Mortgages: Effie Zahos

It's a big challenge building a deposit and securing the finance to buy a property – this quick guide can help you get going

1 THE DEPOSIT

Cash rates are 1.5% and term deposits pay around 2.5%. Your net returns (after tax) would mean your money would be going backwards as the Reserve Bank is expecting inflation to be around 2% over the next year. Your options for putting together a deposit include online savers, which pay as much as 3%. But while your money is certainly safe, it will be a slow journey.

If you’re happy to dial up the risk then there’s certainly a case for saving in line with the asset you want to buy, in this case property. The ASX Russell Investments Long Term Investing Report shows cash grew 2.8% in the 10 years to December 2016 compared with residential property at 8.1%. Fractional funds such as BrickX, where you can invest in property with just $100, are one option, as are property exchange-traded funds (ETFs). Best to get some independent financial advice here.

2 BORROWING

Bank or broker? A good mortgage broker can be worth their weight in gold. But just remember that they don’t offer every home loan in the market. Always do some research yourself first, then see a broker. A broker’s fee or commission for arranging a loan is often paid by the credit provider whose products they sell. When it comes to increasing your borrowing power, you really only have two levers to play with. You either need to increase your income or lower your expenses. If you’ve got a limit of $10,000 on your credit card be aware that it will reduce your borrowing power for a home loan by around $40,000.

3 FORTNIGHTLY OR WEEKLY

When it comes to slashing your interest bill by a good $86,000 or so (see table), there is no better strategy (and it’s easier too) than paying fortnightly. To get these savings you need to take the minimum monthly repayment, halve it and then pay that amount every two weeks. This way you get 13 monthly repayments in the year rather than 12. Minimal savings are made if you make the monthly repayment, multiply it by 12 and then divide by 26.

4 EQUITY

Your home equity is the difference between the value of your family home and the amount you owe on your mortgage. Equity is usually built up from a combination of paying down the mortgage and the increase in the value of the property over time. Let’s say, for example, your home is valued at $800,000 and you have a mortgage of $350,000. The difference between the two is $450,000, which is your home equity. As a general rule you could use up to 80% of this equity, so $360,000, to help fund the purchase of investment property. Be aware that tough rules now apply around investment lending with increased rates and tightened up policies, or lenders are even saying no to investment lending altogether.

5 EXTENDING YOUR HOME LOAN FOR A RENO

If there’s enough equity (see point 4) in your home to fund the renovations, then the simplest way to set up a refinance is to increase your loan size and place the funds in an offset account. That way, in effect you’re not paying interest on the renos until you use the funds. Whatever you do don’t put it on your credit card. On a credit card charging 17% you’d pay $20,441 in interest over seven years even if you were making repayments of $609 a month. If you had added it to your mortgage and paid an extra $672 a month you’d have $6929 in interest, assuming a rate of 6%pa and a monthly fee of $8.