The process of finding a new home can be daunting. Home buyers have to find the right property, make an offer, go through the mortgage approval process, and then close the transaction.
When it comes to getting a home loan, there are certain types of people who have an easier time qualifying than others.
In this article, we will discuss the target market for home loans and who typically qualifies for them.
This process, of course, varies from region to region and from country to country and so we will focus on the common factors that affect home loans in most markets for the average home buyer.
Who is the Target Market for Home Loans?
To best understand the target market for home loans, we need to first study the reasons why someone decides to get a loan when buying a new home rather than financing the purchase through other means.
By understanding people’s motivations for needing home loans, we can divide this market into customer segments and study each segment on its own.
This needs-based segmentation allows lenders to create products and services, as well as marketing strategies, specifically designed for each segment.
Here are the main customer segments of the target market for home loans:
- People who need external financing to buy a new home
- People who want to benefit from low-interest rates
- People looking to lower their tax bill
- People looking to refinance their home
- People who want to use their home equity to finance other purchases
- People who would rather invest their savings in other assets
Let’s look closely at each of these market segments.
1. People who need external financing to buy a new home
The most obvious segment of the target market for home loans is people who need to finance their home purchases through a loan.
In most cases, these buyers do not have enough personal savings to cover the entire cost of the property and must therefore turn to external sources of financing.
For this segment of the target market, lenders offer products such as mortgages and home equity loans.
2. People who want to benefit from low-interest rates
Not everyone who takes a home loan needs the money to make the purchase. Sometimes people save up the money needed for the purchase but there may be other reasons why they prefer a loan.
One such reason is a low-interest rate.
By locking in a low-interest rate, borrowers can save a significant amount of money over the life of their loan. This is especially true for people who plan on owning their homes for a long time.
Of course, the logic in this transaction is that people feel that can get a better return if they invest their money elsewhere instead of in purchasing a home. And when interest rates are very low, even safe investments can be a better deal.
3. People looking to lower their tax bill
Sometimes people opt for a home loan because it offers them certain tax advantages.
In most countries, the interest paid on a home loan is tax-deductible. This means that people can reduce their taxable income by the amount of interest they paid on their loans.
For example, if someone has a taxable income of $50,000 and they paid $2000 in interest on their home loan, their taxable income would be reduced to $48,000.
This can result in significant tax savings, especially for people in high tax brackets and especially over a long period of time.
4. People looking to re-finance their home
Not everyone looking for a home loan is interested in buying a new home. Sometimes people who already own a home need or want to take out a loan in order to refinance their mortgage.
There are many reasons why someone might want to refinance their home.
They may be looking for a lower interest rate, they may want to change the term of their loan, or they may need to access the equity in their home. These people often go through a mortgage broker who can help them find the best deal on the market.
Whatever the reason, people who are looking to refinance their homes make up a significant segment of the target market for home loans.
Often, these people have owned their homes for quite some time and are in an age and income bracket where they are more likely to have the financial resources needed to qualify for a loan.
5. People who want to use their home equity to finance other purchases
This segment of the target market for home loans includes people who already own a home and want to use the equity they have built up in their property to finance other purchases.
For example, someone who has owned their home for several years and has paid down a significant portion of their mortgage may want to use the equity they have in their home to finance a child’s education or start a business.
Another example might be someone wanting to use the equity in their home to finance a major home renovation which in turn can increase the value of their property.
6. People who would rather invest their savings in other assets
This final segment of the target market for home loans includes people who have the funds to purchase the house outright but would rather invest that money somewhere else where they can get a better return on investment.
And for this reason, they would take out a home loan.
Some of the reasons why people may take this route are because they believe that other asset types are undervalued (eg the stock market is down) or because they would like to invest in more liquid assets in case they need to take the money out for some reason.
The largest segment of the target market for home loans includes people who are buying a new home and need external financing to close the transaction.
But the market also includes people who have the funds but prefer to take out a loan because of favorable interest rates or because of the tax breaks they can get from interest payments.
People looking to raise money for other projects, will often tap into their home’s equity and take a loan against it.
And finally, some people take home loans because they would rather invest their funds elsewhere, perhaps into assets that are more liquid than a home or where they can get a better return on their investment.