Help Me Choose – Mortgage – Helpful Tips
- Different Loan Types Explained
- Ways to Reduce Your Home Loan more quickly
- Negative Gearing
- Tips for Successful House Hunting
- Tips for Selecting a Mortgage Broker
- Checklist for a Loan Application
1. Different Loan Types Explained
Standard Variable Rate Home Loan
The Standard Variable Rate loan is the most common type of home loan. The interest rate that applies to the loan is subject to change, depending on the official rates set by the Reserve Bank rate and the prevailing market conditions. If the rate is increased, so do the amount of your regular loan repayments. If the rate falls, your repayments will be accordingly reduced.
This type of loan is the most flexible and may include optional features such as the ability to make extra repayments, to split the loan, or to redraw extra repayments made.
Basic Variable Rate Home Loan
A Basic Variable Rate loan is usually a “no frills” version of the Standard Variable Loan, good for the budget conscious borrower. It generally offers a lower interest rate, but with less flexibility and fewer features than the Standard Variable roan. In some cases, there will also be more restrictions on this type of loan, with higher fees charged for greater flexibility. As with the Standard Variable Rate, the Basic Variable Rate is subject to official and market interest rate changes.
Fixed Rate Home Loan
The Fixed Rate Loan offers one key advantage over Variable Rate loan types: the certainty that your loan repayment amount each month will not change, whatever is happening in the market or to official rates. Fixed Rate loans are based on a set interest rate for a pre-determined period of time that might run from 6 months to 10 years. If the Reserve Bank changes official rates, for example, this will have no impact on your regular repayment under a Fixed Rate schedule.
This provides some level of security for borrowers but a Fixed Rate Loan is often the most inflexible of loan types. For example, additional repayments, made to reduce the term of the loan and interest payable on the balance of the loan, may result in additional charges being incurred. Redraw is generally not available on Fixed Rate loans.
The Split Loan offers a “best of both worlds” scenario between the Variable and Fixed Rate loans described above. If you are concerned about rising interest rates, but want to maintain the flexibility of making additional loan repayments without being charged extra costs, the Split Loan might be for you. Essentially, you split the total loan into two portions, making one portion a Fixed Rate loan, with the second portion a Variable Rate loan. The split ratio is typically up to you but 50:50 or 60:40 splits are the most common.
Introductory or Honeymoon Rate Home Loan
Introductory loans offer an interest rate that is lower than the standard variable rate for an initial period of time, usually the first year of the loan. This rate may be fixed or variable and once the Introductory period concludes, the interest rate usually reverts to the Standard Variable rate. The advantage of this rate is that it offers borrowers a chance to ease their way into the routine of repaying a home loan with the reduced rate. This “honeymoon” period also allows you to reduce the principal loan amount more quickly by making extra repayments at no penalty charge.
All In One Home Loan
The All-In-One Loan essentially combines your home loan account with your day-to-day transaction account. This allows you to directly credit your salary into the account and then withdraw funds as you need them, like a standard transaction account. The major benefit of this structure is that enables you to decrease the interest charged on the loan by keeping your salary, savings and other income in the account for as long as possible.
The interest rate on All-In-One loans may be slightly higher and you may also be charged a higher monthly fee. This type of loan suits reasonably disciplined borrowers or experienced investors who can regulate their spending so as to not allow the debt to expand or stagnate.
Line of Credit Home Loan
Line of Credit loans, also known as Home Equity loans, offer high levels of flexibility. You can think of it operating a little bit like a credit card, in that the lender assigns you a credit limit secured against your property, and when you need cash for bills or other spending, you simply draw against that limit. As you pay back the loan, the funds become available to you again.
One of the biggest advantages of a Line of Credit is that you always have ready access to money, making it highly attractive to investors. However, Line of Credit usually will attract a higher rate of interest than a standard loan. As for All-in-One loans, a degree of discipline is necessary to make sure the debt does not escalate and never reduce.
Low Doc Loan
Low Doc Loans are useful for borrowers who are self employed and are unable to provide the conventional documentation required to prove their income level. There are many variations on these types of loans, some allowing customers to simply declare their income by completing the loan application or by signing an income statement.
The trade off for this level of flexibility in the application process is either more initial deposit money or a higher interest rate. Many Low Doc products give borrowers the option to switch back to a conventional variable rate product after a set period of time without the need to show full financial statements, provided that they have maintained a good credit history during the applicable period.
Non-conforming Home Loan
Non-conforming loans are designed for borrowers that don’t meet standard lender credit criteria. These people may include seasonal or contract workers, non-residents, small or no-deposit holders or even those with a poor credit or repayment history. In most cases, non-conforming loans will attract higher interest rates.
Bridging Home Loan
This is a short term loan that allows a buyer to complete the purchase of a property before selling their existing property. It is useful for borrowers who want to finance the building or purchase of a new home while still living in the old one. Given the higher risk to the lender associated with this kind of loan, the bridging loan may attract a higher interest rate.
2. Ways to repay your home loan more quickly
Home loan repayments can be a constant challenge or irritation to any home owner. While you will eventually have to pay back the whole of your mortgage amount, there are a few ways you can make it easier to keep up with your repayment obligations and actually paying off your home more quickly.
1. Offset accounts
By linking a deposit account to your home loan account, any funds you have in the deposit account work to offset the interest you are paying on your home loan. Over time, money in your offset account can and the home loan interest this saves, help to reduce the loan principal more quickly, allowing you to pay off your loan sooner and build up equity.
Let’s say you may have a home loan of $200,000 at 7.2% p.a. and an offset account with $30,000 in it. The offset account balance is set off against the home loan, meaning that interest is calculated against $170,000, rather than $200,000. Thus your repayments reduce more of the principal each time, allowing you to repay the loan over a shorter time period.
2. Honeymoon rates
Many lenders offer “honeymoon rates” as a marketing tool to attract borrowers to their products. Basically, the lender will grant a cheaper rate of interest for an initial period (usually 6-12 months) after which time the rate reverts to the standard variable rate of that institution.
This system appeals to borrowers who plan to attack the loan early by making extra payments in first months to help reduce principal. Honeymoon rates are tempting, but watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the available features to offset the lower interest rate. This can result in limited flexibility or higher charges over the term of the loan.
3. Debt consolidation
If interest rates rise on your home loan, it’s guaranteed that credit card and personal loan rates will also climb. This can be crippling, as the interest rates on your credit cards and personal loans are usually much higher than the interest rate on your home loan. To alleviate these higher repayments, many lenders will allow you to consolidate or refinance all of your debt under the one roof of your home loan.
This means that instead of paying up to 20% p.a. on your credit card or personal loan, you can transfer these debts to your home loan and pay them off at the current variable rates (generally around 7.25% to 7.5% p.a.).
4. Additional repayments
Whichever way you decide to go with your home loan, don't forget to consider the advantages gained through additional repayments.
Say you have a loan of $300,000 at 7.25% p.a. that requires a minimum repayment of $2,168 per month over 25 years. By contributing an extra $100 per month (that’ s just $25 a week), you will see the loan paid off 2 years, 9 months earlier with an interest saving of around $46,000. Even if you can’t pay extra, making weekly or fortnightly payments rather than monthly will also reduce the loan term and your interest costs.
Whether you make regular payments or irregular one-off payments whenever you have some spare money, the financial benefits can be considerable – and you’ll be debt free sooner.
3. Negative Gearing
Negative gearing can be a great way to get your foot in the door to the investment property market, but it pays to do your homework first so you’re not left with a massive loan you can’t afford to pay. It is important to seek advice from a qualified expert who can advise you on the taxation and financial implications. Mortgage brokers generally will not be able to give you such advice, so you’ll need to consult an accountant or a licensed financial planner. The following information should not be considered to be investment or financial advice.
Negative gearing is defined as borrowing to invest, where any income you receive from the investment is less than your borrowing costs and the costs of acquiring and maintaining the investment. These losses can then be used to reduce your taxable income and hence potentially reduce your tax bill – perhaps even qualify you for a tax refund.
Take this example. David saved a $50,000 deposit which he used to purchase a $500,000 investment property. He borrowed $450,000 to fund the remainder and covered all of the additional purchasing costs from his own pocket. He plans to keep the house for around 10 years, then sell it and repay the loan in full. The house is currently tenanted at $1400 per month but David’s loan repayments (interest only) are $3495 per month, leaving a shortfall of $2095 per month, which accumulates as $25,140 per year. At the end of each financial year, David’s taxable income (upon which his tax liability is calculated) can be nominally reduced by $25,140.
A popular wealth creation strategy, negative gearing lets everyday consumers invest in the property market through access to additional funds. The intention of all gearing for investment purposes is to access a larger pool of money, namely the investor’s own stake together with outside loan funds, than if only a smaller pool - the investor’s own stake by itself - had been used, says Nick Renton, author of Understanding Investment Property and Negative Gearing. This produces a much higher net return for the investor and a larger benefit from inflation.
Like any investment, there are uncontrollable factors that could impact on your plans, especially in suburbs that have experienced negative value growth in the last year or two. It’s also important to consider the possible impact of any interest rate rises or having an investment property untenanted for an extended period of time.
While negative gearing can be an effective way to make financial gains, Nick Renton cautions investors to thoroughly consider the pros and cons first. Apart from the possibility of making a loss instead of a profit, a borrower can also face the situation that he or she will not have the necessary cash resources to repay the loan on its due date, or at all, and that the lender will be unwilling in the circumstances to roll over the loan.
Common negative gearing mistakes:
- Seeking to minimise income tax instead of maximising returns.
- Thinking that an investment that does not stand up on its own merits can be made attractive by negative gearing impacts.
- Not realising that while a tax loss from negative gearing can be attractive in isolation, it is also automatically accompanied by an even larger actual loss.
- To forget that while gearing can increase profits, it can also increase losses.
4. Tips for successful house hunting
The path to home ownership can be riddled with traps for the inexperienced first home buyer. But there are also some invaluable tips that could save you thousands of dollars on the purchase price. Here are useful tips that may help when buying a home.
Research your selected area
Getting a sense of what represents good or fair value in the current market can begin before you attend inspections. Research your area by looking at recent sales for the type of property you are looking for. Organisations like What Price My House (www.whatpricemyhouse.com.au) can provide you with this type of report. Also, after a period of time spent looking, you will find you can gauge your own assessment of market value.
When to look
Summer or winter: which season is best? Both have their positives and negatives. Summer is traditionally a more active season in real estate and there are more homes on the market. However, there are also more buyers out looking which means the competition is greater. There is generally more limited stock available during winter, but there is far less competition, potentially leaving more room for negotiation with vendors.
Remove the emotion (if you can!)
When you have fallen in love with a property, you have made an emotional connection with the property, which is precisely what the agent needs to secure the sale. This movement from logical to emotional buying can see buyers end up paying too much, because they want the home so badly they are willing to move up in price just to secure it. Even if you know it's the one you have to have, never act too excited and gush about the home in front of the agent. They will see this emotional connection and work to push the price upwards.
Disclosing your price limit
It's important to remember that while the agent may seem like they are being very helpful, they are ultimately working for the vendor or the property owner with the aim of securing the maximum selling price. Never disclose your highest price limit to an agent; once you have done this you have placed all your cards on the table so the agent knows exactly how high you are prepared to go. If you play your cards closer to your chest, you could secure the home for a lot less.
No one wants to move into their dream home only to discover a few nasty and expensive surprises. Before signing any contracts, it's important to have a building inspection carried out to check that the plumbing, wiring, foundations, ceilings, window seals etc. are all in good condition. Similarly, if there is an infestation of wood destroying borers or termites, you want to know about it before you buy. If you do find a problem and discover it is treatable for a reasonable price, you could use this information to negotiate the selling price down.
Check the contract
Take a close look at the sewer diagram, included in the Contract for Sale, to ensure there are no sewer mains crossing your property. If repairs need to be made to the mains, then your property may incur some damage while they are being accessed. Always check the contract of sale and ensure that all of the pages and inclusions are present. You may wish to consult with a conveyancer or solicitor.
5. Tips for selecting a Mortgage Broker
Mortgage brokers can save you hours of legwork, save you heaps of money and help you find the loan that suits your needs best. But it pays to be cautious and do your checking when selecting the right broker and loan for you.
A mortgage broker's role is to work with individual consumers to determine how much you need to borrow and whether you can obtain that amount. They will then help you select the most suitable loan from a variety of sources and assist in managing the loan process until final settlement.
Standards of training vary widely across the mortgage broking industry. So choosing a broker with an industry accreditation, such as belonging to the MFAA (Mortgage and Finance Association of Australia), will mean they are obliged to adhere to an industry Code of Practice and maintain minimum standards. Ask your family, friends or colleagues if they can recommend one and check their industry accreditation before commencing.
Brokers are remunerated by a commission from the lender and other benefits, so their service should not cost you anything. Paying an upfront fee to a broker is not standard industry practice and is potentially illegal in some States. You should not pay any fees at all until your loan is approved.
Borrow only what you need
This applies equally whether you borrow through a broker or go direct to the lender. The more you agree to borrow, the higher the commission the broker receives. Don't be swayed if they encourage you to borrow more than you need; it just puts you further into debt and places you at higher risk of defaulting on the loan.
Find the right loan
Brokers are expected to have a greater knowledge of the types of loans available compared to the average consumer. A loan will be selected from their panel of lenders, which varies in size from broker to broker. The panel contains all of the banks, non-bank lenders and mortgage managers from which they will source loans. As a general rule, the wider that list the greater your options. You can ask to see a broker's lender panel list.
Read the fine print
Your broker should be clear and upfront about all of your loan terms and provide them in writing. This information should include the loan amount, the loan term, interest rate, loan establishment fees, any fees for a redraw facility or any exit fees. Similarly, you may ask for a copy of the broker’s Credit Assessment that confirms that the proposed loan is not unsuitable for you.
If you're not satisfied with the conduct of your mortgage broker, you can complaint to the broker. If you are not satisfied with the response you receive, you may refer your complaint to an external dispute resolution scheme. These bodies deal with disputes and will fully investigate your complaint. They can make findings and determinations that are binding on the broker. The two most relevant schemes are the Credit Ombudsman Service (www.cosl.com.au) and the Financial Ombudsman Service (www.fos.org.au).
6. Checklist for Your Loan Application
Save time and hassle by being extra prepared for your first meeting with a Mortgage Broker. Use our loan application checklist to ensure that you have answers to all of the following questions and even better, try to have originals of all the following documents handy.
If you are not able to supply any of the following, you should openly discuss that with your broker as there may be alternative options available to you.
Compulsory for All Applicants
ID documents comprising combinations of:
- Current passport or Birth Certificate
- Driver's Licence/Pension Card
- Credit Card/Bank passbook/Rates Notice
- Medicare Card/Senior's Card/Public Utility Bill
If you are an employee, you will need to provide the following:
- Most recent two pay advices
- Tax Returns and Assessment Notices for the previous two years
- Payment Summaries for the previous two years
- A letter from your employer stating your wage and the tenure of your employment (full time/part-time/casual/on probation)
If you are self-employed or a sole trader you will require:
- Tax Returns and Assessment Notices for the previous two years
- Profit and Loss statements and Balance Sheet for the previous two years
- Letter from your accountant certifying the accounts if no current tax return is available
If you are purchasing a property:
- Evidence of genuine savings over a minimum of six months, usually amounting to a minimum of 5% the purchase price
- Proof of your deposit and funds to complete purchase (bank account statements or similar)
- Confirmation of rental income for investment properties
- Copy of current or proposed Lease Agreement if property is/will be rented
- Section 32 or Contract of Sale
If refinancing existing loan/s:
- Last six months’ loan statements (some lenders will require twelve months) showing no arrears
- Confirmation of rental income for investment properties
- Copy of current Rates Notice for the property/ies showing no arrears
- Copy of current or proposed Lease Agreement
- Copy of Certificate of Title (if available)
Are you building or developing a property?
- Section 32 or Contract of Sale
- Fixed price building contract
- Plans and Specifications
- Drawdown/Cashflow schedule
- Copy of current or proposed Lease Agreement
- Copy of Certificate of Title
Will there be someone acting as Guarantor for your loan?
- Each guarantor will need to provide similar (and full) information as for applicants.
Have you been gifted funds that will be used to complete the purchase?
- A signed letter (some lenders will require a Statutory Declaration) from the person/s gifting the funds, stating the funds are a gift and are not repayable.
Do you have an adverse credit history?
- Letter stating the details of the debt including amount, date of occurrence, amount paid or unpaid, and reason for the default.