First Home Buyers

The choices you make when taking out a mortgage have long lasting implications – so you need to approach borrowing with a healthy attitude.

When determining your borrowing capability, start by measuring your income against expenses, including potential mortgage repayments. While everyone’s circumstances and expenses are different, a good rule of thumb is that no more than 35 per cent of your gross monthly income should go towards servicing your mortgage. Lenders will also need to assess your circumstances to work out how much to lend you. As a general rule, the bigger deposit you have and the higher your income, the more they should be willing to lend.

Don’t over commit. Borrowing too much can be a big strain on your personal life and lifestyle. Houses are like stepping stones – it’s probably best to start with something affordable and move towards your dream home as your personal earning capacity and equity grows.

Consider how any rate rise may impact on your ability to make repayments and factor that in when setting your borrowing limits. And don’t forget, there are added extras when purchasing a house, for example, stamp duty, pest & building inspections, solicitors and application fees, as well as ongoing commitments including council rates, possible strata or body corporate costs and utility bills. Consider these costs when determining how much you can borrow.

Your lender will assess your loan and affordability to estimate a maximum borrowing amount. However, it’s essential that you work out what you can afford and what repayments you feel comfortable with.

There a number of ways that you can borrow for your first home. If you are one of the lucky ones who have a 20% deposit saved plus stamp duty & legals, then you are ready to go. Many first home buyers struggle to save a large deposit, especially if they are currently renting.

Lenders Mortgage Insurance (LMI) helps Australian homeowners enter the market earlier through allowing you to borrow a higher percentage of a property’s value.  Through financing a higher proportion of a property’s purchase price, lenders take on a higher level of risk in the event you fail to meet mortgage repayments, and the property needs to be repossessed and sold. LMI is therefore paid by you to insure your lender against loss should this happen. It is important to be aware that LMI only covers the lender if you default on your loan payments and the lender is unable to secure the full outstanding debt still owing, when they sell your property. LMI does not provide you with any cover.

LMI is usually paid as a one-off lump sum at the time of settlement but in many cases it can also be added into the loan amount and paid off over the life of the loan – a term known as capitalising the LMI.

Another options is, that a family member could help you get into your home faster by allowing you to use a portion of equity in their home as additional security for your loan. This reduces the need for a large deposit and can avoid the cost of LMI. Once your property has grown in value (allowing for normal market increases, together with the loan balance reducing due to your repayments) to bring your borrowing to within 80% of the current property value, your family guarantee can be released.

Canberra Mortgage Brokers will go through all options available to you, loan products and features, interest rates and fees. They will assist you to ensure you are getting the most appropriate mortgage for your personal situation. And, their service doesn’t end there as they will work with you year after year to help you pay your home loan off sooner.

Investors

The idea of property investment is one that appeals to many Australians but is sadly often overlooked because of the misconception that it is only within the reach of the wealthy. The reality is that with the right finance, planning and strategy, an investment property may be easier to achieve than you think.

Property buyers are typically required to contribute 20 per cent of the property’s value, and for some this can be a stumbling block. But existing home owners may be able to unlock equity – or the increased value that has built up in their own home to cover some or even all of the down payment on an investment property.

If you are interested in buying an investment property or building a property investment portfolio, don’t make the mistake of waiting until you have fully repaid your own home loan. Making use of the equity in your current home, means you will have more than one property growing in value. With financial and tax advice, and the right property, negative gearing may be a tax-effective investment strategy for you. On the other hand you may decide on a property that supplements your income through positive gearing.

Once you have decided what strategy is important to you, then of course you have the task of deciding where to buy. It’s well known that real estate agents act on behalf of the vendor, but did you know that there are also professionals that provide a service to buyers? Buyer’s agents are gaining popularity with time poor buyers and those with less experience or confidence in the market. They can be engaged to identify suitable properties and even take on the negotiations with real estate agents or vendors.

For investors it’s worth noting that the cost of engaging a buyer’s agent may be tax deductable as with many of the other associated costs involved with a property purchase.  Charges can vary from a flat fee to a percentage of the property purchase depending on the services provided. You may be able to pay a smaller amount if you are only after representation at an auction. If engaging a buyer’s agent appeals to you, look for a recommendation and make sure you check their credentials, fees and charges carefully before engaging them. It is important to check that your agent is licenced.

Rhonda has extensive experience in assisting clients establish investment property portfolios. Investing in property can be challenging and exciting all at the same time. But, with the right assistance and information you will soon be on the right track.

Refinances

Your life never stands still, and neither should your mortgage. If change is afoot, it might be time to search for a more suitable product.

If your loan doesn’t suit your lifestyle or personal situation you could be wasting thousands of dollars a year on extra interest and fees. You may be able to refinance and find a loan that’s more appropriate for your needs, with more suitable features and a competitive interest rate to match. There are so many lenders and alternatives now, that you owe it to yourself to regularly check what is available to you.

As a client of Canberra Mortgage Brokers we will carry out health checks for you, either at rollover times for your fixed rate loans or at any time you just want to make sure you that you are still on the right track. Rates and mortgage deals are constantly on the move so it is important to make the most of a competitive mortgage market.  This is where working with a Mortgage Broker has its advantages.

As an Ex- Bank Manager myself, I could only ever offer my bank customers the products and interest rates of that particular bank. The main reason I chose to leave the bank and become a Broker, was so that I could offer the best loans on the market, no matter which bank or lender that may be.

In July 2011, the Australian government abolished deferred establishment fees. Deferred Establishment Fees (DEF), or early exit fees were enforced on a borrower if they repaid their loan early, generally within the first 2-5 years of their loan settlement.  The number of borrowers who switched to other lenders rose after the DEFs were dropped as customers went in search for a better home loan deal.

Break costs for a fixed rate loan is very different to a DEF.  When a bank funds a fixed rate loan they borrow money from the wholesale money markets using the Bank Bill Swap Rate (BBSR or BBSW). Their BBSW rate is locked in at the same time as your interest rate.

However, they don’t have the option to repay their loan early so when you repay your home loan they have to lend the money to someone else yet still pay a high rate on their loan from the money markets.

Sometimes the Bank Bill Swap Rate on the wholesale market falls between when you fixed your rate and when you pay off your loan.

When this happens, the bank has an “economic cost” to carry until their loan from the money market is ready to be repaid. They pass this cost on to you as a break cost.

If you are considering refinancing your loan to a more competitive interest rate or product, make sure you get a quote on the current break costs applicable. Break costs can be expensive and at the same time they can be less expensive than you thought, so you’ll need to check that you’ll come out ahead when all costs are considered.

Many lenders also offer a Refinance Rebate ranging from $1,000 to $1,500 to assist in the cost of refinancing. With the DEF now abolished, a banks normal discharge fee ranges from $250- $500. With the refinance rebate, you are generally out in front to start with, depending on the set up cost of the new loan.

Canberra Mortgage Brokers will complete calculations for you to assess whether moving to another lender is beneficial or not. At times it is best to stay with your current lender but alter the loan products to suit your situation. This often becomes the case in high lending scenarios ie. above 80% where you may have paid mortgage insurance. If your property value is still much the same, you would have to pay mortgage insurance once again with a new lender, which would defeat the benefit of obtaining a cheaper interest rate.

There’s a lot to consider and your Broker can make this task easy for you.  If you’re striving to be mortgage free, there’s a good chance there may be a more appropriate & competitive product to meet your needs.

Vacant Land Loans & Construction Loans

Loans for an individual block of land are generally flexible with most lenders. You can have a variable rate loan or a fixed rate loan. Some lenders will have a requirement that a home is to built within a certain timeframe, such as 12 months to 5 years.

With house & land packages,  generally the loan for the land is settled first then progress payments are made for the construction of the home. If the loan is set up as one loan to cover both the land & construction the loan will be interest only until the home is complete. Most lenders only offer a variable rate loan for construction due to the progressive drawdowns. There are a small number of lenders who offer fixed rate construction loans.   

Equity Loans

Equity loans are commonly termed a Line of Credit. Using your home as security, your Line of Credit will have an approved credit limit and you can draw against this limit when the need arises. No matter what the limit is, interest is only charged on the outstanding balance.

A line of credit can be useful if you have built up a reasonable amount of equity in your home, as you can easily access it to purchase other assets or items. For example, you could draw down on your home equity to fund a new car. The benefit of this is that you are effectively borrowing for a car at home loan rates.

Some investors also use a line of credit to invest in the share market. When they sell shares they put the money into the line of credit, and when they want to purchase shares they draw down on the line of credit.

A line of credit facility can be useful for emergencies that may arise from time to time or for such things as education costs, or home improvements.

Lines of credit have also been marketed as a tool to help you reduce your mortgage fast by directing income from all sources into your line of credit loan account, and then drawing living expenses as and when required.

Interest on your loan is calculated on the remaining balance in the account, so the longer your income is held, the less interest you will pay on your mortgage. Be warned though many clients who have tried this practice have found that they end up drawing out more than they put in, resulting in higher debt.

It is also important to note that a Line of Credit has a higher interest rate than a standard home loan. If you are looking to establish a line of credit to take advantage of this type of structure, a better result may be achieved by establishing a transactional offset account, against a cheaper standard home loan. This way you will still be reducing your mortgage through principal and interest repayments and the daily balance in your offset account will be reducing the interest charged on your home loan.

As you have virtually unlimited access to your funds, a line of credit is only a sensible choice if you are extremely disciplined in managing your everyday finances. If you will be tempted to use the funds for spur of the moment purchases, a line of credit is probably not for you.

Reverse Mortgages/ Seniors Loans

Reverse mortgages are loans for pensioners and retirees that are designed specifically for older borrowers who are typically ‘asset rich’ but ‘cash poor’. Reverse mortgages allow people from the age of 60 to convert the equity in their property into cash. The funds can be used for just about anything, such as home renovations or repairs, to buy a new car, medical expenses, take an overseas holiday or to generally improve the lifestyle of the borrower in their retirement.

No income is required to qualify. Although interest is charged like any loan, the borrower is not required to make repayments, although they can usually make voluntary payments if they wish. As with normal home loans, a reverse mortgage is secured by a first registered mortgage over the borrower’s home. The amount of equity that can be released is determined by the borrower’s age and the value of the security property and this criteria can vary between lenders.

The borrower retains full ownership of their property and is able to stay in their home as long as they want. The interest is ‘capitalised’ to the loan and will compound over time ie. the balance of the loan will increase unless voluntary payments are made.

The debt is repaid when the applicant either sells the property of their own accord, ceases to reside in the property, or when the last surviving borrower dies.

It is a common misconception that the bank will ‘own’ or ‘take’ the property under reverse mortgage. In fact the borrowers remain the full legal owners of the property, and the lender takes a mortgage only. As long as the borrower does not ‘default’ under the agreement by breaching key obligations, the bank cannot force a sale of your home. Reverse mortgage contracts vary between lenders but common default conditions include failure to pay council rates, keeping the property fully insured, and wilful neglect or damage of the house.

All reverse mortgage lenders are now required by law to provide a guarantee termed a ‘No Negative Equity Guarantee’ that should the debt grow to such level over time that it exceeds the value of the security property realised at sale, then neither the borrower, nor beneficiaries of the estate, can be pursued for this shortfall after the sale has been concluded (as long as the borrower is not in default of the loan contract). Put simply, if the sale of the security property is not enough to cover the debt, the lender wears the loss.

In addition, the lender cannot force the borrower from the property if they think the debt may have grown to a level where a shortfall may occur.

Mortgage Brokers must hold a special accreditation to be able to write Reverse Mortgage Loans. Canberra Mortgage Brokers hold the required qualifications through SEQUAL (Senior Australian Equity Release).

We encourage our Reverse Mortgage clients to involve their family in the transaction to ensure they fully understand how the facility works and what effect it may have on the borrower’s equity. All borrowers must obtain independent legal advice for Reverse Mortgage Loans.