A: As a rough guide, it is recommended that you budget 5 -7% of the purchase price to cover fees and charges. These fees and charges may include (but are not limited to): (Explanations of some of these are highlighted in our costs to consider section)
Transfer of land
Lenders mortgage insurance (LMI)
Connection fees – phone/gas/electricity
A: The amount you can borrow, commonly known as your borrowing capacity, will differ from lender to lender. To get an indication of how much you can borrow, use our borrowing capacity calculator. You should then make an appointment with us to get a complete individual assessment of your situation.
A: Your borrowing capacity will be affected by how many dependent children you have, your current income and your total current debt commitments. These variables play a major part in how much a lender will lend you. Mind you, there is a large range with borrowing capacity between lenders.
A: To improve your chances of obtaining finance through a mainstream lender reduce the number of credit cards or card limits you have. Lenders look at your maximum limit, not what you owe – the bigger the limits the less you can borrow.
Secondly, review your credit history. If you’re suspicious of any defaults or mistakes, you can order your own credit file by visiting http://www.vedaadvantage.com.au/ or by phoning Veda Advantage on 1300 762 207.
Finally, if you’ve fallen behind in repaying existing debts, make sure you pay the arrears immediately.
A: People with poor credit histories now have access to non-conforming loans. They begin with slightly higher interest rates yet with a good repayment record you can move on to a conforming, or regular loan, with a lower interest rate.
A: Pay more frequently than monthly – with fortnightly repayments you will actually be making one additional repayment a year. However, for this to be effective it is important that you ask your lender to halve your monthly repayments rather than recalculating them
Make extra repayments above the minimum – even $80 a month on a $200,000 loan at 7.32% will save you 3 years and 3 months off your loan term
Extra money like inheritance, a good tax return, a bonus from work should be credited into your home loan. If you have a redraw facility you still have access to this extra repayment when needed
Make your first repayment at settlement
Consider a 100% offset feature
Salary crediting: you can use a credit card with a good interest free period to pay for your regular living expenses and at the end of the month have the card ‘swiped’ (or paid off) against the home loan
If interest rates fall ask your lender to leave your repayments as is
Do a regular health check on your home loan. A loan may start off as good but have its competitiveness eroded by increased fees or rates, or by the introduction of better priced products on the market
Interest repayments on an owner occupied home loan are non tax-deductible, which means it makes good sense to give priority to paying off your home loan quickly instead of directing funds towards paying off investment loans or having them sit in low interest-bearing deposit accounts (where any interest received will also be taxed).
A: Interest is calculated on your outstanding balance on a daily basis and charged to your home loan account once a month. For this reason, and because of the number of days between interest charges varies, the amount of interest charged each month may also vary. To calculate monthly interest, the balance is multiplied by the interest rate, then divided by 365 days in a year, then multiplied by the number of days in the current month.
A: This is a loan used mainly by property investors. It allows the borrower to pay only interest for an agreed period instead of principal and interest (i.e. the principal balance remains the same during the interest only period). This maximises the investors tax deductions whilst also freeing up cash flow for other investing opportunities.
A: Most lenders these days offer flexible regular repayment plans. You can choose to pay weekly, fortnightly or monthly. Your repayment can therefore be matched to your pay cycle.
A: The deposit required depends largely on the type of home loan and, of course, the lender you select. As a general rule, you will require a total of 5 – 7% of the purchase price as a deposit.
A: The First Home Owner Grant is a lump sum benefit provided to first homeowners. You may be eligible for the ‘First Home Owners Grant’ – a one off payment of $7,000 when you buy or build a home. Visit http://www.firsthome.gov.au/ for eligibility criteria and to download the application form.
A: As a basic rule, you are eligible if you are an Australian citizen or permanent resident, buying or building your first home in Australia, with the intention of occupying it as your principle place of residence within 12 months of the settlement. It is important to note that if you are buying the property in conjunction with others, they must also meet the same criteria for the grant to be applicable.
A: Lenders Mortgage Insurance (LMI) covers your lender in the event of you defaulting on your loan. You are not protected by LMI.
If your property is subsequently sold and the amount from the sale is not enough to pay off the loan in full, this insurance will cover the lender for the shortfall. However, you will then be liable to pay for the shortfall to the mortgage insurer.
LMI is obtained by your lender. This insurance should not be confused with Mortgage Protection Insurance which covers your mortgage instalment in the event of such things as death, disablement, unemployment, etc.
LMI premiums are a once only fee payable by the borrower at loan settlement when the amount borrowed is above a certain percentage, usually 80%, of the lender’s valuation of the property, or for low doc loans usually more than 60% of the property’s value. Some lenders will allow you to add the LMI premium to your home loan; others require you to pay it up front.
A: In conjunction with submitting your home loan application, you will need supporting documentation confirming your identity, financial position and to substantiate your income. Documents can include:
- 100 points of Identification – Photo ID containing your signature e.g: passport or driver’s license.
- Proof of income.
- Savings account statements from all savings accounts.
- Proof of other assets such as property, motor vehicles, shares, managed funds, home contents.
- Evidence of all liabilities; personal loans, mortgage loans, credit/store cards, lease liabilities, interest free loans, any other debts.
A: No. We get paid a commission from the lender that you choose after your loan settles. This commission depends on the lender, product & loan amount that you choose.
A: If you have a complaint about a credit related product or service that has been provided to you the Credit Ombudsman Service can help. Should you have a dispute with us then we will work with you to resolve the matter. This can be done with the party you have a concern with or if preferred the other partner. If an agreement can’t be reached, you can refer the matter to FOS Financial Ombudsman Service who can assit you to resolve the issue at no cost to you on 1300 780 808. A link to their site is provided in our useful links page.
Adventurer Finance Solutions membership number is 25633.
A: Every month the Reserve Bank of Australia (RBA) reviews the official cash rate which is dependent upon the inflation rate. The RBA looks at the inflation rate compared against the unemployment rate, consumer price index (CPI) and retail sales and sets the interest rate based on the analysis of this information.
The RBA uses interest rates as a tool to control spending. For example, if economic activity is deemed excessive it may try to slow things down by raising the offical cash rate which will in effect raise the lenders variable home loan interest rate. This will ultimately stop you from spending money by increasing your loan repayments.
Those of you on a fixed interest rate will be unaffected by any variance in the offical cash rate during the fixed term of your home loan. Fixed home loan interest rates are determined by what’s happening on the bond market, where lenders source their fixed loan funds. At the first sign of inflationary pressures, those fixed rates will rise.
The Lenders are also able to move on rates outside of the Reserve Bank which we have seen often during 2010.
A. That depends on who ‘you’ are.
When you take out a home loan, you can choose to have an interest rate this is fixed, variable, or split (a combination of the two). There is no right or wrong option – it all depends on your circumstances.
Fixed Rate Home Loans
With the Fixed Rate Home Loan, the interest rate on your Mortgage doesn’t change for an agreed period (usually 1-5 years) – no matter what happens to official interest rates.
Variable Rate Home Loans
With the Variable Rate Home Loan, the interest rate on your Mortgage can change. If official interest rates go down, your interest rates go down too. However, if the Reserve Bank increases interest rates, your Home Loan rate will probably rise too.
Split Rate Home Loans
A Split Rate Mortgage combines elements of the Fixed Rate and Variable Rate options. e.g. You can have 80% of your Home Loan at a Fixed Rate , while the remaining 20% is at an interest rate that varies with the market. Which Home Loan interest rate option is best?
Because it is absolutely predictable, the Fixed Rate Home Loan can give you greater confidence that you can meet your Mortgage repayments regardless of changing economic conditions. The disadvantage is that it generally lacks flexibility.
If official interest rates fall, the Variable Rate Home Loan can save you money, but you need to consider the risk that your Mortgage payments could rise in the future. If you are contemplating a low introductory or honeymoon rate for an initial period you will save initially, but you must find out what the rate will be when the ‘honeymoon’ is over. The lowest initial interest rate doesn’t always mean the better deal.
The Split Rate Home Loan gives you some of the benefits of both Fixed Rate and Variable Rate loans. You won’t save as much as a full Variable Rate loan if interest rates fall, but neither will you be as exposed if interest rates rise.
A. Because things change: interest rates, products and you
Just because you’ve spent ages making sure you have the right Mortgage, it doesn’t mean it will always be right for you.
Mortgage Refinancing Reasons: you change
Over time, your personal and financial situation may change. You may get a pay rise, or decide on a sea-change. You might go from a safe corporate salary to the more uncertain income of the self-employed. You might want to start a family, or need to finance their education. As your needs and priorities change, you’ll probably find the right Home Loan product for you will change, and you’ll need to refinance your Mortgage.
Mortgage Refinancing Reasons: rate rise
In stable economic conditions, a variable interest rate might look more attractive, while in more volatile periods you could prefer the predictability of a fixed interest rate. Refinance your Home Loan to suit the economic times.
Mortgage Refinancing Reasons: new products
In the past, there was limited innovation in the Mortgage market. But now competition between Lenders is fierce and new products are constantly emerging that might suit your situation better.
A. An economic loss incurred by the lender but passed on to you
When a Lender provides the borrower a fixed interest rate loan, the Lender obtains the funds for the loan through a transaction at wholesale interest rates.
What are Break Costs ?
A. Break costs are an amount equal to a reasonable estimate of the Lender’s loss arising as a result of the borrower breaking the loan when it is at a fixed rate.
The lender suffers a loss when wholesale market interest rates fall between the start of the fixed rate period and the time the borrower breaks the fixed rate period.
The borrower breaks a fixed rate period on the loan when, during the fixed rate period:
- the borrowers prepays the loan in part or in full; or
- the total amount owing becomes immediately payable because the loan is in defaul
When are Break Costs payable ?
Break costs are payable on a fixed interest rate loan when wholesale interest rates have fallen AND:
- the borrower prepays all of the total amount owing on your loan before the end of the fixed rate period; or
- the borrower makes extra repayments beyond the agreed threshold as set out in your loan agreement (varies Lender to Lender); or
- if the total amount owing on the loan becomes repayable immediately during a fixed rate period because the loan is in default.
Why Are Break Costs necessary ?
When the borrower break your fixed rate period, the Bank has to break its wholesale interest rate arrangements and, if wholesale market interest rates have dropped, this causes a loss to the Bank.
How are Break Costs calculated ?
Lenders will calculate break costs using the break costs method set out in their respective General Terms and Conditions of the loan agreement. The break costs method estimates the Lender’s loss, but may not necessarily reflect any actual transaction that the Lender may enter into (either before or at the time of the break).
Break costs are calculated on wholesale market interest rates. Those rates may not be the same as the fixed interest rate for the loan or other fixed interest rates that apply to other products of the Lender. They may be lower or higher.
Warning: Break costs can be high and the formula is complex. It’s best that the borrower ask the Bank for an estimate of the break costs and seek independent financial advice before prepaying any amount on the loan during a fixed rate period. Prepaying refers to any extra repayments above & beyond any agreed threshold set out in the Lenders loan agreements & terms and conditions, or repaying the loan in full before the expiry of the fixed rate period.