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Help Me Choose – Mortgage – Tips/Tricks
1. Different Loan Types ExplainedStandard Variable Rate Home LoanThe Standard Variable Rate loan is the most common type of loan. It is based on the official Reserve Bank rate and varies with time depending on the market. If rates go up so do the amount of your regular loan repayments. If on the other hand the Reserve Bank drops their official interest rate, then 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 funds. It is often possible to incorporate an introductory discounted rate with a standard variable loan for the first 12 month period of the loan, at which time it then reverts to the standard variable rate for a prescribed period. Basic Variable Rate Home LoanA 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 rate loan. In some cases there are also more restrictions on this type of loan and extra fees for extra flexibility. As with the Standard Variable Rate, the Basic Variable Rate is subject to decisions made by the Reserve Bank to cut or increase their official rate. Fixed Rate Home LoanThe Fixed Rate Loan offers one key advantage over Variable loan types; the certainty of making a set loan repayment amount each month. 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 its interest rate, either for better or worse, up or down, 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 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, are penalised with extra fees. Split LoanThe 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 fees, the split loan might be for you. Essentially, you split the total loan into two portions, making one portion a fixed rate loan, and the 2nd 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 LoanIntroductory loans offer an interest rate lower than the standard variable rate for an initial period of time, usually the 1st 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 burden of having a mortgage with this 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 LoanThe 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 being that the All-In-One Loan 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 however and you may also be charged a higher monthly fee. Also you must pay attention to not withdraw more funds than the amount you deposited in the first place. This type of loan suits only fairly disciplined first time borrowers, or experienced investors. Line of Credit Home LoanLine of Credit loans, also known as Equity Loan or Revolving Credit offers 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 money becomes 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. Line of Credit usually will attract a higher rate of interest than a standard loan however. Low Doc LoanLow 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 "state" their income by filling in a blank on the application, while others go so far as to not require any information at all about income, assets or even existing debt. The trade off for this level of flexibility in the application process is either more initial deposit money or a significantly 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 Low Doc period. Non-conforming Home LoanNon-conforming loans are designed for borrowers that don’t meet 'standard' bank criteria. These people may include seasonal or contract workers, non-residents, small or no-deposit holders or even those with a poor credit history. This type of loan may also be suitable if you wish to borrow 100% of the property value. In most cases non-conforming loans will attract a higher rate of interest. No Deposit Home LoanA No deposit home loan allows you to borrow up to 100% of the purchase price whilst still providing a full range of home loan features. This type of loan is available for both new and established housing, either for an owner occupier or as an investment. It is ideal for those borrowers that have good cash flow but no equity or savings. Bridging Home LoanThis is a temporary loan which allows a buyer to complete the purchase of a new property before selling their existing property. It is useful for borrowers who want to finance the building of a new home while still living in the old one. Given the high risk to the lender associated with this kind of loan, the bridging loan will usually attract a higher interest rate. 2. Ways to reduce your home loanMortgage payments can be the bane of any home owner’s existence. Although you will eventually have to pay back the whole of your mortgage, there are a few ways you can make it easier to keep up on your repayments and accelerate paying off your home. 1. Offset accountsBy linking a savings account to your home loan account, any savings you have works to offset the interest you are paying on your home loan. Over time, money in your offset account can help to reduce the loan principal, allowing you to pay off your loan sooner or build up equity. Let’s say you may have a mortgage of $200,000 at 7.07% and an offset account with $30,000 in it earning 3%. This means that $170,000 of your loan is accruing interest at 7.07% but the rest is accruing interest at just over 4%(7.07% on your loan less the 3% the $30,000 in your offset account is earning). Over a number of years, both the principal and interest on your loan are repaid faster. 2. Honeymoon ratesMany banks are now offering ‘honeymoon rates’ as a marketing tool to lure borrowers into their fold. Basically, the lender will promise a cheaper rate of interest for an initial period (6-12 months) then the rate reverts back to the standard variable rate of that institution. This system appeals to lenders who plan to attack the loan early by making extra payments in the beginning 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 penalties over the term of the loan. 3. Debt consolidationAs interest rates rise on your home loan, it’s guaranteed that any credit card or personal loan rates will also climb. This can be crippling as the interest rates on your credit cards and personal loans are much higher than the interest rate on your home loan. 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 15 to 20% on your credit card or personal loan, you can transfer these debts to your home loan and pay them off at the current variable rate (about 7.07%). 4. Additional repaymentsWhichever way you decide to go with your home loan don't forget to consider the advantages gained through additional repayments. Say you have a mortgage of $300,000 at 7.25% 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 payment saving of $46,270. 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 much sooner. 3. Negative GearingNegative 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. Negative gearing is defined as borrowing to invest in property, where any income you receive from that property is less than your borrowing costs. These losses can then be deducted from your taxable income and hence reduce your tax bill. Take this example. David had saved a $50,000 deposit which he used to purchase a $500,000 investment property. He borrowed $450,000 from the bank and covered all of the additional purchasing costs from his own pocket. He plans to keep the home for around 10 years, then sell it and repay the loan in full. The home is currently tenanted at $1400 per month but David’s mortgage repayments 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 can have tax deducted against this financial loss. 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 growth in the last 12 months. 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:
4. Tips for successful house huntingThe path to home ownership can be riddled with traps for the inexperienced first home buyer. But there are also some invaluable tips out there that could save you thousands of dollars on the selling price. Here are some common tips and traps that may help when buying a home. Research your selected areaGetting 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 lookSummer 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 more limited stock available during winter, but there is far less competition leaving more room for negotiation. 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 limitIt'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. Thorough inspectionsNo 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 contractTake 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 5. Tips for selecting a Mortgage BrokerMortgage 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 cross 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. They will then help you select the most suitable loan from a variety of sources and then manage the loan process until final settlement. Industry accreditationStandards of training vary widely across the mortgage broking industry. So choosing a broker with an industry accreditation, like belonging to the MFAA (Mortgage and Finance Association of Australia), will mean they are impartial and obliged to adhere to an industry Code of Practice. Ask your friends and family if they can recommend one and check their industry accreditation before commencing. FeesBrokers 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 actually illegal in many states. You should not pay any fees at all until your loan is approved. Borrow only what you needThis 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 loanBrokers 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 they will source loans from. As a general rule, the wider that list the greater your options. You can ask to see a broker's lender panel. Read the fine printYour 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. ComplaintsIf you're not satisfied with the conduct of your mortgage broker, you can take your complaint to the industry-funded Credit Ombudsman. They deal with disputes and hand down binding determinations. Visit www.creditombudsman.com.au for more information. 6. Checklist for Your Loan ApplicationSave 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 original copies of all the following documents handy. If you are not able to supply any of the following then you should openly discuss that with your broker as there may be alternative options available to you. Compulsory for All Applicants100 Points of ID comprising any combination of:
For the Property Purchase:
If Refinancing and existing loan:
Are you building or developing a property?
SPECIAL CIRCUMSTANCESWill there be someone acting as Guarantor for your loan?
Have you been gifted funds that will be used to complete the purchase?
Do you have an adverse credit history?
Are you receiving a divorce settlement that will be used to complete the purchase?
Is the property you are purchasing, under a Company Title?
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