Key Things to Consider Before Taking Out a Loan

Taking out a loan is a big decision. Whether it’s your first home loan, an investment mortgage, or refinancing your existing debt, there are multiple moving parts to get right. You don’t want surprises later on. In this article I’ll walk you through the key things you should consider before applying so you can go into the process with your eyes wide open.

Understand Your Borrowing Capacity and Serviceability

Before you pick a property or apply for a loan, you want to know what you can realistically afford. Lenders assess your serviceability - your ability to meet repayments over time - based on your income, living expenses, current debts and any buffers for interest rate rises. If you overcommit, even a small rise in interest rates or a surprise expense can stretch your budget too far.

It also helps to get a sense of your borrowing power early - what size of loan a lender might approve you for. That gives you clarity on the price range of properties you should be looking at.

Deposit, Lenders Mortgage Insurance and Loan-to-Value Ratio (LVR)

The size of your deposit makes a real difference. If your deposit is less than 20 per cent of the property’s value, many lenders will require Lenders Mortgage Insurance (LMI). That extra cost doesn’t benefit you, it protects the lender in case you default.

Also, your LVR (loan-to-value ratio) is important, it shows the proportion of the property value you’re borrowing. The higher the LVR, the riskier you’ll look to a lender, and the conditions may get stricter.

If you can delay and save a bigger deposit, you might avoid or reduce those extra costs, giving you more room to breathe later.

Interest Rates: Fixed, Variable or Split

One of the biggest choices you’ll make is between a fixed rate, variable rate, or a split loan (part fixed, part variable).

• Fixed gives you certainty, your rate won’t change for the fixed period - but usually less flexibility (especially for extra repayments or switching lenders).

• Variable gives you flexibility, more chance to make additional payments, switch, redraw - but your repayments can rise if rates go up.

• Split gives you a mix, some of your loan is locked in, some floats.

Think about how risk-averse you are, how long you plan to stay in the property, and whether you’ll want to accelerate repayments later.

Fees, Charges and Hidden Costs

The interest rate is only one piece of the puzzle. Many loans come with additional fees and charges: application fees, valuation fees, ongoing account-keeping fees, redraw or early exit penalties.

Also, if your deposit is low and LMI is involved, that cost must be built into your borrowing calculations. Ask for a full breakdown of what you will pay now and what you may pay later because those extras can bite.

Compare More Than Just Rate

When comparing loan offers, don’t just look at the advertised rate. Look at the comparison rate, which tries to factor in many of the fees and charges, so you see a more accurate cost of the loan.

Also check the features: ability to make extra repayments, redraw, offset accounts, repayment holiday options, and whether you can renegotiate or refinance later.

Credit History, Documentation and Financial Health

Your credit history matters more than many people appreciate. Any defaults, late payments, existing debts or even your credit limit usage can affect the interest rates or willingness of lenders to approve your application.

Make sure you have all your documentation ready: proof of income, identification, assets and liabilities, statements for debts, and details of the deposit source. The cleaner and clearer your financial picture, the smoother the process.

Buffer for Interest Rate Rises and Unexpected Costs

Even if you can afford repayments at today’s rate, build in a buffer. Interest rates do go up and down over time.

Also there are costs you might not expect: maintenance (for investment properties), insurance, council rates or strata fees, moving costs, or hiccups in settlement. Having a safety margin gives you more wiggle room.

Loan Term, Repayment Strategy and Flexibility

How long you take to repay has big implications. A shorter term means higher repayments but less interest over the life of the loan. A longer term gives you lower repayments but more interest overall.

Also, think through your repayment strategy: Can you make extra repayments? Do you want to redraw? Can you switch to a better loan down the track without huge penalties? Flexibility matters.

Conclusion

Getting a loan is more than just locking in a rate. If you take time early on to understand your borrowing capacity, deposit size, interest structure, fees, credit standing, and plan ahead for surprises, you’ll be in a much stronger position. When you approach lenders or a broker, you’ll be better informed, more confident, and ready to choose the loan that really suits your goals.

Get In Touch

Your home loan journey doesn’t have to be overwhelming.

Whether you’re ready to take the next step or just exploring your options, let’s have a chat.