80 per cent of the value of the property.
9. What other costs will be charged on this loan?
Every mortgage comes with fees and charges for various services that lenders and other parties involved in the transaction provide. These may include application fees, valuation fees, bank solicitor's fees and stamp duty on the mortgage documents. You need to find out what you'll be charged and whether these costs can be rolled into the loan or need to be covered separately.
10. Can I make additional repayments on the loan?
Some mortgages only allow you to make the minimum monthly repayment, while others will let you make additional payments. If you can make additional repayments, you should find out whether these payments will be credited towards the loan interest or the principal amount.
11. Is there an early repayment penalty on this loan?
The early repayment question is most important for loan shoppers. Generally speaking, a home loan is not tax deductible and should be paid off as quickly as possible. Therefore, if you do come across extra money which allows you to pay off your loan early, it's important to ensure you won't be penalised for early repayment of the loan.
If you provide the lender with complete, accurate information, everything should go smoothly and fairly quickly. However, there could be a delay if the lender discovers credit problems or requires extra paperwork, which is why it is critical to get everything in order (as much as possible) before you visit your mortgage provider.