While the joy of living in your own home is incomparable, it’s not unusual to feel bogged down by the mortgage costs, including the interest you will pay on your home loan. However, there are a few things you can do, like comparing home loan deals online to find a lower rate and getting the right features in your home loan, to save money in interest charges and create some financial breathing space for yourself.
This post brings you some straightforward hacks to reduce the interest on your mortgage.
1. Getting an offset account linked to your mortgage
An offset account is a transaction account linked to your mortgage. Any funds in the offset account are used to reduce the balance on which the interest is calculated. Therefore, you will end up paying less interest overtime, and a larger part of your repayment is applied towards the principal amount.
Here’s just one strategy you can use to reduce your loan balance with an offset account. If you use a credit card for your expenses, you can have your salary deposited in your offset account and use it to pay off your credit card bill in full at the end of the month. This will help ensure a high balance in your offset account. But, as always, it’s important to avoid overspending and ensure you are paying your bills in full to benefit from this strategy.
2. Making fortnightly payments instead of paying monthly
Does it really matter whether you choose to make your repayments monthly, fortnightly, or weekly? Well, the answer turns out to be yes!
Although a year has 12 months, the number of fortnights in a year isn’t exactly double that. There are 26 fortnights in a year that correspond to 13 months (or 13 monthly repayments in home loan terms). This means if you simply switch to making your repayments every fortnight, you’ll automatically make an extra month’s repayment every year, which will save you money on interest and also help you pay off your home loan sooner.
Here’s an example to understand this better. Imagine taking out a home loan worth $400,000 for 30 years at an interest rate of 3.64% per annum. Your monthly repayments will be approximately $1,828. Now, if you switch from monthly to fortnightly payments, you will pay an additional $1,828 into your mortgage every year. This will cut down nearly five years from your home loan and save you about $38,000 on interest charges.
3. Opting for a split rate on your mortgage
Whether you should fix your home loan or go with a variable rate of interest is debatable. A fixed home loan gives you the security of fixed repayments, but a variable rate lets you
benefit from market movements. A variable rate home loan is also more flexible, allowing you to make additional repayments or reduce your balance with an offset account.
But what if you could get the best of both worlds?
A split rate home loan allows you ‘fix’ a part of your home loan while leaving the remainder at a variable rate. Therefore, you can benefit from the stability of the fixed portion and the flexibility of the variable part.
4. Refinancing your home loan to a lower interest rate
If you’ve had your mortgage for a few years, this simple hack could potentially save you a lot of money in interest charges.
The mortgage market is quite competitive, and many lenders offer discounts on interest rates and fees to attract new customers.
If you are stuck with an older mortgage with a higher interest rate, this could be the window of opportunity to switch to a lower rate and save yourself a lot of money! You can use this online calculator to work out your monthly savings at a lower rate of interest.
5. Working with a mortgage broker to get a better deal
Consulting a mortgage broker can save you a lot of time and effort in selecting the right home loan for your needs. Working with a broker also makes it easier to find an appropriate home loan if your financial situation isn’t the strongest, like when your credit rating is average, or you have a low deposit.
The best part about working with a broker is that you pay nothing for the service in most cases. Brokers are generally paid on commission basis by lenders, but that doesn’t mean they are biased in their opinions. It’s also illegal for mortgage brokers to recommend home loans to their clients that they cannot afford to repay. Brokers are expected to act in your best interests as per the code of their practice.
A good broker will help you find a competitive deal with the features you need to help you manage your mortgage better. In case you’ve been on the same mortgage deal for some time, a broker can also help you negotiate a better rate with your lender or refinance to another lender.
Applying for a home loan requires a lot of preparation. It is often a time-consuming process, requiring a great deal of paperwork. However, even after putting in so much of your time to carefully compile your home loan application, it can get declined, leaving you disappointed and confused. Thankfully, it’s possible to increase your chances of mortgage approval by understanding the common reasons for rejection and avoiding them while preparing your mortgage application.
6 reasons why loans are rejected by lenders
1. Lack of genuine savings
Some lenders require proof of genuine savings before approving your home loan application. Genuine savings refers to the money you have saved from your income over time (at least three months). To verify your savings, a lender will generally ask you for your last three months bank statements. The purpose of the genuine savings requirement is to confirm how you saved your deposit and whether you’re disciplined enough to continue meeting your repayments once your mortgage is approved.
If you can’t provide this proof, it may affect your chances of approval. So, even if you are planning to use a gifted deposit, consider saving some money regularly for a few months before applying for a home loan to fulfil the genuine savings requirement.
2. A poor credit rating
Applying for a home loan with a poor credit score is risky. When you apply for a mortgage, the lender wants to see that you have a good history of paying your debts on time. Therefore, a tardy repayment history is likely to jump out and reduce your chances of mortgage approval.
However, having bad credit on your file isn’t the only reason your mortgage application may get derailed. Shopping around for a loan can also bring down your credit rating.
Whenever you apply for a loan, the lender will access your credit report to check your creditworthiness. This is known as a hard enquiry, and it is recorded on your file. Too many credit applications in a short span would therefore result in multiple enquiries on your file – which could lead a lender to believe that you’re going through a financial crisis and need a loan desperately.
To avoid rejection due to a poor credit rating, make it a point to pay all your bills on time. It’s also a good idea to compare home loans online or work with a broker to find the best possible deal before making a formal loan application.
3. Poor spending habits
One of the reasons behind a relatively high mortgage rejection rate is increased scrutiny into borrowers’ expenses in recent times. As lenders are bound by the responsible lending criteria, it falls upon them to ensure you’re not advanced a loan that you cannot afford. Therefore, lenders may sometimes request you for bank statements for up to 12 months to see how you spend your money and where you spend it. If they spot any unusual spending habits, it could raise a red flag and lead to rejection. For instance, spending thousands of dollars on gambling, or even eating out or shopping could trigger concern.
4. Missing information
Lenders have access to your bank statements to assess your spending habits. Lying about your expenses or omitting the mention of a credit card or childcare expenses could lead to rejection based on non-disclosure.
It’s always best to be completely honest about your financial situation with the lender. Even though you might criticise lenders for the harsh scrutiny before approving a mortgage application, it is actually for your own good.
Borrowing more than what you can reasonably afford can lead to mortgage stress, especially if the interest rates rise in the near future. Sharing the complete truth about your income and expenses can help a lender assess your repayment capacity better and advance you a loan accordingly to avoid mortgage stress in the future.
5. Missing documentation
The home loan application process can sometimes get tedious. The sheer number of documents required to support your application may seem daunting, but failure to provide all the necessary details in a timely fashion could lead to rejection. A mortgage broker can help reduce your stress by preparing your mortgage application with you and ensuring that no important information or document is missed out.
6. Unsuitable property
Before you start house hunting, it’s worth knowing that some lenders do not accept specific types of properties as security owing to the increased level of risk they might pose. For instance, a lender may not approve a home loan for a property in a regional area or an area that’s prone to excessive flooding.
Generally, each lender has different classifications for the type of properties they will accept. This classification is based on factors like location, size, neighbourhood and the condition of the property. Conducting some market research to avoid buying high-risk properties can reduce your chances of rejection.
You can also check the worth of comparable properties in the neighbourhood to ensure you’re not paying more than the property’s value. Most lenders will get an independent valuation done for the house when you apply for a mortgage. If they find that it is not worth what you are paying for it, they may reject your home loan application.
Knowledge is Power
Now that you know why lenders may reject a home loan application, you can be extra careful while applying for a mortgage to increase your chances of approval. These tips will also help you in case your home loan application has been already rejected. Instead of immediately applying for another home loan, try to analyse why your application got rejected in the first place. Going to another lender without fixing your financial situation will only lead to more rejections, which will adversely affect your credit score. If you’re confused about what went wrong, discussing your situation with a mortgage broker could help.
Increasing property prices have made it extremely challenging for first home buyers to take the first step on the property ladder. However, parents across the country are keen to help their kids fulfil their property buying dreams by advancing large amounts of money to meet the ideal deposit requirement for a home loan. According to recent research, the “Bank of Mum and Dad” has emerged as Australia’s ninth-largest mortgage lender, with parental contributions rising by almost 20% in the past year.
Seeking help from your parents to purchase a house
There are several ways in which your parents can assist you in purchasing your first home. For instance, your parents could gift you a lump sum of money to increase the size of your deposit. Most lenders accept such gifted deposits as part of your down payment, but you’ll most likely require a letter from your parents substantiating the gift. The letter must state the purpose of the gift. It should also mention clearly that you’re not expected to repay the amount you received as a ‘gift’.
It’s worth noting that even though a gifted deposit may cover 20% of the purchase price of a property, you’ll still need to show at least 5% genuine savings to qualify for a loan with many lenders. However, a handful of lenders may waive this requirement if you are a renter with a solid rental history spanning six months or more.
Instead of a gift, some parents might feel more comfortable loaning the money to their child. If that’s the arrangement you’ve reached with your parents, consider speaking with a solicitor to draw up a formal loan agreement to prevent any confusion at a later stage, and also understand the tax implications (if any).
Applying for a guarantor home loan
If your parents are willing to help you with your home loan but don’t have the cash to put towards your deposit, you could explore the option of applying for a guarantor home loan.
Your parents can use the equity in their property to secure your home loan. This means that while your property will serve as the main security for the loan, the lender will also take a mortgage on your parents’ home.
As guarantors, your parents are responsible for paying your home loan in case you default on it. Therefore, it’s advisable to assess your repayment capacity and only ask your parents to guarantee your home loan if you’re sure you’ll be able to service it.
A guarantor doesn’t need to provide security for the entire home loan. It’s possible for your parents to only guarantee a portion of the loan to help you borrow with a low deposit, and without paying for Lenders Mortgage Insurance (LMI). If your parents provide a partial guarantee, they are only liable for that portion if you default on the loan.
Purchasing a house with your parents
It’s possible to purchase a home with your family members or friends as co-owners. This option allows you to pool your resources with your family to reduce your financial burden while buying a house.
You can take out a joint mortgage with your parents (or anybody else) and co-own the property with them as joint tenants or tenants in common. Joint tenants are equally responsible for the mortgage and share the property equally. On the other hand, tenants in common can divide the mortgage and the property according to the size of their investment, or in any other manner they like. You may connect with a mortgage broker to learn more about joint mortgages. It’s also worth seeking advice from a solicitor to understand your responsibilities as joint tenants and tenants in common to select the right ownership structure.
In addition to seeking help from parents, there are government grants and schemes to help you get into your home faster. For instance, you could use the First Home Owners Grant to supplement the deposit for your first home. There’s also the First Home Loan Deposit Scheme, which is a government guarantee that lets you purchase a house with a 5% deposit and no LMI. Eligibility depends upon the location of the property, your income and the number of places available under the scheme.
Some lenders want to see proof of genuine savings as part of your home loan application, especially if you’re applying with a low deposit. Genuine savings refer to the money you have saved from your income over a period of time. The minimum period could range from 3 to 6 months for different lenders.
Why do lenders care about genuine savings?
Most lenders expect you to pay 20% of the property’s value when borrowing money to buy a house. However, having a low deposit doesn’t mean you are locked out of the property market. Some lenders will approve you for a mortgage with as little as a 10% deposit, but you may have to fulfil some additional criteria. For instance, you are generally required to pay Lenders Mortgage Insurance (LMI) when applying for a home loan with a low deposit. LMI is a type of insurance that protects the lender if you can’t meet your repayments and default on the loan.
Additionally, some lenders may ask for proof of genuine savings to ascertain whether you’re disciplined enough to continue meeting your repayments once you have a mortgage. By asking for proof of genuine savings, lenders want to determine how you saved up your deposit. A deposit saved over some time reflects financial discipline and a regular saving habit. Both these traits indicate to a lender that you might be a lesser risk than someone who finds it challenging to save money.
What constitutes genuine savings?
Genuine savings generally refer to your savings held for three months or more. However, genuine savings needn’t be savings in the traditional sense. The money that you earn by selling off your home or shares (held for at least three months) also constitute genuine savings.
While there’s no set definition of what may constitute genuine savings, most lenders will accept some or all of the following as part of genuine savings:
The money held by you in your bank account or a term deposit for more than three months
Any shares or managed funds you’ve held for more than three months .
Voluntary contributions made to your super under the First Home Super Saver Scheme.
The equity in an existing property or sale proceeds from a property.
It’s also possible that you have other savings that weren’t saved or accumulated over time to constitute genuine savings. Such savings are sometimes called non-genuine savings, referring to any lump sum of money you may have received as a gift or windfall.
Some common examples of non-genuine savings are inheritance, work bonuses, funds received under the First Home Owners Grant, profits from the sale of your car and even your tax refund. However, accumulating such savings in your bank account for more than three months may sometimes qualify them as genuine savings.
What are my options if I don’t have any genuine savings?
Lenders typically require you to have 5% genuine savings to qualify for a home loan. However, if you have a good rental history, some lenders may accept it in place of genuine savings.
The whole aim of the genuine savings requirement is to assess your repayment capacity and your ability to save. If you’re currently renting and have a clean rental history for at least six months, some lenders may consider the rent you’ve paid in this period to satisfy the genuine savings requirement. They believe you can use this money towards making your mortgage repayments once you purchase a house as you’ll no longer be paying rent. To qualify, you’ll need to provide a copy of the rental ledger and a reference letter from your property manager as evidence of your rental history.
It’s important to note that every lender won’t accept rent as genuine savings to approve your home loan application. A mortgage broker can suggest lenders who fit your criteria and are more likely to approve your mortgage application.
In the event you don’t have both genuine savings and a rental history, a guarantor home loan could be an option worth considering if your parents, or another family member, agree to guarantee your home loan.
If you’re a first home buyer struggling to save a deposit, you may be able to borrow the entire purchase price of a property from some lenders if you meet certain conditions, such as having a family member guarantee your home loan. That being said, no deposit home loans are pretty uncommon, and you’ll generally require a minimum 5% deposit to qualify for a home loan. If this is the option you choose, you’ll most likely pay Lenders Mortgage Insurance (LMI) to cover the lender’s risk in case you’re unable to make your home loan repayments in future.
LMI is an insurance policy that covers the mortgage lender against any potential losses if you cannot make your home loan repayments. You can either pay the LMI costs upfront to your lender or add the amount to your home loan. If the LMI amount is rolled into your mortgage, you’ll pay interest on it just like the rest of your home loan.
Depending on the size of your loan and the property you’re buying, LMI can run into thousands of dollars, adding to your house buying costs. Whether you choose to pay LMI or wait for a few more years to save a larger deposit is a choice only you can make. Meanwhile, also consider the following options if you plan to buy a home with a low deposit (or no deposit) and don’t want to pay LMI.
1. Seek help from the “Bank of Mum and Dad”
The Bank of Mum and Dad can help you put up a sizeable deposit by gifting you the money you need. This is known as a gifted deposit, and most lenders will accept it as part of your initial down payment for the home. However, you’ll still have to demonstrate at least 5% genuine savings in addition to the gifted deposit to qualify for a home loan. If you’re renting a house, some lenders may waive off the genuine savings requirements if you can provide proof of timely rental payments made over a year or more.
If you’re using a gifted deposit to purchase a home, make sure to keep a paper trail to substantiate the gift. You can have a declaration signed by your parents stating that the money is gifted, which implies you’re not expected to repay the money.
2. Ask a family member to guarantee your home loan
Some lenders may let you borrow up to 100% of the property value if you have a family member guaranteeing your home loan. However, if you fail to make your repayments, your parents (or any other family member guaranteeing the loan) will be liable to pay on your behalf.
3. Apply for First Home Owners’ Grant (FHOG)
If you’re a first home buyer, you may be eligible for FHOG in your state to boost the size of your deposit. The scheme was rolled out in 2000, and you must fulfil the required criteria in your state to be eligible for the funding. Visit the First Home website for the latest information on FHOG.
4. Have the government guarantee your home loan
The First Home Loan Deposit Scheme is essentially a government guarantee that lets you buy your first home with a 5% deposit and no LMI. However, the guarantee is limited to 10,000 first home buyers in a year with an income cap of up to $125,000 per year for individuals or $200,000 per year for couples.
Another extension of the scheme is the Family Home Guarantee that enables eligible single parents with dependants to purchase a house with just a 2% deposit and no LMI.
It’s worth remembering that a government guarantee is different from a government grant. While you don’t have to repay the amount you receive under FHOG, the First Home Loan Deposit Scheme is only a guarantee. It enables you to borrow money for your first home with a low deposit, increasing the overall size of your borrowing. However, irrespective of your loan size, you’re required to repay the money in a limited time frame of 30 years or less. Therefore, it’s important to calculate your monthly repayments before borrowing a larger percentage of the property’s price to avoid mortgage stress.
Auctions can simultaneously be an exciting and daunting experience. While you may feel nervous amidst a chattering crowd, there’s no denying the surge of adrenaline each time you bid. However, there’s also the risk of overbidding in the thrill of outbidding the competition. But that usually happens when you walk into an auction unprepared. The key to succeeding at an auction lies in preparing yourself mentally, emotionally and financially for the event. If you’re wondering where to start, we have for you these 6 tips that will help you bid confidently at an auction.
1. Get a home loan pre-approval
It’s recommended to have a home loan pre-approval before you visit an auction. Getting pre-approved for a home loan helps you in two ways. First, it gives you an idea of how much you’ll be able to borrow, which can make it easier to bid confidently, as you already know your limit.
A pre-approval also makes you look like a more serious buyer. Even though a pre-approval is conditional, it indicates that your finances are in order as the lender has already gone through your documents before pre-approving you for a mortgage. You must also keep your deposit ready on the day of the auction, as you’re required to pay it upfront if you make the winning bid.
2. Find some data to set a limit for yourself.
It’s always a good idea to check for comparable sales in the neighbourhood to justify the vendor’s price. Knowing the market price of a property also helps you bid more confidently. Some experts believe your opening bid must always be closer to where you want to end. Since most buyers are aware of the property’s market value, bidding close to this figure can help eliminate a lot of low bidders.
3. Visit several auctions before bidding at one
It’s a fact that auctions can be stressful, especially for someone new to the process. But you can prepare yourself mentally by visiting several auctions before you decide to bid at one. This will help you understand how the process works and get the hang of the jargon, so you don’t feel out of your depth when you attend your first auction as a buyer.
4. Stay calm
Staying calm at an auction is easier said than done. But there are things you could do to keep yourself cool. For instance, if you follow the tip in the previous point and attend several auctions, you’ll soon find yourself at ease in the high-pressure environment. Some people also prefer to arrive early at the auction site to survey the area and see who’s present there. If you choose to arrive early, it could give you some time to speak with the seller’s agent and other buyers, which might make you feel at ease. If you still feel nervous, you could always ask someone else to bid on your behalf or engage a buyer’s agent to attend an auction with you.
5. Get expert help
Before any property auction, it’s worth getting a copy of the sale contract and showing it to a lawyer or conveyancer toreview. A legal professional can advise you of the risks that come with the property and how you can protect yourself.
It’s also vital to get a professional building report to find out any potential issues with the property before the auction starts. Remember that most auction sales don’t come with a cooling-off period. If you discover a defect in the property after winning at the auction, there’s not much you can do about it. A professional inspector can save you from such a situation by looking beyond the property’s aesthetics to unravel any damages or defects that could be a safety hazard in the future.
6. Leave no room for emotion
If you’re thinking of buying a home at an auction, it’s vital to eliminate emotion from the equation. Despite all the preparation and planning, there’s always a chance of missing out at an auction if you stick to your ‘walk-away’ price. However, it’s not something to feel sad about. It’s always wise to not over-bid and commit to a property that you cannot afford.
You can use an online calculator to determine the amount you can borrow for a home. It also helps to calculate your monthly repayments to determine the size of the loan you can comfortably repay. This amount should be your ‘walk away’ price in any auction to prevent you from over-bidding and landing in trouble later.
If you’re a first-time property investor, you may find it overwhelming to wade through all the investment jargon. Here are five common terms you’ll regularly hear from other investors and need to understand before investing in real estate.
1. Rental yield
If you’re planning to invest in property, you must know how to calculate rental yield to get a good return on your investment. Rental yield refers to the annual income generated from rent, expressed as a percentage of the property’s value. It is determined by several factors, including the location and type of the property, as well as the market dynamics.
You can calculate the gross rental yield by dividing your annual rental income by the value of the property, and multiplying that figure by 100. However, a more useful figure is the net yield of the property that also factors in your expenses, giving you a better understanding of the net return on your investment.
Some common investment property expenses include:
Insurance
Maintenance
Vacancy costs
Agent costs
Marketing fee
Strata fee
Mortgage repayments
Stamp duty
To calculate your net rental yield, subtract your annual expenses from the annual rental income. Divide this figure by the total property cost and multiply the result by 100 to get the net rental yield of the property.
Suppose that you buy a property for $800,000, and the weekly rental you expect is $400 (amounting to $20,800 annually). Your annual expense for the property comes to about $3,000. In this case, you will calculate the net rental yield as follows:
Net rental yield = [(Annual rental income – annual expenses) / total property cost]100
Net rental yield = [(20,800 – 3000) / 800,000] x 100]
Net rental yield = 2.23%
You may want to look for properties with a gross yield of 5.5 or above to ensure adequate cash flow.
2. Negative gearing
Negative gearing is a common benefit associated with investment properties. Negative gearing happens when the cost of owning an investment property (including the expenses we listed in the previous section) exceeds the rental income. While this may sound counter-productive, you can benefit from the loss by using it to reduce your taxable income from other sources.
The opposite of negative gearing is positive gearing. A property is positively geared when its rental income exceeds the cost of owning it. A positively geared property is likely to give you a good rental yield. However, some investors prefer negatively geared properties to offset their short-term losses while seeking long-term gains.
3. Depreciation
If you own a rental property, you can claim depreciation as an expense to reduce your taxable income. Depreciation tax deductions fall into two categories – capital works, and plant and equipment deductions.
Capital works refer to the tax deductions you can claim for wear and tear of the building’s structure and fixed assets to the property. On the other hand, plant and equipment deductions can be claimed for the wear and tear of assets that can be easily removed from the property, such as solar panels.
The Australian Tax Office (ATO) provides a comprehensive list of rental expenses you can claim over several years, including capital works and depreciating assets. As the calculations for depreciation deductions can get complicated, it usually helps to hire a quantity surveyor to assess your property and prepare a formal depreciation schedule to get an estimate of your tax deductions.
4. Rentvesting
Rentvesting is becoming a popular buying strategy for those who cannot afford a house in the area they want to live in. For instance, a house in your favourite suburb may cost you around $900,000, but you can only afford a property worth $700,000.
In such a situation, you may choose to renvest, which refers to renting in your desired location and purchasing an investment property in a more affordable area. The rental return on this property should ideally cover its mortgage repayments.
5. Equity
In real estate terms, equity refers to the value of your share in a property. If the market value of your house is $800,000 and there’s an outstanding mortgage of $300,000 on it, your equity will be the difference between the two, which is $500,000 in this case.
If you already own a house, it’s possible to dip into the equity you’ve built over the years to finance the purchase of your next property. In the above example, you can refinance the mortgage on your existing property to access up to 80% of its current market value and use the surplus as a deposit to purchase another property.
Speak to us to find a competitive interest rate for refinancing your existing mortgage and take advantage of the low interest rates on offer while also freeing up some of the equity in your house. If you’re looking for an investment loan, we can guide you and keep you from hitting the serviceability wall as your property portfolio grows.
The process of buying a house is both exciting and arduous. It can take several months before you finally find the dream house you’ve been waiting to purchase. But you can’t hang up your boots and relax just yet. There’s a lot to organise before you finally receive the keys to your home, including settlement, which is one of the most critical stages in the home buying process.
What is meant by settlement in a property sale?
Property settlement refers to the legal process of transferring the ownership of a property from the seller to the buyer. It is the final step in a real estate transaction that happens on the settlement date outlined in the sale contract. On this date, the buyer is required to pay the full amount due for the property to the seller and pay stamp duty in their state to complete the title transfer process.
It’s important to note that different states have different regulations regarding how a property can be legally transferred to a new owner. If you’re in the market for buying a home, having a solicitor or a conveyancer by your side can help you handle the settlement process smoothly. Additionally, a broker on your team can help ensure that your loan is disbursed promptly to prevent any unnecessary delays on the settlement date.
How long does it take to complete a property settlement?
This period between the exchanging of contracts and the final transfer of ownership is also known as the settlement period. It usually lasts between 30-60 days, but the duration may vary according to your state and the terms of your sale contract.
What happens during the settlement period?
Once you’ve paid the deposit and exchanged the signed copies of the sale contract, you may think that the deal is sealed. But the legal ownership of the property doesn’t pass on to you until the settlement date when you pay the seller the remaining amount for the property.
In between these two stages, you’ll get time to conduct property searches and prepare the necessary legal documentation for the title transfer. You’ll also need to arrange the funds required for settlement by applying for a home loan and wait for it to get approved. It’s usually recommended to apply for a mortgage pre-approval before you start hunting for properties. A pre-approval gives you a basic idea of how much you may be able to spend, which helps in narrowing down your property search. Being pre-approved for a mortgage also means that you meet the lender’s eligibility criteria for a home loan, which may help speed up the final approval unless the lender doesn’t find the property suitable, or your financial situation changes for the worse.
Here’s what you need to do during the settlement period to ensure a smooth property settlement:
Consider engaging a legal professional to act as your agent during the settlement process. Your legal representative will check whether the contractual terms are equitable, ensure it is correctly signed and dated, and even negotiate an early or late settlement date for you if needed. They will also make sure that any existing mortgage on the title is discharged and no third party has any rights over the property.
Organise all the funds required to complete the sale. Your mortgage broker can help you lodge your home loan application in a timely manner and prevent unnecessary delays to help ensure timely disbursement of funds.
Keep extra funds handy to pay for additional costs like stamp duty, legal and conveyancing fees, and property inspection fees. You’ll also need to buy home and contents insurance, effective from the purchase date or settlement date, as required in your state.
Get a final pre-settlement inspection done to uncover any defects or potential issues that must be settled before the ownership is transferred to you.
What happens on settlement day?
Despite all the build-up, the proceedings on the settlement day are pretty straightforward. Your legal and financial representatives will meet the seller’s representative at a predetermined time and place on the settlement date to exchange documents. At the same time, the lender will release the balance of the purchase price to be paid to the seller and register a mortgage against the property’s title.
There’s no requirement for you to be present during the proceedings on the settlement date unless you wish to be there. Once the settlement is complete, you must pay the transfer duty and registration fees to the government, preferably on the settlement date itself, so that the conveyancer can register the property in your name.
So what’s next?
Once you’ve paid the stamp duty and the property is transferred to your name, you can start packing and get ready to enjoy your new home. However, you’ll also see your responsibilities increase. While the seller is responsible for paying the council fees and other rates until the settlement date, it’ll be your duty to make these payments once you’re registered as the owner. Additionally, your home loan repayments will begin shortly, and it’s essential to budget your expenses to make sure you can comfortably repay your mortgage.
Home is where the heart is, but what if your heart demands more from your home?
There’s been a great deal of change in how people think and feel about their homes in the past year. According to a survey by Australian bathroom retailer Blue Space, more people plan to spend their savings on renovations than on holidays. The top reasons for renovation include wanting to refresh an old room, making changes that add value to the home or create more space for a growing family.
Funding your home renovation project
Lifestyle changes in the past year have forced several homeowners to rethink their homes and add more value by creating functional spaces. However, whether you want to refresh your interiors with a new coat of paint or add an extra room or floor, renovation projects are not cheap, and you need to know your options before undertaking one.
Lockdown living has led to increased savings for some families, largely due to cancelled holiday plans. If you’ve been saving up diligently during this time, it’s likely you have a few thousand dollars to put towards your home renovation project. But if you’re considering something more than a minor touch up,you’ll probably need to borrow some money to get the project going.
While there are several ways for financing a home renovation project, including taking out a personal loan or using your credit card, tapping into your home equity could be cheaper in comparison.
What is a home equity loan?
A home equity loan is probably the most common financing option for home renovation projects. Equity refers to the current value of your home minus the amount outstanding on your mortgage. Given the recent increase in property prices, you’re likely to have substantial equity in your home, especially if you’ve had the house for a few years and have been diligently making your repayments.
So, if your property’s present value is $800,000 and you owe $450,000 on your mortgage, the difference between the two ($350,000) is your home equity. However, you won’t be able to borrow the full value of the property. You can usually increase your borrowing to up to 80 per cent of the property’s value without paying Lenders Mortgage Insurance (LMI). In this example, you can increase your total borrowing to $640,000, which is 80 per cent of the property’s value. Now, subtract the amount already owing on your loan from this number to get your usable equity ($640,000 – $450,000), which is $190,000 in this example. This means you can borrow up to $190,000 using a home equity loan.
Most borrowers use an equity drawdown to fund minor renovation projects (like upgrading a bathroom or the kitchen) costing up to $100,000. You can either use a top-up facility or take out a second loan on the property to release your equity. For major renovations involving structural work, it’s usually helpful to consider a construction loan. A construction loan for a pre-approved amount releases funds in stages to directly pay the builder at the completion of each subsequent milestone in your project. You only pay interest on the money that has been drawn down, saving you a lot over time.
Refinancing your home loan to unlock your equity
A loan top-up is one of the options to use the equity in your home by sticking around with the same lender and mortgage terms. However, you don’t need to continue with the same lender unless you want to. If you find there are better and more competitive home loan deals on the market, you can refinance and renovate at the same time to score a better deal from another lender.
However, this option is usually more suitable if you’re on a variable rate, as refinancing a fixed interest loan can lead to you paying an unnecessary break fee. It’s also important to compare other refinancing costs vis-à-vis the interest rate and features on a new loan to decide whether it’s worth making the switch. Remember, it’s not about getting the cheapest home loan possible but one with helpful features that will make it easier for you to manage the mortgage in the long run. Speaking to a mortgage broker could help you assess your options to find the best possible way to finance your renovation. As brokers work with multiple lenders, they also make it easier to choose the right lender, which is one that is most likely to approve your home loan, meets most of your objectives and offers a competitive rate.
It’s also worth remembering that tapping into your equity will increase your borrowing and decrease your ownership of your home. This could see you making larger monthly repayments if you continue with the same loan duration or staying in debt longer if you refinance to another 30-year term. Refinancing to a longer term could be more expensive in the long run, despite a low interest rate, as you’ll be paying interest over an extended period. Therefore, it’s worth considering your present financial situation and long-term goals before deciding to dip into your home equity to finance a renovation project. For smaller amounts, you may consider other options, such as redrawing some of the extra repayments you made into your home loan.
Purchasing a house requires a lot of careful planning. Yet, sometimes you may want to back out of a well-thought-out purchase for reasons out of your control. For instance, if your financial position takes a turn for the worse (for example, you lose your job unexpectedly), or the lender doesn’t approve your loan after you exchange contracts with the seller – what can you do?
It’s also possible that some defects crop up in the property inspection report, and the house is no longer a good deal. A cooling-off period can be a godsend in such situations, allowing you to cancel the purchase agreement within a specified timeframe with minimal penalties in most cases. You don’t even have to give a reason for why you are cancelling the purchase during the cooling-off period. If you don’t want to buy the house – you can literally say ‘No’ without being answerable to anyone. You may be required to pay a small fee or a percentage of the deposit to the seller for their inconvenience, but that’s usually an insignificant price to pay compared to purchasing the wrong property.
What is a cooling-off period?
A cooling-off period is a length of time following the signing of a purchase contract during which the buyer may choose to terminate the agreement without incurring a significant penalty or losing their deposit.
As a buyer, it usually helps to have a cooling-off period built into your purchase contract. It gives you a chance to change your mind about the property if you made a hasty decision or find that the property is no longer right for you.
For instance, let’s assume you signed a contract with a three-day cooling-off period to purchase a unit. However, a better deal comes along your way the very next day, forcing you to rethink your decision about buying the property you signed up for. In such a situation, you may choose to exercise your right to withdraw from the purchase agreement during the cooling-off period. Depending on your contract and the relevant laws in your state, you’ll receive most of your deposit back minus a small fee. You are also free to make an offer on the other property if you plan to buy it.
How long is a cooling-off period, and how does it work?
Your cooling-off period ranges from 2 to 5 business days, depending on the laws in your state. The period starts on the day you receive a copy of the signed contract and ends at 5 pm on the last day of the specified timeframe. This usually excludes Sundays and public holidays.
During this period, you have the option to terminate or cancel the agreement without being in breach of the contract. If you wish to cancel the deal, you’ll need to send a written notice of termination to the seller or their authorised agent within the cooling-off period. If you delay the written communication and send it after the cooling-off period ends, you’ll be bound by the terms of the contract.
It’s also worth noting that cooling-off periods vary between states, and don’t apply to every situation. So think twice before getting carried away in a heated property market, especially when you’re buying at an auction, as you’ll not always have a cooling-off option at hand to rectify any hasty decisions or mistakes.
Here’s an overview of the cooling-off periods applicable in different states:
ACT: 5 business days. You will forfeit 0.25% of the purchase price to the seller.
NSW: 5 business days. You will lose 0.25% of the purchase price to the seller.
NT: 4 business days. The full deposit will be refunded to you.
QLD: 5 business days. You will pay 0.25% of the purchase price to the seller.
SA: 2 business days. A small holding deposit of $100 will be payable to the seller.
TAS: No cooling-off period applies, and you stand to lose the entire deposit if you rescind the contract after signing it.
Victoria: 3 business days. You will forfeit 0.2% of the purchase price to the seller.
WA: No cooling-off period applies unless you have one built explicitly into your contract.
While the above list gives you a general idea of the applicable rules as on date, it’s worth checking with your lawyer, solicitor or conveyancer for more information about the cooling-off period in your state. If you’re purchasing a property in Tasmania or Western Australia, you may be able to negotiate a cooling-off period with your seller even though it’s not mandated by law.
Is it possible to back out of a sale after the cooling-off period has expired?
It’s usually a lot more challenging to get out of a sale once the cooling-off period expires. As you’re already bound by the purchase contract, the same penalties as outlined in the agreement will apply. You are most likely to incur high costs, such as losing a larger percentage of your deposit (if not all), and the money you spent on legal and conveyancing fees, as well as other purchase costs.
If you are not sure about what it will cost you, take time to read your contract thoroughly and discuss your situation with your real estate agent or solicitor to understand the implications of any action you may decide to take.
Your credit score is a number that represents your financial history, and is used by lenders to determine how much risk you pose as a borrower . Your score is calculated from the information contained in your credit report, such as the number of debts you are responsible for, whether you’ve been making timely repayments or not, your credit card limits, etc.
Depending on the credit reporting agency, your credit score may sit between zero to 1,200, as each of the three major agencies use a different range when categorising consumers’ scores. However, your individual score will usually be similar across all three reporting agencies, as the information used to derive the score is the same. Even though what constitutes a good credit score may differ according to the reporting agency, generally a score above 600 is considered good, and 750+ is considered very good.
Having a good credit score means lenders are more likely to approve your application for credit than someone with an average or poor credit score. Lenders also tend to reserve their most competitive rates for borrowers with a high credit score. So, you’re more likely to qualify for a loan with a lower interest rate and favourable terms when applying with a high credit score.
On the other hand, a poor credit score could make it difficult for you to qualify for a loan or any other credit product, or you might be charged a higher interest rate or fees. If you’re planning to apply for a home loan or any other credit product in the near future, it’s worth checking your credit score online to see where you stand. There are plenty of websites that allow you to check your credit score for free. If you do find that your credit score is lower than you need it to be, don’t worry. We’ve put together some simple tips that can help you improve your score over time.
How to fix a low credit score?
There are two steps to fixing a low credit score. The first is getting a copy of your credit report (preferably from all three credit agencies) and checking it for errors. Some of the mistakes that might creep into your credit report are:
Duplicate listings
Incorrect amounts of outstanding debts
Credit applications not made by you
Repayments made by you that were not recorded
If you find information that has been listed incorrectly, you can report it to the relevant credit agency for investigation. Once the error is confirmed, it will be corrected on your report and automatically reflected in your credit score.
Try not to fall for credit repair agencies that charge you for repairing your credit, as they can’t do much more than spotting errors on your file, which you can easily do on your own.
Apart from correcting any errors, the other way to improve your credit score is through positive changes in your financial behaviour.
1. Pay down your debts diligently
Under the Comprehensive Credit Reporting scheme, both positive and negative behaviours impact your credit score. So, paying off your debts promptly, including your mortgage and credit cards, can help improve your credit score by creating a record of consistent and timely repayments.
2. Pay your bills on time
Paying your telephone and utility bills on time can help improve your credit. A late payment of more than $150 may be listed on your report as a default when overdue for 60 days or more. Such defaults can stay on your file for up to 5 years, and you cannot have them removed by paying your bill late. It’s worth budgeting for regular expenses and setting up an auto-debit from your account to make sure your bills are paid on time.
If you move house, remember to update all relevant parties, including your local post office, utility providers and lenders, with your new details to make sure you receive your bills on time. You might also want to opt to receive your bills by email to avoid confusion and to save paper.
3. Lower your credit card limits
While it can be good to have a higher credit limit in case of emergency expenses, in some cases you might find that it actually ends up hurting your credit score. This is because your credit report doesn’t reflect the amount you spend on your card. Instead, it’s your credit card limit that’s shown on your report and used to calculate your credit score.
So, if your combined credit card limit is $10,000, that’s the amount that will show on your file, irrespective of whether you only spend $1,000 of that. Lowering your credit card limit reduces the amount of active credit on your file, which may increase your borrowing capacity and boost your credit score.
4. Use your credit cards wisely
Not having a credit history will also lead to a low credit score. One of the simplest ways of building credit is by using a credit card, but you need to be aware of the costs and risks involved. While credit cards offer an easy method to pay for your day-to-day expenses, they also make it easier to fall into a debt trap, making it easier to spend more than what you earn. Therefore, it’s important to budget and set limits on your credit card spending to make sure you’re able to pay your bill in full each month to avoid penalties and high interest charges.
5. Avoid making multiple applications for credit
Whether you’re searching for a home loan, personal loan, or a new credit card, shopping around for the best deals on the market can help you boost your savings. But while it’s okay to compare deals online, making multiple applications for credit too close to each other can impact your credit score negatively. That’s because a credit provider pulls out your credit report each time you make an application for new credit. Such inquiries are listed on your credit report. If a lender sees multiple inquiries on your report in a short duration, they may suspect some kind of financial trouble. Such inquiries reduce your credit score slightly, but multiple inquiries can add up to have a more significant impact.
If you’re looking for a home loan, you can always speak with a mortgage broker to narrow down your search to lenders most likely to approve your application. A broker will also help you find a loan that’s competitive and suitable for your requirements to help you get the most out of your mortgage.
While comparing home loans, there’s much to look at beyond the headline rate advertised by the lender. Needless to say, the interest rate matters, and a slight difference can save you thousands over the years. Even so, the home loan with the lowest advertised rate might not be the best deal for everyone. That’s why it’s recommended to compare home loans with different options and features to find one that’s most likely to match your requirements. You can also opt for home loan features that help you build some flexibility into your loan or pay it off sooner. However, some of these options could cost you more, so it’s a good idea to chat with a broker to make sure they’re worth it before you commit.
Here’s a round-up of some common home loan features that you might want to consider.
1. Extra repayments
Making extra payments toward your loan could help you pay off the debt faster and save money in interest charges over the life of the loan. Consider this example.. Imagine you have taken out a $500,000 home loan for 30 years, with an interest rate of 2.3 per cent per annum. Five years into the loan, you decide to take some small steps to pay off your loan early. At this stage, even if you only choose to pay an extra $100 on top of your minimum monthly repayments, you would save $9,775, and pay off your loan 1 year and 7 months earlier.
Many home loan providers allow you to make fee-free extra repayments on variable rate home loans. That doesn’t mean you cannot access the feature with a fixed rate mortgage, but there might be a fee or restrictions regarding the number or value of extra repayments you’re allowed per year.
Depending on your credit provider, you may be allowed to make several lump sum payments over and above your minimum repayment amount. You could also choose to pay a little extra each month to consistently reduce your debt over time.
2. A redraw facility
Extra repayments and a redraw facility often go hand-in-hand. Once you’ve made additional repayments on your home loan, you may use a redraw facility to ‘withdraw’ some of these funds if you need them urgently. For instance, you may choose to redraw the additional funds to pay for a home renovation or an urgent repair.
However, it’s worth remembering that redrawing the additional money you paid towards your home loan will increase your outstanding balance (and the interest charged on it) once again. Your lender might also charge you a predetermined fee for redrawing any money from the loan, or place restrictions around how much or how often you can redraw. Still, in some cases, you might find it cheaper to dip into your additional loan repayments than taking out a personal loan with a high-interest rate. It’s usually best to crunch the numbers to pick the most suitable option for your situation.
3. A 100 per cent offset account
If you don’t want to lock your savings into your home loan, you may want to consider a 100 per cent offset account to help reduce the interest on your home loan, while still keeping your savings accessible.
An offset account is similar to a regular bank account in many respects. You can have your salary deposited into the offset account, use it for paying bills, and even ask for an ATM card to withdraw funds. However, unlike an everyday bank account that might pay you some interest on your deposits, an offset account doesn’t pay you any interest. Instead, the balance in your offset account is deducted from your outstanding loan balance, and you’re only charged interest on the difference. So, if you owe $300,000 on your home loan but you’ve got $50,000 sitting in your offset account, you’ll only be charged interest on the difference of $250,000.
While it’s true that an offset account can help you save money in interest charges, most lenders will charge you a fee for this facility or increase your interest rate slightly. It might only be worth paying for the feature if you’re going to have a decent sum of money deposited in the account at all times.
4. Repayment holiday
The average term of a home loan is 25-30 years, but a lot can change over three decades, including your personal and financial circumstances. A repayment holiday can give you a much-needed breather by allowing you to skip your home loan repayments for a few months. If you find yourself unable to make your repayments due to an emergency or personal situation, having this feature available can make a real difference. For instance, you might want to use this feature while you’re on maternity leave or taking a sabbatical from work to upskill. Or, if you’re out of your job for a few months due to an illness, a repayment holiday could help you manage your expenses better.
You may also consider purchasing mortgage protection insurance to cover your repayments for a longer duration in times of crisis.
5. Home loan portability
It’s possible that you might outgrow your new home before you’ve finished paying off the mortgage on it. You may have welcomed a new family member, decided to move to a new suburb, or simply require more space for the family. While there could be many reasons for switching your home, closing your existing mortgage and applying for a new one could see you jumping through several hoops that you might want to avoid.
A home loan portability feature frees you from the struggle of applying for a new loan each time you shift, by allowing you to transfer your current mortgage to a new property. Instead of applying for a new home loan, loan porting lets you switch the property on which your mortgage is secured while allowing you to continue with the same interest rate and features.
The main benefit of this feature is the time and cost savings in avoiding closing one loan and setting up another. However, you’ll still need to pay for a property valuation (for both your existing and new homes), and a small loan transfer fee might apply. You’ll also pay for Lenders Mortgage Insurance (LMI) if you’re borrowing more than 80 per cent of the property’s value, even if you paid it before at the time of applying for the original mortgage.
Overall, it’s worth noting that while additional features might make it easier to manage your mortgage, it’s important to weigh up if they are worth the cost you’re going to pay. When comparing your options, consider your lifestyle and goals, only selecting features you’re really going to need and use. Choosing a home loan with all the bells and whistles is likely to cost you more than a low interest vanilla home loan. It could help to speak with a mortgage broker to understand what features are better suited to your requirements while ensuring a competitive rate on your home loan.
If you’re planning to buy a house, you’ll likely need a home loan to finance it. But did you know there are multiple home loan products on the market, and what works for your friend might not be the right choice for you?
Even though mortgage products might look similar, they can be structured differently, which can significantly impact your cash flow and the ability to manage your repayments.
Here’s a rundown of some popular home loan options to help you make an informed choice.
1. Owner-occupied and investor home loans
The type of home loan you’ll need depends upon the purpose you’re going to use the property for. If you’re buying a house to live in – you’ll require an owner-occupied home loan. On the other hand, if you’re buying a property as an investment to earn rental income, you’ll need to apply for an investor loan.
Owner-occupied loans are typically principal and interest loans. You make regular repayments on the principal (or the borrowed amount) in addition to paying interest each month to gradually pay down the loan over 25-30 years.
Investment loans, on the other hand, are often interest-only loans. If you take out an interest-only loan, your repayments will only cover the interest on the principal during the initial period (which could be up to 5 years in some cases). While this can help you maximise your cash flow as an investor, remember that your debt won’t reduce during the interest-only period, and you won’t build any equity in the house unless its value appreciates. Your repayments will also jump significantly at the end of the interest-only period as you need to pay off the debt within a smaller timeframe.
Lenders usually consider investors as a riskier type of borrower than owner-occupiers, which is why the interest rate and fees on investor loans are generally higher than owner-occupied loans.
2. Fixed, variable and split-interest rate loans
Whether you’re buying a house for yourself, or as an investment, you’ll need to select the type of interest you want to pay on your mortgage. If you choose a variable rate, the interest you pay will depend on the official cash rate set by the RBA, as well as any interest rate changes made by your lender. You might be able to save money on interest charges during low-interest rate periods, but there’s always the possibility of an interest rate hike in the future.
Fixed-rate home loans allow you to ‘fix’ your interest rate for a specified period, up to 5 years. During this time, your interest rate will not change regardless of any changes in the market. You might prefer a fixed-rate because it’s easier to plan your budget with fixed repayments. However, fixed-rate home loans are usually less flexible than variable-rate loans, and you might have to pay a fee if you decide to refinance a fixed-rate loan during the ‘fixed’ period.
It’s also possible to fix a portion of your loan and pay a variable interest rate on the remaining part. It might help to speak with a broker to understand the pros and cons of each option before deciding what’s best for you.
3. Low deposit home loans
Lenders usually require you to pay 20 per cent of the property’s value upfront to qualify for a home loan. However, you might be eligible for a low deposit home loan with some lenders if you have good credit and adequate income to service the loan. Still, you’ll need at least 5 per cent of the property’s value in genuine savings, and to pay for Lenders Mortgage Insurance (LMI) to qualify.
You could also consider a guarantor home loan to avoid paying LMI when borrowing with a low deposit if your parents (or another family member) agree to guarantee your mortgage with their own property.
4. Low doc home loans
Self-employed borrowers and freelancers might find it hard to qualify for a traditional home loan because they have variable income and cannot provide standard proof of income, such as pay slips, to support their mortgage application. A low doc loan is an alternative for borrowers with non-standard income. Such loans require minimal paperwork, making it easier to qualify for a mortgage, but they usually come with a higher-than-average interest rate.
5. Bad credit home loans
Life is all about second chances. If you’ve had bad credit in the past but your finances are back on track, a bad credit home loan could help you purchase your dream home, if you’re able to afford it.
Bad credit home loans are for people with a poor credit history that are now able to service a home loan. However, these home loans are only offered by specialist lenders, and the rate of interest is usually higher than the market average. The good thing is you can improve your credit score by making regular repayments on your home loan, and eventually refinance to a traditional home loan with a lower interest rate.
If you’re considering a bad credit home loan, make sure you only borrow as much as you can afford, as missed payments are only going to worsen your credit score. You could also risk losing your home if you default on the mortgage.
6. Construction home loans
If you’re building your home from scratch or planning major renovation work, a construction loan could help you save money on interest charges. Construction loans allow gradual withdrawals to fund progressive construction stages, leading to lower repayments that help manage cash flow. Additionally, you’re only charged interest on the amount that has been used up until that point, leading to lower interest costs.
7. Bridging home loans
If you’ve decided to switch homes, you might have to wait to sell your current home before you can purchase a new one. But what if you find a deal that’s too good to resist, or you need to move to your new place sooner? A bridging loan can help you ‘bridge’ this gap by providing you money for the new house while you’re still trying to sell your current place. Bridging loans generally last a year, during which you’ll continue repaying your original mortgage and only pay interest on the bridging loan. Once your home is sold, the sale proceeds are used to pay off the original mortgage, and you’ll then start paying both interest and principal repayments for the remaining debt.
Overall, there’s no single mortgage product that’s best for everyone. You need to find a product that matches your requirements and financial goals. Speaking with a mortgage broker can help you understand your options and pick a home loan that’s tailored to your specific needs and goals.
Lenders Mortgage Insurance (LMI) is a type of insurance that covers a lender’s financial risk in case a borrower defaults on their mortgage repayments. It’s usually required when a borrower applies for a home loan with less than a full deposit.
Generally, the smaller the size of the deposit, the higher the cost of the LMI. The amount of LMI payable also depends on the size of the loan, and can often run into tens of thousands of dollars. You can use an online LMI calculator to get a fair estimate of how much extra you’ll need to shell out in LMI fees for a low deposit home loan.
How does LMI work?
Let’s assume you default on your home loan, and there’s still $550,000 owing to the lender. After repeated reminders, you fail to make the repayments, and the lender eventually sells the property to make good its losses. However, the lender only receives $500,000 in sale proceeds, leaving a shortfall of $50,000.
Normally, the lender can attach your personal assets to recover this shortfall. However, when you pay LMI, the lender can claim the shortfall from the insurer instead of coming after your assets.
Homeowners often confuse LMI with mortgage protection insurance, which is a different product altogether. While LMI only protects the lender in the case of default, mortgage protection insurance is designed to help with your repayments if you become seriously ill or meet with an accident (as laid down in the insurance policy).
Is it worth paying for Lenders Mortgage Insurance?
Most lenders require you to pay at least 20 per cent of the property’s price upfront as a deposit. However, saving a full deposit is no mean feat. Recent data indicates first home buyers take about eight years to save a deposit for a home in Sydney and a little less than seven years for a house in Melbourne. The “steep deposit burden” restricts many first home buyers from entering the market unless they are able to get support from their parents in the form of cash or a home loan guarantee. Alternately, first home buyers can consider paying for LMI to qualify for a home loan with less than a 20 per cent deposit.
Overall, LMI might prove to be a useful tool if you wish to enter the property market sooner without having to save a full deposit. This could be the case if you think you’re in a property market where prices are likely to hike faster than you save. Or, you’ve come across a rare deal on your dream home that’s too good to miss, and it’s going to remain a profitable deal despite the extra LMI fee.
On the flip side, the cost of LMI can run into several thousands of dollars and add to your debt. If you’re already struggling to save a deposit, you might find it difficult to foot the LMI payment upfront. Some lenders may allow you to roll the LMI into your loan, but you’ll then be charged interest on the additional amount, along with the rest of your loan, resulting in higher monthly repayments.
It’s also worth noting that LMI premiums are usually not refundable. While you may be able to transfer your loan to another property using the mortgage porting feature, you generally cannot transfer your LMI to another lender. This means you could be required to pay LMI again while refinancing if you borrow more than 80 per cent of the property’s price.
The answer to the question of whether it’s worth paying for LMI depends on your personal goals and circumstances. For instance, you may find paying LMI worthwhile if it gets you into a volatile property market sooner. On the other hand, you might find it practical to wait until you have an adequate deposit to save on LMI costs and potentially qualify for a better rate on your home loan. It could help to discuss your options with a mortgage broker to select the right course of action for you.
How can I avoid paying LMI costs?
Paying for LMI can help you purchase your home sooner, but it can also add thousands to your home loan costs. One of the simplest ways to avoid paying for LMI is to save up a 20 per cent deposit for your purchase. Even if you can’t meet the 20 per cent goal, it’s worth saving as much as you can to reduce your potential LMI costs.
Another option that first home buyers may consider is a guarantor home loan. If you can get a parent or other close relative to guarantee your mortgage with their own property, you could avoid paying for LMI despite having a low deposit or even no deposit in some cases.
However, taking out a guarantor home loan places more responsibility on your shoulders. If you default on your mortgage repayments, your guarantor will be responsible for making the payments. If both you and your guarantor fail to meet the home loan repayments, the lender may sell your house, followed by the guarantor’s property, to pay for any shortfall. Therefore, it’s important for all the parties to be aware of the risks before signing up for this option.
Depending on the state in which you’re buying, you may be able to take advantage of state and federal grants to beef up your deposit. For instance, most states and territories offer the First Home Owner’s Grant (FHOG) to help first home buyers get into their homes sooner. You can check your eligibility for FHOG on your state’s website.
The federal government’s First Home Loan Deposit Scheme allows eligible Australians to buy their first home with just a five per cent deposit and no LMI. Single parents with dependent children can purchase a home with only a 2 per cent deposit under the Family Home Guarantee. However, both the schemes have a range of eligibility criteria to fulfil, and only a limited number of spaces are made available in each financial year.
You may also check with your broker if you’re eligible for an LMI waiver. Certain professionals like doctors, lawyers and accountants are often considered low-risk by lenders. If you belong to any of these professions, you might be eligible for a professional discount that lets you borrow up to 90 per cent of the property’s value without paying for LMI.
When buying a house, one of the first things you will need to do is ensure you’ve got enough of an upfront deposit to be eligible for a home loan. While there’s no fixed number, having a deposit that equals at least 20 per cent of the property’s price can improve your chances of approval. Some lenders may even approve you with a lower deposit, but you’ll need to have a minimum of 5 percent of the property’s value unless you have a guarantor for your home loan.
Most lenders also require you to pay for Lenders Mortgage Insurance (LMI) if you’re borrowing with a low deposit and without a guarantor. However, certain professionals such as doctors, lawyers and accountants are considered low-risk by lenders, and the requirement to pay LMI may be waived if you belong to one of these professions. You can speak with your broker to check your eligibility for a professional discount and purchase your house sooner.
It’s also worth remembering that besides the deposit, you’ll also need enough savings to cover various other costs associated with buying a property, such as:
Stamp duty, which could run into a few thousand dollars, depending on your state
LMI, if you’re borrowing with a low deposit
Building and inspection fees
Legal fees
Building and contents insurance
Moving costs
Why do you need a deposit?
A home loan deposit can be understood as your initial contribution to the purchase price of your house. It helps you own a portion of your home, which reduces the lender’s risk in lending you money.
Generally, the higher your deposit, the more is your stake in the property, and the lesser risk you pose to the lender. Lenders also consider you less likely to default on loan repayments if you have a higher stake in the property.
By regularly putting aside money for a deposit, you’ll also demonstrate good financial planning and the ability to save money, which increases your credibility as a borrower.
How to save for a home loan deposit faster?
Having a 20 per cent deposit not only improves your chances of mortgage approval but also makes you eligible for competitive interest rates and discounts from lenders. A larger deposit also means you’ll need to borrow a lesser amount of money, which can make your repayments easier to manage in the long run. That being said, saving for a deposit isn’t exactly easy.
For instance, the median property price in Sydney for a unit is around $800,000. So, you’ll need to save at least $160,000 for a 20 per cent deposit and an additional $40,000 to cover the additional costs. Depending on your income and expenses, it could take you several years to put together $200,000 in genuine savings. There’s also the risk of property prices escalating in the meanwhile.
It’s up to you whether you want to wait it out and save up a 20 per cent deposit, or purchase sooner with a lower deposit by paying LMI or using a guarantor. Regardless of your decision, it’s worth budgeting and trimming down unnecessary expenses to put aside as much as you can toward your deposit. You can use the following tips to build your deposit faster:
1. Plan a household budget and review your expenses
Reviewing your expenses is one of the surest ways of boosting your savings. Once you make a budget and go through your monthly expenses, you may find memberships and subscriptions you’re no longer using. Eliminating these easily overlooked expenditures will instantly boost your savings.
Having a budget in place will also help you determine the amount of money you can set aside each month for your home loan deposit without stretching yourself too thin. This, in turn, will give you a fair idea of how long it’ll take you to reach your savings goal, as well as the amount you can comfortably repay each month for your home loan.
2. Seek help from your parents
If you’re renting, you may consider moving in with your parents or find flatmates to share your living expenses. You could even ask your parents to guarantee your home loan with the equity in their property, allowing you to borrow with a lower deposit without paying LMI.
However, do consider your repayment capacity when borrowing with a low deposit. If you’re renting, you’ll most likely be comfortable with a monthly repayment that is similar to your current monthly rental fee. Borrowing more than you can afford can make it difficult to service your loan if interest rates hike or your financial situation changes for the worse. In such a case, you not only risk losing your house, but also the home of your guarantors.
3. Take advantage of ongoing government grants and schemes
It’s worth exploring the various government schemes available to help first home buyers get into their homes sooner. For instance, the First Home Loan Deposit Scheme offers eligible first home buyers the opportunity to buy a home with only a 5 per cent deposit and no LMI. There may also be state-sponsored grants (depending on where you’re buying) you can take advantage of to boost your deposit. Some states also offer transfer duty concessions to first home buyers, which can help you save some money. It’s advisable to visit your state’s website for the latest information on available grants and schemes.
Most home loans are set up for a period of 25 to 30 years, but that doesn’t necessarily mean you have to be stuck in debt for your entire mortgage term. With smart financial planning, it’s possible to pay off your mortgage early and own your home sooner.
Here are five tips for paying off your house sooner without spending a lot of extra money:
1. Switch to fortnightly repayments
If you’re comfortable shelling out cash every two weeks or so, switching to fortnightly or weekly repayments can help you settle your mortgage faster.
While there are 12 months in a year (resulting in 12 monthly repayments), there are 52 weeks or 26 fortnights. So, when you’re paying weekly or fortnightly, you’re effectively making an extra monthly repayment each year.
2. Make higher repayments
Chipping in a little extra than your minimum monthly repayment can help you pay off your debt sooner. For instance, if your lender reduces your variable interest rate, you’ll benefit from lower monthly repayments. But, suppose you continue with your original mortgage repayments despite the interest rate discount. You’ll end up paying extra money into your mortgage each month that will be directly applied towards reducing your mortgage principal.
Even if you can’t commit to a higher monthly repayment, regularly paying a bit more off your loan can help you close your mortgage sooner. For instance, paying $4 a day (the approximate price of a cappuccino) more into your loan could help you pay it off several months earlier. However, do check with your lender whether you’re required to pay any fees for making extra repayments and whether your expected savings justify the cost.
3. Consider using an offset account
An offset account is similar to a transaction account linked to your mortgage. You can deposit money into the account, and the balance will be offset against the amount owing on your home loan. For example, if you have $400,000 outstanding on your mortgage and $75,000 saved in your offset account, you’ll be charged interest as if you only owe $325,000 on your mortgage.
If you have sizeable savings, using an offset account can help you reduce the amount of interest you’re charged so that you can put more money towards paying down your mortgage faster.
However, it’s worth noting that an offset account facility may cost you more than a standard loan would. . Some lenders may charge a higher interest rate for a loan with additional features (like an offset account) than a basic home loan without any bells and whistles. Do consider the average balance you’re likely to keep in your offset account vis-à-vis the expected savings, and whether it justifies the extra fees you’ll pay for the feature.
4. Make lump-sum payments into your home loans
If you’re expecting a large tax refund or a sizeable bonus at work, it’s possible to use the extra cash to pay off your mortgage faster. Any lump-sum payment you make will come straight off your loan balance, reducing your debt substantially. For instance, a one-off lump sum payment of $5,000 (made in the fifth year) on a $300,000 loan with a 30-year term and 2.00 per cent p.a. interest rate can cut down 7 months from the loan term and save you over $3,000 in interest.
5. Consider downsizing
This is not really a tip to pay off your mortgage faster but one that might help you manage your finances better. Many of us dream of owning a large house. But if you find yourself falling behind on your mortgage repayments, it’s worth considering if you’re paying for a place that you don’t need. It’s possible that your house is too big for you and your family and you don’t require all the space you’re paying for. Downsizing to a smaller home may be a practical solution in this case. A smaller place will likely need a smaller mortgage, making it relatively easy to pay off the debt.
Besides getting the right-sized mortgage that you can comfortably afford, it’s also essential to choose a home loan with the right features that make it easier to manage your mortgage repayments in the long run. It’s also true that the best home loan for you today may no longer be the right choice five years down the line. Depending on your financial situation and goals, switching to another lender offering a lower interest rate or more useful features can help you save money and pay off your mortgage faster. However, be mindful of refinancing to a standard 30-year loan term that will increase the overall duration of your mortgage.
A bad credit score can stand in your way when you want to get a mortgage, take out a personal loan or even buy a new car. Lenders use your credit rating to assess the risk involved in lending you money. They also reserve their best interest rates and deals for borrowers with a high credit score. On the other hand, bad credit on your file can make it difficult for you to get approved for finance, or you might be offered a loan at a higher interest rate than the market average.
What Leads to Bad Credit?
Perhaps it’ll come as a surprise, but it’s not just people with financial difficulties that have poor credit on their files. Many reasons can lead to your credit score being lower than you would like. A simple mistake like forgetting to pay your utility bills while you’re away on vacation can also be recorded on your credit report and negatively impact your credit score. Various other factors, like outstanding debts, credit card limits, and even the length of your credit history can impact your score.
The good thing is your credit score is a dynamic number, and making positive changes in your lifestyle can help improve it over time. Under the Comprehensive Credit Reporting guidelines, your credit report now also includes positive information like your repayment history. So, if you’re regularly paying your bills and taking steps to manage your debt better, it’s likely to have a positive impact on your credit.
Top Tips for Borrowers With Bad Credit
Getting approved for a home loan with bad credit can be challenging, but not impossible. Here are some tips to maximise your chances of mortgage approval with bad credit on your file.
1. Avoid Lenders Mortgage Insurance (LMI)
Most lenders require you to provide a 20 per cent deposit to be eligible for a home loan. While you can still borrow with a lesser deposit, you’ll have to pay for LMI, which protects the lender’s interests if you default on the loan. It also means you’ll require two approvals for your mortgage – one from the lender and the other from the mortgage insurer. By having adequate funds to cover your deposit and additional costs like stamp duty, you can avoid having your application assessed by an insurer, and potentially increase your chances of mortgage approval.
2. Seek Expert Help
If you’re applying for a home loan with bad credit, it might be a good idea to speak with a mortgage broker to understand the various financing options available to you.
Mortgage brokers are required by law to act in your best interests. They also have experience working with a wide range of borrowers and lenders to gauge the likelihood of your application being approved by specific lenders.
For instance, many lenders use an automated credit scoring system to evaluate your home loan application. If there’s bad credit on your file, the software is likely to rate your application poorly. Based on this score, your application may be automatically declined without even passing through a real person.
Generally, a broker is aware of these things and will help you apply with a lender that doesn’t use a credit scoring system to assess your application. This will help ensure that your application is evaluated by a real person. Your broker can also help the lender understand the reason for your past financial problems and what steps you’ve taken to get your finances back on track, which might improve your chances of approval.
3. Demonstrate Good Financial Behaviour
If you’ve had credit problems in the past, it’s time to demonstrate better financial behaviour by taking control of your expenditure and ensuring all your bills are paid on time. This includes your credit card bills, rent and utility payments, and any personal or other loans you might have taken out, be it for any purpose.
It’s also worth checking your credit report and making sure that the information listed on it is correct. If not, it’s advisable to contact the credit reporting body and ask them to fix the issue by removing the incorrect listing.
4. Apply to a Specialist Lender
Depending upon your credit history, you may not be eligible for financing from some mainstream lenders. However, you may still be able to apply for a bad credit home loan offered by specialist lenders. The only downside is that you’ll be charged a higher interest rate on a bad credit mortgage. Also, if you’ve had financial troubles in the past, it’s essential to think carefully and practically as to whether you can realistically afford a home loan or not. If you struggle to make the repayments on your bad credit mortgage, your credit score could suffer further. In the worst case scenario your house could be repossessed if you default on your home loan. Conversely, if you continue making your repayments promptly, you have a good chance of improving your credit situation and refinancing to a lower rate in the future.
Many people choose to buy an investment property to boost their cash flow through regular rental income. Property investors are allowed several expense deductions by the Australian Tax Office (ATO) for periods their properties are rented out or genuinely available for rent. Investors can write off their investment costs against taxes if their expenses and interest payments exceed their property returns during a financial year. This is also known as negative gearing. Negative gearing helps in mitigating short-term losses through tax deductions to maintain a regular cash flow.
However, negative gearing is not the only tax benefit available to property investors. If you’re renting out a property, you can claim a whole lot of other rental expenses, including the cost of marketing your property for tenants. Yet many investors are unaware of the eligible investment property tax deductions. This post will help you save money on your tax bill by acquainting you with the top tax deductions you can claim on your rental properties:
1. The Interest on Your Investment Loan
The ATO lets you claim the interest charged on a loan for an investment property, including the bank fees for that loan. So, if you incur $10,000 in interest on your loan and $100 in loan fees, you can claim these amounts on your personal tax return. However, you cannot claim any repayments on the principal sum borrowed for an investment property. You are also unable to claim interest for the entire loan if a part of it has been used for private purposes.
2. Depreciation Deductions
With time the structure of your property naturally becomes old and worn out, and may require renovation to maintain its structural integrity. Similarly, the fittings and fixtures in a property also wear out over time and decrease in value. The ATO uses the term depreciation to describe the gradual loss in the value of an asset over time. It also allows you to depreciate rental assets under two categories, capital works and plant and equipment assets.
Capital Works Deductions
Capital works deductions relate to the construction costs of an investment property. Under this category, you may be able to claim a deduction on the depreciation of the building’s structure and the renovations made to it. You can claim a depreciation deduction of 2.5 per cent annually on construction costs for up to 40 years – which, as per the ATO, is the length of time a building lasts before it needs replacing. However, you can’t claim a deduction on the original construction costs if the property was built before 16 September 1987. Similarly, you can’t claim depreciation deductions on renovations made before 27 February 1992.
Plant and Equipment Depreciation
Much like your building’s structure, the fixtures and fittings in it also wear out with time. As these items (like the appliances in your house) wear out, their value is gradually reduced, which is known as depreciation. The good part is that you can claim this depreciation over several years, depending on the effective life of the item. You can visit the ATO website for a comprehensive list of the estimated useful life of various investment property plant and equipment assets you might be able to claim. It’s also important to note that you can no longer claim depreciation on second-hand assets unless those assets are being used as part of a business. .
Top tip: It’s usually a good idea to hire a quantity surveyor to prepare a depreciation schedule for your property to maximise your return. The fee you pay to a quantity surveyor can also be claimed as an investment property tax deduction.
3. Rental Expenses
You’re likely to incur several expenses when you put your investment property up for rent, but you can claim a wide range of these expenses on your personal tax return. For instance, if you need to advertise to find tenants for your property, you might be able to claim the marketing costs, including the money spent on listing websites and printing fliers. Alternatively, you might prefer to hire the services of a property manager to find tenants and manage your rental properties as well. The fee that you pay to your property manager can also be claimed as an investment property tax deduction. It’s also possible to claim the legal expenses related to rental activities and your rental insurance premium. However, travel expenses related to your rental property may no longer be claimed.
4. Repair and Maintenance Costs
Any money you spend on repairing or maintaining the property to continue renting it out is eligible for a tax deduction. This can include essential repairs like plumbing, and even pest control treatments that you paid for. You can also claim the council rates in the year they are paid and the body corporate fees for properties on strata title.
In a nutshell, knowing what rental expenses are eligible as tax deductions can help you maximise your savings. However, it’s important to remember that you can only claim deductions for expenses related to the income-producing use and not your personal use of the property.
If you’re a beginner investor or in the business of renting out properties, it might be worth consulting a financial advisor to make the most out of the tax deductions available to you. In case you’re considering an investment property purchase, a specialist broker can help you better understand investment loans and assist you in the process of applying for one.
If you’re planning to buy your first home, you’re likely to apply for a home loan to fund your purchase. Therefore, it makes sense to find out about your borrowing capacity before you go house hunting to avoid getting disappointed at a later stage. For instance, you might like a property but when you apply for a home loan you realise you can’t afford it, as your borrowing capacity is lower than what you planned to borrow.
Getting a fair estimate of the amount you can borrow, helps you narrow down your search. It also enables you to figure out your future repayments so that you don’t spread yourself too thin while buying a house.
What Do You Mean By Borrowing Capacity?
Your borrowing capacity is the maximum amount of money a lender is willing to lend you for purchasing your house. It depends upon your home loan serviceability, which is calculated using a complicated formula by lenders. Most lenders rely on multiple factors to work out this amount. While the criteria may differ for different lenders, some common factors affect your borrowing capacity. These include your income details, current assets and debts, credit card limits and general living expenses. You can use a borrowing capacity calculator to roughly figure out how much you might be able to borrow by entering your income and expense details.
Another factor that impacts the amount you can borrow is your deposit size. Most lenders require you to provide a 20 per cent deposit to be eligible for a home loan. Some lenders may allow you to borrow with a lower deposit, but you might have to pay lenders mortgage insurance (LMI) fee. This is a one-time insurance premium payment that protects the lender against any losses if you default on your loan anytime during the term. However, some low-risk professionals like doctors, lawyers and accountants might be eligible for an LMI waiver. You can speak with your mortgage broker to check your eligibility for any professional discount or offer.
Borrowing Capacity vs. Home Loan Affordability
Your borrowing capacity is just an estimate of the amount you can borrow to purchase a house. However, you’re also required to repay what you borrow (along with interest!) within a specified timeframe of 25-30 years. Considering that your home can be one of your most expensive investments and a financial commitment, it’s essential to work out a budget and check whether you can afford the repayments on your home loan or not.
Interestingly, the amount of money you’re eligible to borrow might be different from what you can afford to borrow (or repay, to be precise). For instance, you may have poor credit on your file, which will reduce the amount you can borrow. But your financial condition might have improved over the years, and you can afford a higher repayment in your present situation. If that’s the case, you may consider discussing your situation with a broker to apply for a specialist home loan. You could also choose to wait it out while following these tips to repair your credit.
Conversely, you might be eligible for a higher loan amount that you cannot service. It’s worth using a mortgage repayment calculator to figure out a reasonable amount that you can repay without running yourself into the ground. Some experts recommend that you calculate your monthly repayments at a higher interest rate (about 2 to 3 per cent more than the average interest rate) to account for any future rate hikes. You’re most likely to be comfortable with a monthly repayment that matches your current rental costs. However, if your repayment amount considerably exceeds your current housing expenses, you might find it challenging to meet other necessary expenditures and reel under mortgage stress. It’s perhaps better to go for a smaller unit or rework your budget to buy an affordable property that you can enjoy stress-free.
Many Australians go for property ownership as their investment method of choice. While investing in the real estate market is common, many first-time investors will be surprised to learn that the ownership structure they choose for their new property can have a notable impact on the returns they see on the investment.
Like most decisions you’ll make regarding the property market, there is no one-size-fits-all guide to choosing an ownership structure. You’ll need to take careful consideration of your circumstances and seek out expert advice to find the option that suits you best.
Some ownership structures are more common than others, though, and understanding these is a great place to start.
Individual
By far the most common and straightforward form of property investment, individual ownership means that all of the benefits, losses, and repayments are your responsibility alone.
This property investment type can be used to offset losses against your income through negative gearing, though it offers little asset protection.
Individual ownership is most suitable for first- and small-time investors and high-income earners.
Joint tenants
Couples or spouses most commonly choose a joint ownership structure, but it can work just as well for friends or relatives. Functionally, joint ownership works very similarly to individual ownership. Both you and your co-owner are equally responsible for the property, repayments, and losses, and each will benefit from any gains. When choosing a joint ownership structure, you can specify the percentage of ownership for each involved party. Upon either party’s death, ownership of the property will be transferred to the surviving individual unless there is a will in place specifying otherwise.
Company
Choosing to purchase an investment through a company means that you, as an individual, do not legally own the property. If you were to be sued or declare bankruptcy, the property would not be affected, making this ownership structure a desirable option if you’re concerned about protecting your assets.
However, all income earned through the investment is subject to a flat tax rate of around 30% and must be divided among the company’s shareholders. A company ownership structure is suitable for those looking at property investment as a long-term strategy.
Trust
Although there are multiple types of trusts used by those looking to invest, family and unit trusts are most common. Offering more asset protection that individual or join ownership, purchasing through a trust provides multiple benefits, such as reduced tax.
SMSF
Adding a property to your Self Managed Super Fund can save you money on tax and boost your retirement savings. Any rental income earned on a property managed as part of your SMSF will be taxed at a rate of only 15% and capital gains at 10%.
Not sure which ownership structure would best suit your needs? Well, here are a few factors you should consider:
1. Complexity
The more complex an ownership structure, the more expensive it can be to establish or maintain, and the more difficult it can be to adjust the structure if your needs change. Complex ownership structures can be worth it if you are looking to invest in multiple properties or have a significant focus on property in your portfolio, but if you’re a first-time investor, it is often best to keep it simple.
2. Asset Protection
If you run into any sort of legal risk, regardless of whether your property is involved, you can run the risk of losing your investment. Making sure you have adequate asset protection is an important consideration when deciding on a suitable ownership structure.
3. Tax
Investment properties are a great way to save on tax and offset losses. Therefore, ensuring your chosen ownership structure is set up in such a way that best suits your circumstances should be one of the most critical aspects of your decision-making process.
If you’re considering investing, the most crucial piece of advice is to seek an expert’s opinion, such as an accountant or a lawyer. Investment can be complex, so it is best to be confident you are choosing a structure that ensures you will receive the maximum benefit from your property.
