Find the best financial fit for your home

Richard Brewster provides some valuable tips that prospective home buyers should consider before choosing a mortgage.

Most home buyers will spend their entire working life paying off their mortgage, unless they've won the lottery or inherited a vast sum.

However, it's a worthwhile exercise in the long run when you consider capital gains in property and the security that home ownership brings.

Before taking the plunge, make sure you seek independent, expert advice.

The Australian Securities and Investment Commission's website - called MoneySmart - offers tips to prospective home buyers. It advises people to first have:

● A substantial deposit - aim to save 20 per cent of the purchase price plus enough to cover costs (such as stamp duty and legal fees.)

● A regular savings habit - a solid track record of employment and a history of regular savings in your bank account.

● Pre-approval for a loan - compare a few different loans before you decide. Ask your lender for a key facts sheet on each home loan so you can compare more easily.

● Additional savings - to act as a buffer if interest rates rise.

MoneySmart also has a mortgage calculator to help you work out how much you will pay each month. For example, based on a loan of $600,000 at 6 per cent over 25 years, your repayments will be about $3876 a month.

With the Reserve Bank interest rate at 2.5 per cent, bank lending rates are at historic lows - varying from 4.66 to 6.17 per cent - so it is worth shopping around.

Obtain expert advice to ascertain the type of mortgage that best suits your circumstances. The main difference between mortgage types involve fixed and variable interest rates.

When rates are low, many home buyers fix part of their mortgage to guard against future interest rate rises. It is unwise to secure the entire loan at a fixed rate, however, because this limits your ability

to make extra mortgage repayments and pay off the loan more

quickly.

Within these basic frameworks, Australian lending institutions have developed a host of specialised products designed to suit different circumstances.

The introductory rate or honeymoon loan is aimed at first-home buyers and involves paying a discounted interest rate for an initial period - usually 12 months.

This offer can take one of two forms - a fixed discount or a discounted fixed rate - with the first fixed at a specific margin (say 0.05 per cent) below the variable rate and the second oblivious to any market movement for the period involved.

First-time home buyers examining such a loan should be prepared for increases in interest rates and allow for larger payments at the end of the discount period.

They may do better by finding a loan that lasts for the period they wish to borrow - and consider it a bonus if it has an introductory discount offer.

Another type of lending is the construction loan, tailored to people wishing to build a new home.

This has a drawdown facility that splits the loan into five stages following the construction phases of land purchase, floor, roof, lock-up and final stage - avoiding full interest payments from the start of the project.

Professional package loans (for people borrowing $250,000 or more) are another option.

Originally designed for higher-income earners or borrowers in specific professions, they are available these days to anyone who can afford them and include interest rate discounts on variable home loans, up to four credit cards with no annual fee, free or discounted offset and savings accounts, insurance discounts and fee waivers.