HOME LOANS & LENDING ARTICLES

1. COMPARISON RATES EXPLAINED

Comparison rates were introduced a number of years ago, in an effort to help consumers compare ‘apples with apples’ when reviewing different home loans.

It is difficult to compare home loans that have different interest rates and fees. This is why credit providers must give a comparison rate when they advertise a rate or a weekly payment for home loans.

The comparison rate includes the interest rate or weekly repayment amount, plus most fees and charges. Here is an example.

In the example above, home loan B will cost less than home loan A, even though home loan A has a lower interest rate. However, keep in mind the the features being offered by each loan to ensure in the long run which is going to cost you more.

If you can find the comparison Interest rate from each loan, you can get the true cost of the loan to compare to. When a Lender advertises, they should show their comparison rate somewhere in the advertisement.

It also pays to read the fine print. Sometimes the comparison rate can be based on an entirely different scenario to yours and won’t reflect the loan you are looking for.

Different loan amounts and repayment duration can change it dramatically.

You also need to be aware that a comparison rate doesn’t take into account other costs you may incur at the beginning of the loan, such as loan establishment fees and approval fees. These can vary widely, so you really need to do your research to make sure you’re getting the best deal for your requirements.

The same will also apply to finance on cars, cards and personal loans.

Remember, a loan is about more than the cost – you need to consider other loan features and flexibility factors such as offset and redraw, and fixed versus variable terms.

So comparison rates are a good starting point, but not the be all and end all.

2. FIXED RATES EXPLAINED

With interest rates at an all-time low, taking the option of locking in an interest rate on your home loan to guard against possible future fluctuation may be attractive. However, it pays to know the ins and outs of fixed-rate loans before committing to one.

When purchasing a property, borrowers can decide between fixed-interest loans that maintain the same interest rate over a specific period of time, or variable-rate loans that charge interest according to market rate fluctuations.

Fixed-rate loans usually come with a few provisos: borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early.

However, locking in the interest rate on your home loan can offer stability.

“For those conscious of a budget and who want to take a medium-to-long term position on a fixed rate, they can protect themselves from the volatility of potential rate movement,” ING Direct Head of Third-Party Distribution Mark Woolnough says.

Fixed rates are locked in for an amount of time that is prearranged between you and your lender.

“There are some lenders that offer seven-year or 10-year fixed terms, but generally one to five years are the most popular terms,” Woolnough says. “The three- or five-year terms are generally the most popular for customers because a lot can change within that amount of time.”

Further to this, fixed-rate loans can also be pre-approved. This means that you can apply for the fixed-rate loan before you find the property you want to buy.

“When you apply for a fixed rate, at the point of application you can pay a fixed rate lock-in fee which will, depending on the lender, give you between 60 and 90 days from the time of application to settle the loan at that fixed rate,” Woolnough explains.

“You pay a fee to protect your interest rate. Alternatively, you can choose to lock the rate in at the time of actual approval.”

Pre-approval helps you to discern how much money you are likely to have approved on official application. Knowing that your potential lender will offer a fixed-term interest loan grants further peace of mind for those borrowers looking to budget precisely rather than be susceptible to rate fluctuations.

3. WHAT IS LVR?

The mortgage industry is a wide, wondrous world with a language all of its own. One of the many acronyms bandied about is ‘LVR’, which stands for ‘loan-to-valuation ratio’. Here’s what it means.

When you are working out what amount you can borrow to purchase a property, the size of deposit you need to save and whether you are eligible for a particular mortgage product, the loan-to-valuation ratio (LVR) is one of the most important considerations.

In the simplest terms, the LVR is the percentage of the property’s value, as assessed by the lender, that your loan equates to. So, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is 80 per cent of the property value, making your LVR 80 per cent.

LVR is important because different lenders and loan types have different maximum LVRs, and some lenders will only lend up to a certain LVR for units and properties in certain areas.

Most lenders will finance up to 80 percent LVR with out Mortgage Insurance which can add thousands to the loan.

The maximum LVR we have seen for a new Home Purchase is 95% LVR + LMI insurance Costs. See Explainer For LMI (Lenders Mortgage Insurance)

4. LENDER MORTGAGE INSURANCE (LMI) EXPLAINED

Explainer LMI or Risk Fees

LMI is short for Lenders Mortgage Insurance. It is required in many instances, most common when a loan is worth more than 80 per cent of a property’s purchase price. It is also applicable when refinancing in Difficult Financial Circumstances, buying a unit in in a High rise Building or in Alt Doc or Lo Doc Loans. In very basic terms, when a lender considers a loan to carry a high risk, LMI or a risk fee is likely to be payable. The LMI cost will likely scale to the amount of risk or deposit being paid. Here’s how you can avoid paying that costly premium.

Save for a higher deposit

The purpose of LMI is to protect lenders in case the borrower fails to make repayments and, when the loan-to-valuation ratio (LVR) exceeds 80 per cent, so the loan amount is more than 80 per cent of the value of the property being mortgaged, the risk of a lender not recouping their costs should the borrower default is increased. A higher deposit means a smaller loan amount, so will decrease the LVR and the perceived risk, and may be the key to avoiding paying LMI. A 5 % Deposit will have a higher LMI fee than say a 10% Deposit. This is something you should be comparing between Lenders as it can be thousands of dollars different.

Get a guarantor

If you don’t have the financial capacity to meet a 20 per cent deposit but still want to avoid LMI, you do have the option of getting a guarantor on your loan. Normally a close relative, such as a parent, guarantors can use the equity in their property to help you secure yours. In some instances, having a guarantor on your loan may mean that you won’t need a deposit at all.

Take advantage of professional benefits

Although special offers based on the borrower’s profession are not limited to medical professionals, doctors are the big winners when it comes to waived LMI fees. Due to the perceived stability and high income, some lenders consider professionals earning a minimum of $150,000 a year as ‘low risk’ borrowers and therefore offer them special loan benefits.

5. CONSTRUCTION LOANS EXPLAINED

If you are thinking of building your own home, you will need to be familiar with the ins and outs of construction loans.

Construction loans are not as straightforward as simple home loans. There are additional decisions to be made about the structure of the loan, additional documentation is required and the funding is released in an entirely different way.

Documentation

In addition to documentation about your finances, income and identity, your application for a construction loan needs to include contracts or tenders for the construction, as well as the plans so that a valuation can be performed.

Further documentation will also be required before the first payment is made from the lender to the builder, including a schedule of the payments to be made (called drawdowns), the builders’ insurance details and the final plans that have been approved by the local council.

Structure

To avoid having to contribute your full deposit and being charged interest on the entire loan amount from the moment the land purchase settles, you can split your mortgage into a land loan and a construction loan. At settlement of the land purchase, you pay lender’s mortgage insurance (LMI) on the land loan, if LMI applies, and start being charged interest and making repayments on the balance of the land loan. The interest and repayments on the construction portion then kick in only as each drawdown is processed.

Funding

The drawdown schedule is very important, as you don’t start paying interest on each portion of the loan until it is paid to the builder – you, the lender and the builder need to be satisfied with the schedule.

For the lender to make each payment to the builder, you will need to fill out a drawdown request form from your lender, and submit it to your builder. The builder can then send the lender your form with an invoice for that part of the payment and, after the lender is satisfied that the work has been completed and is up to the standard expected in the valuation, the drawdown can be completed with a payment to the builder.

Any changes to the contract and plans can trigger a reassessment of the loan, so be as sure as you can be that the plans and contracts the lender sees are final, and it is also worth trying to pay for any small amendments from your own pocket, rather than changing the loan and risking a reassessment.

Problems can also arise when other work on the site that isn’t completed by the builder needs to be paid for, as some lenders only make the remaining funds of the mortgage available after the completion of construction. While some builders will include subcontractors as part of the main contract, meaning that they can be paid by the builder as stages of work are complete throughout the drawdown schedule, others will not do this. Again, this may make it necessary to pay from your own pocket.

Bank or Specialist Lender

Banks and Lenders can vary in their requirements for a Construction Loan, some not even doing it all. Its really is worth getting the information up front before you go shopping for a house Land package.

Owner Builders are certainly difficult to get finance for, so do not commit yourself to a project before you know exactly what Funding will be needed.

6. GENUINE SAVINGS REQUIREMENT EXPLAINED

What counts as genuine savings in a loan application?

If you apply for a home loan, particularly if the loan is for more than 80 per cent of a property’s value, you’ll more than likely have to prove to lenders that you have a satisfactory amount of savings. This is to demonstrate your ability to funnel a portion of your income into repayments.

Although it can differ, in most cases lenders generally look for consistent additions to savings over a period of at least three months and preferably a year or more. This means that the following are not considered genuine savings:

a cash gift
an inheritance
casino/other gambling winnings
proceeds of the sale of a non-investment asset
government grants and other finance offered as incentives

Can I still get a loan without genuine savings?

For those who don’t have any genuine savings but still want to obtain finance, there are options. These include:

P2C loans with parents or others putting up money to be part of the loan as a separate security after the Lender.
Guarantor loans – Having a guarantor on your loan may mean that no deposit is required, with the equity or asset the guarantor stakes standing in for a deposit.
Other significant assets such as shares, managed funds and/or equity in residential property – Depending on your chosen lender, cash isn’t the only thing accepted as genuine savings. There are even situations where the sale of a vehicle can be considered as genuine savings if proved that it was owned for three months or more.
A strong rental record may see a lender allow you to forgo the genuine savings route – Some lenders will waive the requirements if a letter can be produced from a licensed real estate agent confirming that rent has been paid on time and in full for the preceding 12 months, as it highlights your ability to make repayments on time and on an ongoing basis.

It’s a matter of looking at your full situation and knowing which lender is going to have the policies to suit what you’re trying to achieve. This knowledge can only be achieved through experience and keeping in constant communication with lenders to know what their policy niches are.

7. HOW LENDERS WORK OUT IF YOU CAN AFFORD A LOAN

Different lenders use different formulas to work out how much you can borrow, but the biggest loan isn’t always the best idea.

Being able to secure your ideal loan amount can seem like a battle of balances. Once you’ve worked your budget and finances through a spreadsheet, there’s still the one issue left to deal with: assessment rates. This is also known as an ‘interest rate buffer’.

Getting in while the going’s good and securing your loan while interest rates are low doesn’t change the fact that lenders are compelled to ensure that you will be able to make repayments if interest rates fluctuate.

Matching the features of a loan to your financial position is important, and often requires a third-party expert to help guide you through.

“What is very important is that people understand the ramifications of exposing themselves to debt,” says Andrew Crossley, Homeloans Business Development Manager and best-selling author of Property Investing Made Simple.

“When modelling costs, an adviser would be wise to be very conservative in the figures they are using.”

Assessment rates add a margin to the variable or fixed interest rate of your loan. The assessment rate provides added protection that you will be able to repay your loan when interest rates rise, because they are sure to rise and fall throughout the life of your loan.

“APRA is clamping down on lenders exposing people to too much debt and not preparing them for interest rates as well as they could have,” Crossley says.

The assessment rate can be anything from 1.5-2% above the variable rate, depending on the lender, and many are currently using rates of approximately 7-8%. Mortgage assessment rates vary from lender to lender, which is why different lenders may offer people in the same financial situation different loan amounts.

In some cases, the difference in loan amounts offered by different lenders can go into tens of thousands of dollars, but the biggest loan isn’t always the most suitable. Ensuring that you can pay your loan, whether rates stay low or rise, requires a bit of know-how. Speak to Money Buckets now to find out more.

8. WHY A PRE-APPROVAL?

For those getting ready to stride into the world of home ownership, the uncertainties of pre-approval can cast a shadow of doubt over an otherwise exciting time. When is it necessary? How long does it last? And what does it involve, exactly?

Pre-approval is a lender’s assessment of your likelihood of being approved for an otherwise suitable loan. The appraisal is made on the basis of your ability to service a loan by looking into your living expenses and liabilities, your credit history, your employment circumstances and how often you have moved home or employment in the recent past.

As it is performed prior to a property being found and chosen, it does not take into account the particulars of a specific property and valuation, which is why uncertainties can arise.

Pre-approval is helpful for those who want to know how much they can borrow before attending open homes, and can be reassuring for new borrowers.

“When someone gets pre-approval they can start looking at properties knowing how much they can borrow. They know what their price range is,” explains the finance broker. “People take comfort in knowing that a lender has looked at their application to make sure it meets policy.”

Pre-approvals are usually valid for up to 90 days but, depending on the lender, may be renewed to allow more time to find a property.

It is very important to note that a pre-approval is not a guaranteed loan. It is your potential lender’s way of signalling how much they expect to lend you. This may change on your official application. Policies are changing day-to-day, week-to-week so still get a proper approval before you sign contracts.

Another thing that may cause a lender to decline your loan application after pre-approval is a change to your pre-approval circumstances.

You need to make sure that you do not go and get another credit card or car lease, or any other debt that may affect their income and serviceability.

You need to stay in your job till the loan is settled. A shift of employer, even to a higher paid job may see your approval put back 6 months.

Your pre-approval will also usually be conditional on a property valuation. If your lender does not deem the property a marketable asset, they may not approve the loan.

The Lender will want to check that it is a readily saleable property. That’s the biggest thing. To make sure the actual security itself is acceptable. Postcodes are given categories and if Sales are very slow in your category a Lender may see the area as too high a risk.

You need to be wary of the changes that can affect your ability to take out a loan, regardless of pre-approval figures, to ensure you don’t commit without a guaranteed source of funding. Pre-approval is not a guarantee, but is a very useful tool for anyone looking for a price guide on a property. Get a Pre-approval before you lock in your Saturday open home schedule.

9. SHOW A SAVINGS HISTORY OR A SUSTAINED DEBT PAYMENT PLAN TO QUALIFY FOR A HOME LOAN

So you want to borrow money for a Home of your own?

You are going to need to show genuine savings ability, Have a deposit and have cleared the decks of existing debt to Qualify. Heres how.

If you have used Money Buckets Budget planner to improve your Financial Situation, you may have already put yourself in a position to qualify for a Home Loan. A bank or Finance provider will be looking for more than just your income to be able to pay a loan. They will be looking for you to have had a history of savings and repayments to loans, in addition to your rent, that shows you can live with a home loan.

Owning and maintaining a home and paying the home loan, will initially take more out of your pay than just paying the rent. You will have rates to pay, repairs to make and you will probably want to individualise your home, simply because you can. In the long term, say in 10 to 15 years, your Home Loan repayments will probably become cheaper than renting and eventually when you own your own home, Financial Freedom is beckoning.

But lets get back to now. A home loan of $500,000, at 5% interest over 30 years, would cost you roughly $620 per week. But in reality you probably need to allow $670 to $720 a week to pay for the Rates, Insurance and Maintenance. Even more if Strata Fees are involved .

A Home Loan of $300,000, with the same conditions as above, would cost $372 per week, so once again you need to allow that $50 to $100 extra, so around $425 to $475 per week.

What the Lender is looking for is your ability to pay this higher amount on a sustained basis. And your ability to live on the amount that this leaves you.

So you are going to need to show that what rent you are paying now and what you have been saving adds up to this figure. This could also be shown with other regular debt or loan repayments.

Lets look at two examples

1: If you are paying say $350 a week rent now, you would need to be showing a sustained saving plan of $150 a week or $300 a Fortnight to show you can afford a $300,000 home loan. So you will have showed an ability to pay $500 per week on a regular basis. If you had been saving this amount for 3 to 4 years you would be in a good position to get a home loan. You would have a savings history and a savings account of around $30,000. That would be enough for a small deposit, stamp duty and legal fees.

2.: If you are paying $500 a week rent now and wish to borrow $500,000 you would need to show a saving history of say $220 per week, which shows an ability to pay $720 per week on a sustained basis. Done over 3 to 4 years, this would give you from $35,000 to $45,000 of savings to put towards deposits and legal fees.

If you have been paying Loans, Cards and Debts back, as well as savings, this will also add onto your proven ability to live with the Home Loan you are asking for. But these loans will generally have to have been paid off for you to qualify for a Home Loan. It is preferable to have no other Debt when applying for a home loan. Each extra loan you have reduces your borrowing capacity.

You need to demonstrate you can live on the Budget you are proposing for the Home Loan. If you have trouble living on that budget, its not going to get any easier with a home loan, so it’s good practise.

Is there any short cuts?

If you have a partner, you can combine your resources and put yourself in this position quicker.

If there is a gift of money or inheritance that helps you along, you may only have to show a savings record of 6 to 12 months to get approved. Parents can sometimes help with the equity in their home, to put up against your home, but once again you will have to show at least a 6 to 12 month history of being able to save and show your ability to put away that amount of money.

If you need help planning this out, contact Money Buckets and talk to a consultant to get an overview of your situation.

Those who have addressed their Debt Problems, turned things around and started saving, will be in a good position to move into their own home at the completion of their Debt Agreement.

If you haven’t been able to save while in your Debt Agreement, start planning to save once the Debt Agreement Payments stop. Once again a quick chat with a Money Buckets Consultant could put you on the right Track Phone 1800 825 010

10. THE ADDED COSTS OF PURCHASING PROPERTY

Buying a property carries more costs than just the purchase price, so don’t forget to account for these extras when considering a Home Purchase. You will need sometimes to get quotes.

In addition to moving costs, council rates, strata fees, renovations and furniture, homebuyers face additional fees to complete their property purchase. Here a quick list of what to ask the cost of.

Stamp duty

Stamp duty must be paid in order for mortgage documents to be legal. It’s essentially a tax levied by the state or territory government on the purchase value of the property or the market value, whichever is greater.

Legal costs

The legal transfer of ownership of the property will require a solicitor, conveyancer or settlement agent. He or she will perform property and title searches to ensure the seller is entitled to release the property, for instance, that they are the legal owner of the property, that there is no council approval problems and by checking any strata body corporate records for example.

Inspections

Pest and building inspections are an added cost, but they can save you from dealing with a major building problem after the purchase is complete. The amount is often dependent on the size of the property.

Agent fees

First-home buyers don’t have to worry about paying commission, since it is charged to the vendor of the property, most often as a percentage of the sale price. However if you’re selling your current home to buy another, you’ll probably have to take these fees into account when considering the cost of selling and buying.

Borrowing costs

Lenders have application, valuation and settlement or loan approval fees that vary depending on the lender. Finance Brokers are familiar with these fees and can help you take them into account when choosing a lender.

Insurance

Depending on your loan-to-valuation ratio (LVR), you may be required to take out lenders mortgage insurance (LMI) Although the borrower pays for it, LMI is not insurance for the borrower; it protects the lender should you default on the loan. The Insurance company may then still chase you for any remaining Debt once the property has been sold. You will also need building insurance if you are not purchasing a strata property.

11. THE SMART WAY TO BORROW FROM THE MUM AND DAD BANK

Parents love their kids and want to help them out. Kids love being able to realise their dreams and their folks can be a big help. But sometimes ‘it’s complicated’.

With the property market moving further out of reach, flat wages and higher personal debt, financial stress is on the increase. And the risks of family loans are very real.

Thankfully, there is a smart and safe way of arranging a loan from the ‘Mum and Dad Bank’.

With the P2C® loan, Fast Debt Help can offer young home buyers the purchasing power they need right now, without needing parental guarantees or risking retirement savings.

The P2C® is a formally documented loan and therefore not a gift. There are many benefits for both generations.

The borrower

All the paperwork is handled in one transaction.
You and your parents have flexibility to agree on the dollar amount, loan duration and initial interest rate.
You can get the home you choose, without being limited by lock-in finance deals.
You can still apply for the First Home Owner’s Grant or Stamp Duty concessions.
You have access to funds lent for any worthwhile purpose: property, tuition, debt consolidation or investment.
Your inheritance is safe from relationship rough patches like marriage breakdowns, family feuds or sibling battles.

The lender

Your credit history is unaffected.
You aren’t risking your family home or your life savings through giving guarantees.
This is a secured investment with a registered Fund of over 14,000 retail investors, each receiving a monthly income.
You can set the terms and conditions of the loan and can advance up to 105% of the property purchase price.
You are free to waive/forgive the debt or to enforce it in future.
You can combine the P2C® process to co-invest with other families assisting their children.

Managed risk

Parents who want to make a P2C® loan, though not currently cash ready, are free to borrow against their existing assets. Repayments made by the borrowers can be set to cover the lender’s own loan repayments. In this case First Debt Help recommends that you take independent financial and legal advice.

Should the borrower default on the P2C® loan, the property is subsequently sold. If there is a shortfall in this sale, the parents will lose some capital. Parents can grant a stay of recovery proceedings in relation to their investment if they wish.

12. GUARANTEEING YOUR CHILDREN'S LOANS

Rising house prices are making it increasingly difficult to enter the market. Parents who guarantee their children’s loans can help, but it is important to understand how this can impact the parents’ retirement or investment plans.

Being a guarantor generally means using the equity in your own property as security for your child’s home loan. It can help a first-home buyer to secure finance for a property they can afford but may not have a large enough deposit for, and to avoid the added cost of lenders mortgage insurance.

There are other advantages as well. By guaranteeing a loan, you’re helping your child enter the property market sooner. Also, your child may be able to buy in a more desirable location and a home that better suits their needs or needs less spent on maintenance. If they did it on their own, they may need to go further out of the city or perhaps settle for fewer bedrooms.

The risks

You may want to help your child but it’s important you don’t go into the transaction blindly.

The main risk of guaranteeing the loan is that, depending on the structure of the guarantee, you will be liable should your child default on the payments, either by taking over the repayment schedule or handing over a full repayment.

If you can’t make the payments, the lender may sell the home used as security. If this is still not enough, the lender may also require you to sell assets to meet outstanding debt.

Another major risk is a bad credit rating if a default occurs on the home loan.

And also please note, if you need to borrow money for another purpose, your property cannot be used. If you want to buy an investment property, you can’t use the equity in your own home because it’s already tied up in the child’s loan.

Minimising the risk

There are ways to minimise the risks. The most common is using a monetary gift or private loan. This involves borrowing money against your property in your name, and then gifting it to your child. You should have a legal agreement in place for the loan you give.

Another way to avoid the risk is to buy the property jointly with your child. This means your name is on the title and you have a certain percentage entitlement.

Also some Lenders may permit you to only Guarantee the 20% of the property needed for the Deposit and to avoid Mortgage Insurance. As the value of the property rises or the Loan is paid down, you can be released from the guarantee. This may even be kept as a separate loan to limit the amount of your exposure to the guarantee and can be paid out earlier to clear the guarantee if necesary.

When it comes to guaranteeing a loan, it’s always sensible to speak to a professional. You should also consider asking a legal professional to draw up a formal loan document outlining all conditions of the loan, interest rate and expected repayments.

Finally, outline an exit strategy. Financial situations change and, as the loan decreases with repayments, there may be an opportunity for you to withdraw your support to free up your assets without impacting your child’s loan.

13. FLYING SOLO AND BUYING A HOME

Are you flying solo and starting to think that buying a property will never be possible? There’s really no need to wait for a knight, or lady, in shining armour to come along, as securing finance on a single income does happen.

Of course, just as if you were a couple, your borrowing capacity will depend on your income and commitments. But there are some differences. A single will probably have different requirements of a property than a couple would. So consider: are you looking for a residential or investment property? What kind of deposit are you considering? Do you have dependents or children?

You may also need to take extra precautions without a second income to fall back on. Some MFAA Approved Credit Advisers recommend that single-income clients sign up for mortgage protection insurance, in case they lose their jobs or suffer from an accident that could impact their ability to make repayments.

One example is a single first-home buyer who wanted to live in the eastern suburbs in Sydney. She decided to downsize from her large rental and buy an affordable studio in which to live.

We looked at how much she’s paying in rent and what she’s currently saving. Then we looked at what was a good, comfortable spend for her and worked backwards from that.

It wasn’t as if she had to sacrifice everything, she just went smaller. As a single person, she decided she’d be happy in a studio, as opposed to a bigger apartment in a location she wasn’t as happy with.

Another happy client was a young professional who purchased her first investment property.

She used her 10 per cent savings on stamp duty, mortgage insurance and her initial deposit. The property is now being rented out and is a good investment with borrowed return.

An option for singles is to consider purchasing or building outside metropolitan areas in order to lower costs. When deciding whether such a purchase would be owner-occupied or an investment, you need to weigh up relocation or commuting costs, as well as any income losses associated with moving away from a city, against benefits available to first-home buyers who plan to live in their properties.

Often an investment property can put you into the market and keep growing your assets, until you can afford to buy something you want to live in. Or if you develop a portfolio of Investment properties, it may eventually provide enough income so you can rent in a much better location than you can afford to buy in. Especially if you are continually on the move, or intend to be.

14. WHEN TO REFINANCE MY MORTGAGE

A quick chat with a Money Buckets Consultant could put you on the right track Phone 1800 825 010

15. THE COST OF REFINANCING

Exit costs when refinancing

Refinancing can be a great way to save money if you believe you are paying too much for your loan, but there is more to it than just finding a loan with a lower interest rate and making the change. Before making the switch, ensure the savings you could make outweigh the fees involved. Here are the different exit costs to consider:

Exit fee

Although loans taken out after 1 July 2011 are not subject to deferred establishment, or exit, fees, those taken out prior may still be. Also known as ‘early termination’ or ‘early discharge’ fees, they can sometimes be paid by your new lender but are normally applied to an early contract exit.

Establishment fee

Also known as ‘application’, ‘up-front’ or ‘set-up’ fees, these cover the lender’s cost of preparing the necessary documents for your new home loan. They are payable on most new loans, and the alternative to not paying this particular fee is being charged higher ongoing fees for the life of the loan.

Mortgage discharge fee

Covering your early legal release from all mortgage obligations, this fee is not to be confused with an exit fee. Also known as a ‘settlement’ or ‘termination’ fee, its purpose is to compensate your lender for the revenue it may lose due to the contract break.

Lender’s mortgage insurance (LMI)

The non-transferrable premium means that if you hold less than 20 per cent equity at the time of your refinance, you may have to pay LMI even if you paid it on the original loan. Extra care is also needed here because, whether or not you hold 20 per cent of the original valuation of the property, you may not if the property’s value has decreased and; while LMI may not have been a consideration at all in the original loan, it may be payable on the refinance.

Stamp duty

If your purpose for making the switch is to increase your loan amount, for example to fund renovations, then stamp duty will apply only to the difference between the original loan amount and the refinanced loan amount. Different rules apply in different states, so it’s worth speaking to your broker to see if this charge applies.

Other government charges

Fees are applied for the registration and deregistration of a mortgage so that all claims on a property can be checked by any future buyers. Varying from state to state, these can potentially add up to $1000 or more.

Break fee

If you were on a fixed rate loan, your lender is likely to charge you a fee for ‘breaking’ out of the loan term. This fee varies depending on the amount owed, the interest rate you were locked into, the current interest rate and the duration of your loan.

Although some of these fees can be negotiated by a broker, the total cost can be substantial. Fast Debt Help can help you achieve your goals while maintaining your capacity to service the debt. A finance broker can also ensure you are only paying the relevant fees for your unique circumstance.

16. BRIDGING LOAN OR DEPOSIT BOND?

When selling one property and purchasing another, the funds from the sale may not be available in time to use for the purchase deposit. There are typically two options in this scenario: a bridging loan and a deposit bond.

Bridging loan

A bridging loan is a short term home loan designed to allow you to initiate the purchase of a property before you have sold your previous one. Loan terms are often between six and 12 months and bridging loans generally have a higher interest rate than traditional home loans. This can be a great option but carries some risk. It’s important to know that you will be able to make the repayments even in a worst case scenario where your old house doesn’t sell as quickly as you’d hoped or where property values may change unexpectedly. It’s important to talk to a broker and ensure that you have the capacity to service the loan for the period of time required.

Deposit bond

A deposit bond is a tool that, upon agreement with a vendor, can replace the requirement of a cash deposit when purchasing a property. This can be a relatively cheap method of initiating the purchase of a property usually without the need to liquidate your other assets. The cost of a bond can vary depending on transaction complexity and the term being sought. In a simple transaction, it is likely to be approximately 1.3% of the amount of the deposit. For example, for a deposit guarantee to the value of 10% of a property price for an individual purchasing an established property in NSW and repaying that guarantee within 6 months on a $50k deposit for a property purchase of $500k, the fee will be about $650.*

A deposit bond is issued by an insurer to the vendor of the property for either the full or partial deposit required. At settlement, the purchaser must pay the full purchase price including the amount of deposit. At this point, the deposit bond becomes void.

If the purchaser fails to complete the purchase of the property, the vendor is able to give the deposit bond to the insurer who will provide them the entire value of the deposit bond.

The insurer will then seek reimbursement of the deposit bond from the purchaser.

17. BUYING AN INVESTMENT PROPERTY THAT ALREADY HAS A TENANT

There are plenty of upsides to buying an investment property that already has a tenant, as well as a raft of risks. Here’s how to minimise them.

Purchasing an investment property that already has a tenant means you collect rent from day one, with no vacant period and no lease fees to find a new tenant. The lease just carries on as it did before you purchased the property. Sound good? Of course it does. There are some possible problems to be aware of though.
It’s very important to check whether the lease on your prospective investment is current or the tenants are on an expired lease. If the tenants are off-lease, they can give a short period of notice and vacate the property, so those upsides mentioned above could come to nought.
A current lease, on the other hand, offers security, it also means that you are stuck with the lease, its conditions (or lack thereof), the current rental return and the tenants.
There are steps you can take to minimise your risk:
Make sure the bond has been lodged properly. Your agent will arrange for the bond guarantee to be transferred into your name on settlement.
Check the property condition report, making sure that it is a complete and accurate record of the property as you inspected it.
Ensure there are no rental arrears. If there are, or if a landlord has agreed that rental arrears can be taken out of a bond payment, stipulate that this amount is deducted from the purchase settlement amount.
Ask the leasing agent about the tenants and their payment record. You cannot demand that you meet the tenants, but attending the open house will give you a sense of how they live in the property. If possible, sight the tenants’ original application for the property and rental ledger.
Look at the yield for rental properties in the area and compare them to yours. You won’t be able to increase the rent until the end of the lease.
Be aware of any concessions or conditions that are either in the lease or have been agreed with the landlord or property manager, because these will become your responsibility. For example, does rent include electricity or other utilities? Has the landlord agreed to install a new oven or paint a room?
Of course, if you love a property but have doubts about the tenants, the lease or the managing agent, all is not lost. You can easily change the managing agent when you settle. You can also make vacant possession of the property a condition of settlement. You may need to wait until the lease expires to settle, but you aren’t taking on the previous owners’ problems and responsibilities.

If your only problem with a tenanted property is the rental yield, keep in mind that increasing rent on a good, long-term tenant may well drive them away anyway, so do your sums. Work out whether the amount you’d like to increase the rent by equates to more over the year than the lease fee plus any rent lost if your property is vacant for a few weeks.

18. RENTVESTING

Rentvesting – enter the property market without sacrificing your current lifestyle

As property prices continue to rise, purchasing in a centrally-located or sought-after area is out of reach for the average working millennial. Instead, many are opting to rent rather than buy as it means not having to compromise their inner city or beachside lifestyle. But for those who are still eager to enter the market, there is a way to get the best of both worlds.

‘Rentvesting’ is the term coined for when you purchase a property for investment purposes in an affordable location and continue to live and rent in the area of your choice. An example of how the market is evolving, it is a wealth creation strategy that is popular among the younger generation due to the flexibility it offers in comparison to being an owner-occupier.

“Millennials aren’t interested in purchasing a property in the outer suburbs and then having to commute into the CBD. Rentvesting allows your rental income to cover the mortgage expenses, so you can keep living the lifestyle you want without it costing you any money.

For this strategy to work, you’ve got to be a good saver and there needs to be a focus on delayed gratification, It’s all about living within your means. Don’t spend big at the start while you’re building it up. Step away from the mentality of negative gearing and tax minimisation and buy neutrally, or ideally, a positively geared property as this provides higher rental yields.

A recent survey highlighted an increase in ‘rentvesting’ from 21 per cent of investors to 37 per cent over the past twelve months alone. (2017) But while this strategy may appear ideal to many, it’s not suited to everybody.

It’s still a foreign way of thinking, in the past, the great Australian dream was to buy a home on a quarter acre block and then do everything you can to pay that down as fast as possible in the hope of living debt-free. ‘Rentvesting’ is quite the opposite. It says we’re okay with good debt as long as we stick to our budget and keep using the money to invest further. You’ve got to have an open mind and be comfortable with debt.

To ensure you have the means to make ‘rentvesting’ work for you, try your budget out at MoneyBuckets.com.au or talk to Money Buckets about other strategies that will allow you to maintain your current lifestyle.

19. RULES OF INVESTMENT

When you’re trying to secure finance for an investment property, it’s important to keep a few simple rules in mind to make sure you get the best deal possible and will be able to afford the repayments, come what may.

If you’re thinking about purchasing an investment property, it’s important to manage the risks adequately. For example, you shouldn’t rely on rental returns as a guaranteed income to meet loan repayments, as there are times when a property may be vacant or hard to fill immediately and some months the rental return on a property may be diminished by maintenance costs.

Starlight Home Loans will help a borrower find the right product, so that he or she can afford the repayment. All Loan Budgets will have had a two per cent rate hike factored into the rate. This is to make sure you can still make repayments if, or when, mortgage rates go up.”

Most investors will already have put some thought into where they would like to invest and will have an approximate price-range in mind. While a loan calculator is a great resource to start out with, use Money Buckets Budgets and Starlight Home Loans expert knowledge to sense-check and flesh out your plans.

With access to property data and trend analyses like RP Data’s, a finance broker can pull property reports for you, detailing how the area has performed in the past as an investment, the average median house price or rate of return and how much the property values have increased over the past five or six years. These are details that investors generally can’t access.

Even better, if you meet a local finance broker in the area where you want to invest, he or she will know that particular market and be able to provide a lot of detailed information from working there every day.

20. WHY PROPERTY INVESTORS NEED SAVINGS

Urgent maintenance is an unavoidable aspect of being a landlord, so having a cash buffer set aside will help you deal with any unexpected problems.

When renting out an investment property, having access to extra cash is vital for two reasons:

to cover the costs of maintaining the property, giving it the best chance of remaining tenanted; and
to cover the cost of the mortgage should you lose your employment or rental income

A buffer ensures that you are not stretched to your financial limits, but rather comfortable while on your investment journey.

Ideally, your buffer would sit in an offset account against your mortgage, so that you have immediate access to the money while at the same time reducing the principal, and therefore the total interest payable on, your loan.

Before calculating a buffer, have a budget and savings plan in place that identifies your accurate living expenses and ability to save. A buffer of three to six months worth of loan repayments and living expenses may be an investment saver.

For those who find themselves needing to improve a property without a buffer, there are short-term options available. Personal loans and credit cards may cater to urgent funding, but they do attract higher interest rates and fees.

It’s imperative to have a strategy in place to pay back this debt as soon as possible if it is needed. An example could be to refinance your property and draw down equity to pay back the loan, but ensure that you revisit your buffer strategy as well.

21. REVERSE MORTGAGES EXPLAINED

Reverse Mortgages

If you would like the financial ability to spend your retirement how you choose, with independence and dignity, you should talk to us. A Reverse Mortgage will allow you to borrow against the equity in your home without having to sell it – releasing funds for a well-earned and comfortable retirement.

How a Reverse Mortgage Works

Many seniors are now living in homes that hold much of their wealth. By accessing some of this wealth without having to move, you can do the things you need, or have always wanted to do and live the retirement you deserve. A Reverse Mortgage enables you to use some of the money tied up in your home without having to sell it by taking out a loan secured against your home. The total loan amount, including accumulated interest, is usually repayable when you move permanently from your home; this could occur when you sell your property, move into longterm care or pass away. You continue to own and live in your home for as long as you wish, benefiting from any potential increase in property values. Making regular repayments is not necessary, although you are free to do so at any time. The amount you can borrow is typically based on your age, property location and the value of your home. A Reverse Mortgage is designed to help you manage your financial requirements by accessing only what you need, as and when you need it.

What can I do with the money?

A Reverse Mortgage is yours for you to do whatever you choose. Many people use the loan to fund home repairs or improvements, repay debt, travel to visit family members, pay for medical procedures, upgrade to a more reliable car, assist with in-home care, or a host of other uses to make life easier and more comfortable. Fundamentally, a Reverse Mortgage is designed to help you live a better retirement. A Reverse Mortgage is designed primarily to release funds to improve your quality of life. You should review carefully any proposal that involves borrowing to invest, and we strongly recommend you discuss any such proposal with a lawyer or financial adviser and your family. You should contact Centrelink to discuss any impact borrowing may have on your pension or other government entitlements.

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