Your first mortgage and how to handle it

What is a mortgage?

A mortgage is a loan taken out for the purchase of a property. While most Australian mortgages are taken out with a bank, there are lots of non-bank mortgage lenders, such as building societies and credit unions, which offer mortgages.

Alternatively, you could even have a mortgage contract drawn up if you borrow money from someone you know, such as your parents, which outlines the borrowing amount and repayment conditions.

Fixed or variable rate?

In Australia you have two main types of mortgages — fixed interest rate and variable interest rate — and both are pretty self-explanatory. Consider the following points.

• Fixed-rate mortgages tend not to allow additional repayments, and often have an early exit fee should you sell or refinance the property before the fixed term ends.
• Variable rates are set by the individual lender, not the Reserve Bank of Australia, so they can go up or down at any time, but generally give you a lot more flexibility.
• You can opt to split between part-fixed and part-variable to get the best of both worlds.

Regardless of which type of mortgage you go for, you need to understand the difference between principal and interest, because not all home loans include repayment of the principal amount you borrow. Ensure that you know exactly what your repayments are covering.

Managing your finances

Be sure to consider all the options and implications before deciding on a mortgage, as what you choose will affect how you manage it. As a guide, check out the following.

• An offset account: This allows you to store all of your cash and incoming salary on your mortgage, reducing the interest you pay on the loan.
• Additional repayments: Does the mortgage allow you to make additional repayments? If so, is there a cap on how much extra you can pay? Birthday money, windfalls, bonuses or a second job can all save you a small fortune on mortgage repayments over time. A home loan repayment calculator lets you see how your mortgage changes.
• Devise a budget: Nobody likes the ‘b’ word, but having a budget in place to keep track of your spending is the best way of managing your mortgage.
• Mortgage redraw facility: You may think extending your mortgage sounds crazy, but withdrawing money from your home loan instead of taking out a new loan for a car, holiday or renovations generally makes more financial sense. This is because personal loans have a much higher interest rate than your typical home loan.
• Lenders mortgage insurance: If you are buying with less than a 20 per cent deposit, most lenders will require you to take out lenders mortgage insurance.

A mortgage is a big responsibility, but understanding the various options and how they work goes a long way to managing your money. Always consult a financial advisor before you make any concrete decisions about your finances.