Your home will typically be the largest investment in your life, representing the biggest debt you are likely to incur throughout your lifetime. So making sure that you understand your mortgage and keeping on top of how to manage it is crucial to your financial success.
A mortgage is a loan you take from a bank for the purpose of purchasing a house, unit or any other property you own. The most important aspect of your mortgage will be its interest rate, which can be variable, fixed or a combination of both. In each case, your unique interest rate will dependent on your household income, your credit rating, and your current level of debt.
Recently, whilst the RBA has held the cash rate, the big banks have raised mortgage rates and there are likely to be more on the way. Buying a home in Australia is becoming an increasingly expensive proposition. But even before the banks raised their rates, mortgage rates were higher for homeowners who secured their mortgages through the “Big Four” (CBA, WBC, ANZ, and NAB). On average, taking out a mortgage from one of these banks increases your mortgage rate by 0.25%, which seems like a small amount but it can make a significant amount of difference to the interest you pay over the life of the loan.
With future rate hikes, this 0.25% increase is likely to double at least. Thus, you will generally save money on your home by applying for a mortgage with a smaller bank so it might be worth doing some shopping around with some smaller lenders to make sure you are getting the best possible rate for your mortgage.
Standard Mortgage Rates
At the moment, the average mortgage rate in Australia is 5.61% with the Big Four and 5.08% for other banks. But if you do your research, you can expect to pay less than 5%, especially if you are a new homeowner. Even better, if you’re willing to use less well-known and established banks, such as online banks, you can easily find a mortgage rate of less than 4%.
Budgeting Your Mortgage
Before you can work out your finances, you must know your mortgage rate and how much to expect to pay the bank each month. Generally, you want to work with percentages of your gross income. A stable budget that allows a comfortable standard of living while still allowing you to pay off your mortgage should allocate one-third or less of your gross income to mortgage payments.
You would be wise to rethink a mortgage if your calculations show that close to half of your gross income will be going toward debt payments every month. Also, other debts should be factored in as well. Consider paying off your other debts before investing in a home, downgrading your home of choice, or extending your amortisation period (the time in which you are given to pay off your mortgage).