For many individuals, taking out a mortgage is one of the most significant financial commitments they will make. As an accountant, I frequently help clients understand the ins and outs of mortgages. A clear grasp of how a mortgage works is crucial for making informed financial decisions, especially when it comes to buying a home.

Here’s an overview to help demystify mortgages:

1. What is a Mortgage?

  • Basic Definition: A mortgage is a type of loan used to purchase property or land. The loan is secured against the value of your home until it’s paid off.
  • Security for the Loan: If you can’t keep up with your mortgage repayments, the lender may take possession of your property.

2. Components of a Mortgage

Principal

  • Principal Amount: This is the amount you borrow to buy your property.

Interest

  • Interest Charges: Lenders charge interest on the loan, which is the cost of borrowing money. The interest rate can be fixed, variable, or a combination of both.

3. Types of Mortgages

  • Fixed-Rate Mortgage: Offers a fixed interest rate for a certain period, providing consistency in repayments.
  • Variable-Rate Mortgage: Has an interest rate that can change, meaning repayments can go up or down.

4. Mortgage Repayments

  • Regular Payments: You repay the mortgage over an agreed period, known as the loan term, which often spans 25 to 30 years.
  • Repayment Components: Each repayment includes a portion of the principal and the interest.

5. Features of Mortgages

  • Offset Accounts: Some mortgages offer offset accounts which can reduce the interest paid.
  • Redraw Facilities: Allows you to withdraw extra payments you’ve made on your mortgage.

6. Costs Associated with Mortgages

  • Upfront Costs: Include application fees, legal fees, and stamp duty.
  • Ongoing Costs: Include your regular repayments and any account-keeping fees.

7. Applying for a Mortgage

  • Eligibility and Application: Lenders assess your income, debts, credit history, and savings to determine your eligibility and how much they will lend.
  • Documentation: You’ll need to provide various documents, including proof of income, employment, and identification.

8. Tax Considerations

  • Tax Deductibility: Generally, the interest on your home mortgage is not tax-deductible in Australia. However, if you’re buying a property as an investment, the interest may be deductible.

9. Seeking Professional Advice

  • Financial Planning: It’s advisable to consult with a financial advisor or accountant to understand how a mortgage fits into your overall financial plan.
  • Mortgage Brokers: Mortgage brokers can help you navigate different loan options and find the best deal for your circumstances.

Speak to Steve at The Finance Brokers to understand what you lending options are.