What is a mortgage?

A mortgage is a form of debt that is secured against a specific piece of real estate or property. They are also known as ‘liens on property’ or ‘claims on property.’ Most new property purchases have a mortgage attached, especially for first home buyers.

Generally, a mortgage is a long-term loan – often for a duration of anywhere from 15 years up to 30 years. The term length is determined by several factors including the size of the loan, your income (or serviceability) and your age.

Less commonly known is that there are short-term mortgage loans, which are usually five years or less. A short-term mortgage is increasingly considered from private lenders in the absence of being able to secure a loan from a traditional financial institution, like a bank.

When is the best time to apply for a mortgage?

There are many factors at play when it comes to getting a mortgage. It’s important to balance finding the right property, having an adequate deposit (at least 20% is a good rule-of-thumb) and getting your finances in order. A deposit of 20% or more also helps you avoid paying Lender’s Mortgage Insurance (LMI) in many cases.

In the current climate, many borrowers are also refinancing – discharging their current mortgage and replacing it with another from a different mortgage lender at a better rate. If you are considering this option, look carefully at the transaction costs, which include any fees and charges your current lender may impose for early payout of your loan.

Top tips when you apply for a mortgage

Mortgage lenders will appraise your deposit (or equity in your current home), your income, other debts (credit cards, car loans, etc.) and your credit history when considering your eligibility for a mortgage. Unsurprisingly, the better your financial position, the more likely you are to be approved at the lowest possible interest rate. That said, there are an increasing number of lenders that provide mortgages to borrowers who don’t have all their paperwork in order, or who may have experienced credit history challenges. Consider these tips to make the process easier:

1. Have a good deposit: Save at least 20% deposit, or have that equivalent in equity in your current home.
2. Get your finances in order: Have your paperwork organised, including at least six months of bank statements, current payslips, last two years’ tax returns, details of any other loans, etc. It’s also helpful to have a clear view of your total household expenses.
3. Find out your credit score: There are major credit score providers who offer free consumer credit scores and reports that will help you understand your credit-worthiness in the eyes of mortgage lenders, who will access these reports when you apply for a loan.
4. Pay down debt: Less debt means you can borrow more and better service your mortgage loan.
5. Work out your budget and capacity to pay (service) the loan: You need to understand how much you can afford to pay each month in principal and interest. If an increase in interest rates will make it difficult to meet your repayment commitments, then consider a fixed interest rate loan.
6. Shop around for the best deal: There are many sources for mortgage loans that suit your requirements – that may or may not be with one of the big banks. Consider non-bank and private lenders, and keep in mind that mortgage brokers can do the shopping around for you, should you prefer.

Key takeaway

So, is now a good time to get a mortgage? As always, it depends on your personal circumstance. That said, many borrowers are taking advantage of historically low interest rates and high levels of competition from lenders trying to secure more customers.