Planning for a home loan

Planning for a home loan

Refinancing your mortgage or taking out a loan to invest in property requires some planning to ensure the process runs smoothly and you obtain the right kind of finance for your real estate ambitions.

Of course, you'll also need to make sure your goals are in accord with your financial means.

A report from independent consumer advocacy organisation CHOICE has elaborated on the importance of obtaining the right kind of loan.

Understand your obligations

High-risk borrowing strategies are more commonplace in the Australian lending market following the global financial crisis, according to CHOICE.

These kind of practices typically appeal to those who may struggle to save a deposit for their first home.

If you're already a homeowner, you'll have some financial leverage when it comes to refinancing, whether to get a better interest rate or upgrade to a better property.

However, the news from CHOICE is still relevant, as it outlines the importance of careful planning when it comes to borrowing money in order to secure real estate.

"We are seeing products that offer family guarantees and low loan-to-value ratio loans to consumers who don't have a significant deposit," said CHOICE Head of Media Tom Godfrey.

"While the prospect of owning a home when you have little in the way of savings may seem appealing, if you lose your job, get sick or are unable to keep up with the repayments, it may not be long before the bank asks you to sell your house, or repossess it."

Even if you're in a position capable of coming up with a 20 per cent deposit for an investment property or are able to provide additional funds in order to upgrade to a better property via a mortgage refinance, Mr Godfrey's comments are still valuable.

They emphasise the importance of proper planning, both for now and the future. For instance, if you're borrowing in order to invest, it's important to have funds available for ongoing maintenance of your rental properties. The same goes for your primary residence, too.

Being able to keep up with repayments is important, so be sure to carefully analyse your regular income and your ability to make good on your payments.

CHOICE recommends considering whether you would be able to afford a 3 per cent increase in your loan interest rate. If not, you could find yourself in a predicament when interest rates eventually rise.

Another option is to fix your loan or adopt a split loan for extra certainty over your payments.

Getting the paperwork right

In order to refinance your loan or borrow to invest, you'll need to provide the appropriate paperwork.

If you're sticking with your existing lender, they may already have your details on record.

However, if you're switching lenders, there can be a lot of paperwork you're required to contend with. From evidence of your income to personal identification, you'll need to prepare a number of documents.

Your lender is also obliged to give you a key facts sheet if you request one. This provides information relating to a home loan in a standard form, which makes it easier to compare deals between lenders.

Planning for a home loan is as much about finding the right lender for you as it is about the lender evaluating whether you're an acceptable credit risk.

Consider the features

When planning for a home refinance or loan for an investment property, be sure to consider what features you might need.

A line of credit could be incredibly useful if you're planning on completing a few renovations to polish up your new property, for instance.

Be sure to chat with your lender about the options available to you so you can make an informed choice.

Image credit: tcey