All Mortgage Brokers are not born equal. Like any service business, the quality of brokers’ offerings can vary from company to company and from broker to broker. This article will explore the qualities that you should avoid in a potential mortgage broker. Use this information to find a broker that will take the time to understand your situation and secure a mortgage product that’s right for you.
In order to avoid being ripped off, you need to take your time and compare mortgages from a few vendors. This needs to be done correctly, if you desire a good result. You should also understand that the type of mortgage you choose will go a long way to determine the rate you pay. Other factors that might impact on rates include your deposit, credit rating, and others. Listed below are some of the steps that would help you engage in successful and great comparison shopping. They are as follows:
Paying off a mortgage results in more than just owning a home. The value of your home is a form of savings that provides negotiating power for other loan arrangements or investments. For many people, the downside of making regular mortgage repayments is the lack of ready cash or additional savings potential. A home equity loan can provide the solution, by allowing home owners to borrow money against the value of their home. This money can be used for any number of home improvements or other purposes.
Owning a home remains an achievable ideal for most Australians. Values have soared, but it’s worth noting that many sought-out neighbourhoods were fairly humble settlements just a couple of decades ago. Interest rates also remain low, often at 4% or less, providing lower repayments and a positive outlook for prospective home buyers.
The initial climb onto the property ladder can be slow, but wages do incrementally rise, and every passing year sees an increasingly large chunk of the outstanding loan principal paid off. During this time, the value of your home (investment) will significantly increase, and maintaining that investment could involve an injection of serious cash. A home equity loan is the answer.
What is a home equity loan?
Firstly, home equity is calculated as the amount you owe subtracted from the value of your home. In other words, if your home is valued at $400,000 and you owe $100,000, your home equity is $300,000. This is potentially the amount you could borrow, taking into consideration your ability to make repayments for the term of the loan.
The rules governing home equity loans in Australia are relatively simple. If you have commenced paying off a mortgage and possess over 20% equity on the property, you have a good chance of a home equity loan approval. The amount you can borrow is also determined by factors such as income and personal finances. Any encumbrances on your property could also affect the application.
What is a closed-end home equity loan?
A home equity loan can be either closed-end or open-ended. A closed-end loan is ideal for making a single purchase with a set amount of money. In essence, a closed-end loan is a lump sum payment with similar conditions to your initial mortgage, and is often used for major home renovations. An open-ended home equity line of credit (HELOC) is best if you require ongoing funds that are available to replenish and redraw upon, similar in function to a credit card but with greater borrowing power.
Home equity loan benefits:
Refinancing your home loan is a strategy that could save you thousands of dollars in the long run. It is a valid and sometimes necessary approach to ensure you are getting the best possible deal, although there are also barriers that could make refinancing your home loan a bad idea.
Refinancing is a good idea in some situations:
Your bank or credit provider is taking a calculated risk every time they lend money. In order to minimise the risk they will require proof of your ability to repay the loan, and an up-front deposit to protect themselves against any loss if the loan is terminated early.
Your home loan borrowing capacity
As the borrower, you will need to understand your borrowing capacity. This is an amount that you can comfortably repay according to your financial situation. Calculations that determine your borrowing capacity are easy to make by using an online calculator. Your lender will require documents that verify your calculations before commencing with the loan application and approval.
Your borrowing capacity will take into consideration:
- Your annual income
- Monthly expenses
- The type of property
- The loan term (duration of the loan repayments)
Most banks and credit providers work on the principle that your repayments are no more than a third of your gross salary.
Approval on principle
You may have already started to search for a new home, but still have no idea when to apply for a loan or how much to ask for. Your loan calculations will provide a guideline for getting a conditional approval (approval in principle) from your bank. The approval in principle will assist in a couple of ways:
- Real estate agents will treat you as a serious buyer
- You will understand exactly how much you can borrow and the deposit required
Approval in principle is usually valid for three months, giving you time to look around and investigate potential properties. Normal lending criteria is taken into consideration for final loan approval even if it has been approved in principle. You will require up-to-date documents that verify your income. Identification and credit checks are also a part of the process.
Applying for a home loan
It’s a good idea to know who you are dealing with when borrowing large amounts of money. For this reason, most borrowers prefer to interact directly with their bank manager or representative. If you are taking out a home loan for the first time you will surely have questions that are best answered in person. It’s important to fully understand your loan and any conditions that are attached to it.
In many cases, you can also apply for a loan online. It is simply a matter of providing your bank or credit provider with all the requested documentation, and they will consider your application and let you know if it has been successful. You can also call your bank over the phone and make some initial enquiries that will help you determine the best way forward.
The more you pay as a deposit on your new home, the less you will need to borrow. Saving a larger deposit can give you more flexibility of choice, either by purchasing a more expensive home or by making your repayments a smaller percentage of your income. A loan term of 25-30 years is quite a large chunk of time, and nobody wants to be stretched financially over such a long duration.
If your present rental or living situation is comfortable, and your savings are building nicely, it’s worth considering keeping your home buying plans on the back-burner for another year or two. A larger deposit will also prove to your lender that you have good money management skills and the restraint required to make regular loan repayments.
Your lender will generally expect your deposit to amount to around 20% of the house price. If you take out loan insurance (an extra monthly expense) the lender could allow you to borrow up to 95% of the house price.
The information in this article is a guideline only. Contact your preferred lending institution for further information.
Before discussing the different types of home loans it will help to understand what all home loans have in common.
The application process: You will need to show your bank manager or lending institution that you are borrowing within your means and can afford to make the repayments.
Your loan is secured by your home: In other words, if for any reason you fall behind on loan repayments, your bank or lender has the legal right to sell your home to cover their investment.
The deposit: A percentage of your new home’s value is usually paid up-front in order to secure the loan.
It’s easy to get excited when inspecting properties, and it’s not uncommon for people to dream beyond their means. You will need to work out how much you can afford to borrow before shopping around for your home. This will give you a realistic picture and help you avoid disappointment later on. Now it’s time to ask yourself the hard questions:
How much deposit do you need?
- By making a larger initial deposit you can borrow less and therefore have lower repayments.
Is it your first home?
Many people misunderstand how interest is calculated. For example, when investigating a $100,000 loan at 10% interest, a novice borrower might think the total amount of interest to be paid will be $10,000.
The above calculation would be accurate if the $100,000 (plus $10,000 interest) is paid off in one year, as the interest rate is a yearly cost. However, home loans are a long term commitment where repayments chip away at the amount owing over time.
Putting it in perspective: a typical repayment rate on the $100,000 loan at 10% interest could be $1,000 per month, which would add up to $12,000 paid over one year. In other words, you will have paid $10,000 interest plus $2,000 off the principal amount. This means that in the second year of your repayment schedule you will be paying 10% interest on the remaining $98,000 of your loan.
It’s slow going at first, but with each passing year your $1,000 monthly repayments will more rapidly pay off the lowering interest, plus a greater percentage of the principal amount. In other words, you need to be patient to see results, and the last ten years of your loan repayments will be an exciting time as you watch the amount owing quickly disappear.
Reducing interest on your loan
There are various strategies that can help to pay the loan off faster and reduce the overall amount of interest you pay.
Make fortnightly repayments: If you halve your monthly repayment and pay that amount fortnightly you will be making two extra payments every year. This will more speedily reduce the amount you owe and you’ll also pay less interest over the duration of your loan. If you use the above strategy on a 30 year $250,000 loan at 7% interest per annum, you will save around $85,000 in interest and the loan will be paid off more than 6 years ahead of schedule.
Increase your regular repayments: If you have money to spare, this method will achieve similar results to the above equation. By paying around $50 extra per fortnight on your $250,000 loan you will have it paid off almost 5 years ahead of schedule.
Shorten the duration of your loan: Using the same $250,000 loan example and switching from a 30-year term to a 25-year term will save you close to $70,000 in interest costs.
Make lump sum payments: If your financial position improves there may be ready cash that can be used to pay off the loan. Even $15,000 paid toward the $250,000 loan will reduce the loan duration by close to 5 years and save you more than $20,000 interest costs. Always check the conditions of your contract though, as there could be a fee attached to lump sum payments if you are on a fixed rate payment schedule.
Another way to save is by keeping your monthly repayments the same even if the interest rate drops. Avoid the temptation to lower your monthly or fortnightly repayments and you will reduce the principal faster while also saving on overall interest costs.
Fixed interest rate versus variable interest rate
By far the two most common type of home loan contracts involve either fixed or variable interest rates. They both have individual advantages (and disadvantages) and there may be times during your loan term that you switch between the two.
Variable rates: Your variable interest rate will go up or down according to overriding financial conditions. Your lender has the right to raise or lower the variable rate at any time. On the plus side, you have the option to make extra payments without incurring any fee.
Fixed rates: Your fixed interest rate will be locked in for a period that is typically between one and five years. You have the benefit of knowing exactly how much your payments will be during this time. On the downside, you won’t benefit if interest rates fall, and you may not be able to make extra repayments on your loan while you are locked into the fixed rate.
Understanding which home renovation loan best suits your project is the first step toward a successful outcome. The ‘plan’ in financial plan is more than just an idea; it’s an essential factor in making sure you add maximum value to your premises. Unless you have savings set aside for your home renovation, you need to understand what type of loan best suits you.
It’s a sensible first step to talk to your lender prior to making a detailed plan. Provide your lender with a general idea of your aspirations, along with details of your present financial circumstances including fluid savings and accumulated assets. Your financier will then be able to give you an idea of your borrowing power, and arrange pre-approval for your loan. Once you know exactly how much you can spend you will be able to enter into discussions with your chosen builder.
There are several different options for a home renovation loan. Here are a few choices to get you started.
Personal Line of Credit
This loan type is very popular for smaller projects and also ideal for long-term renovations carried out over time. A single loan application allows you to access revolving credit as you need it until you reach your credit limit. By keeping tabs on monthly statements you will be on top of expenses and you will only be paying interest on funds you have used. In other words, if you have a $20,000 personal line of credit but have only used $5,000, you will only be paying interest on the $5,000. Another benefit is that as your credit balance is paid off, you can re-borrow without reapplying for another separate loan.
A personal line of credit is similar to the credit facility on your regular bank transaction account, but usually attracts a lower interest rate. It’s pre-approved against your accrued savings.
A Personal Loan
A personal loan for a home renovation project carries the same stipulations as any other personal loan. Regular payments are made according to fixed or variable interest rates, with the loan typically extending from between one to five years. If you require more credit once the loan is paid off you will need to re-apply for a new loan. Taking out a personal loan remains the first choice for many renovators: the repayment schedule is regular, and the risk of overspending is greatly reduced.
Re-financing your existing home loan
If you are planning a major renovation and need to spread repayments over a longer period, re-financing could be the most sensible option. You could be approved to borrow up to 90 percent of your home’s value (minus your outstanding mortgage balance). Mortgage rates are usually much lower than credit card and other loan rates, meaning you will pay less interest. There is also the option to pay mortgage insurance upfront to safeguard against unforeseen circumstances.
Using your Home Equity
If you have owned your home for some years you will have noticed its increased value. An equity loan allows you to borrow against the increased value of your premises, and is a sensible way to finance major renovations. Re-investing potential profits into your home renovation is economical and often comes with preferential interest rates. A home equity loan usually incurs no cost apart from legal and appraisal fees.
By discussing the options with your preferred lender, you will be able to commence work on your dream home renovation project without unnecessary anxiety regarding your home ownership – which is after all, the most significant investment move most of us will ever make.
Fulfilling the lenders’ criteria
Sometimes the process can seem like one hurdle after another, but you need to realise that each step attained is one step closer to approval. There are no short-cuts, and the criteria are in place to protect both the lender and the applicant.
1: Lenders are legally bound to make certain you will be able to make your mortgage repayments on time. A range of factors will be looked at, including present and past income history. Ideally, a loan applicant will show at least two years of consistent earnings in their current job, or a stable career path in the same field over a number of years. If your lender determines that your earnings are enough to cover repayments, the first hurdle of the loan application is crossed.
2: The second step is also related to income levels, and involves ascertaining whether your income is secure and ongoing. Consistent employment history is taken into consideration, and evidence of employment and wage stability will be required from applicants who have changed career paths. If you are self employed a lender will examine your past as a guideline for the present.
3: A lender will also consider the unfortunate circumstance of your becoming unemployed, injured, or adversely affected financially. Your bank or lender will need to be satisfied that if there is a loan default, they can cover their loan by selling your property. A loan-to-value ratio (LVR) of 80% of the property value is acceptable in most circumstances, and can sometimes be increased to 95% LVR by taking out lenders mortgage insurance.
4: First home buyers are scrutinised fairly strictly. Mortgage insurers will need to know how capable you are at managing and saving money. They will generally expect at least 5% of the property purchase price to be saved if you are borrowing more than 90% of the property value. Savings should not be confused with a deposit attained from sales or gifts. The only other way a property can be purchased with little or no money is by a parent offering their property as guaranteed security on the loan.
Reasons your application may not be accepted
Lenders rely on honest and transparent dealings with borrowers and there are several reasons a loan application can be rejected.
1: A lender will investigate your track record. An attempt to convince a lender based on future prospects for higher earnings will fall on deaf ears. Unfortunately, this can seem unfair on those who have been busy raising children or caring for elderly family members. Repeatedly changing jobs is another red flag to lenders. Nevertheless, some lenders will be more flexible than others and it could be worth shopping around.
2: Lenders will need to be satisfied your property has secure re-sale potential in case of loan default. For example, it’s relatively easy to sell a suburban 3 bedroom home, and the further removed your purchase choice is from that ideal the more difficult it will be to secure a loan. Lenders are more concerned about property limitations rather than potential.
3: A common reason for loan disqualification is bad credit history. Every application for credit shows on your history, and too many credit and loan applications over recent years will reflect badly and possibly result in rejection. Any past credit problems will make lenders hesitant to deal with you. Credit disputes or outstanding repayments should be cleared before you apply for a home loan: and remember your credit problems remain on record for five years.
4: Failure to disclose information relevant to your loan application will result in further investigation from the lender, and possibly the rejection of your application. Obtaining a loan by deception is often a criminal offence.
Failure is the pillar of success
Your lender will inform you of reasons for your loan application being rejected. You may then be able to re-organise or bolster finances to satisfy the lenders needs. It could be a case of asking family for some financial assistance to improve your chances. If your savings or employment history are not acceptable, don’t despair as it’s only a matter of proving yourself over a little more time.
The ideal scenario