Mortgages. Get the right loan for your dream home. Step by Step Guide to: Home Loan (mortgage) basics FIXED VS. VARIABLE RATE HOME LOANS

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1 Step by Step Guide to: Mortgages Get the right loan for your dream home Most Australians dream of owning their own home, however with such a large number of loans designed for different circumstances it can be hard to understand the process of applying for a loan and the implications involved in your decision. This guide will walk you through the basics of a mortgage and the tricks and traps to consider before taking that initial first step. Areas include: Home Loan basics Fixed vs. variable rates Good vs. bad debt Tricks and traps in lending How to choose a lender Reverse mortgages Home Loan (mortgage) basics WHAT IS A MORTGAGE? A mortgage is an offering of a property as security for a loan. The loan finances the property, with the property being owned by the lender until payment has completed. By obtaining a home loan, the borrower is able to buy a house or other real estate. This guide will cover the basics involved in home loans; both obtaining a home loan and paying it off HOME LOANS The main types of loans There are two main types of loans: lines of credit and term loans. LINE OF CREDIT A line of credit loan allows you to access the equity in your home to use as you wish. It is an ongoing loan and generally comes with a credit card. This type of lending is useful to pay for costs including renovations on your home. Your salary and other income dividends are directly credited to the loan, you use the lender s credit card for every day expenses and make a single payment sweep at the end of the month paying off the credit card. This maximised repayments on the loan reducing interest and enabling the loan to be paid off sooner. TERM LOAN Mortgages are taken out over an agreed term, generally years and are thus classified as a term loan. Regular repayments are made throughout this period, according to the interest rate that applies at the time. Longer mortgage terms will result in lower monthly repayments but the total repayments over the life of the loan will be more than shorter term loans. Term mortgages include subcategories such as: Fixed/Variable Reverse Mortgage Interest Only Construction Loan Full or Low Documentation FIXED VS. VARIABLE RATE HOME LOANS Home Loans come in many forms, due to the many components that make up the loan. The most important component of a mortgage is the interest rate charged by the lender. If you want a loan of $400,000, you will have to pay back that money plus the set interest. You will typically make these repayments monthly, although there are options available to make repayments fortnightly or weekly, with the interest that you pay compounded with each repayment. Over time, the lender will change your interest rate, meaning that the amount of your repayments will either increase or decrease. If you are uncomfortable about the possibility of having to pay more per month, you may wish to consider a fixed rate mortgage, where the interest rate stays at an agreed level. FIXED RATE IS IT THE RATE FOR YOU? Fixed rate loans generally have the interest rate fixed for a term from one to five years with lenders occasionally a ten year term. Advantages and disadvantages of fixed rate home loan Advantages: Allows peace of mind that interest rates and repayments do not change for the duration of the fixed period. Disadvantages: Provides less flexibility; as your circumstances change the loan is not adaptable further penalties may apply if the fixed loan term is broken. VARIABLE RATE IS IT THE RATE FOR YOU? The interest rate of a variable rate loan will fluctuate from time to time. Some variable rate mortgages include: A standard variable rate mortgage: this is a mortgage at the lender s normal rate A discounted rate mortgage: this is a mortgage which starts with a low interest rate. Check what the rate is after the discount period and whether there are early repayments fees if you pay the mortgage out during the discount period, or after. Step by Step Guide to: Mortgages infronthomeloans.com.au

2 Advantages and disadvantages of variable rate mortgages Advantages: More flexible than a fixed rate loan. No limit to extra payments being made. Eligible for package interest rate discounts. Disadvantages: If interest rates increase, this will be passed on to you as the borrower. Will you register your property as Joint Tenants or Tenants in common? It is important to understand the differences between a joint tenant and tenants in common. Both options have different legal ramifications for each individual, therefore it is recommended you discuss these options with a solicitor before any final decision is made. JOINT TENANTS Joint Tenancy is the equal holding of property by two or more people. When one party dies, his/her share goes automatically to the other partner/s, regardless of what is written in any will. A tenant in common is a type of co-ownership where two or more people own distinct interests (which may be equal or unequal) in the same piece of property. When one party dies, their share of the property can be left to beneficiaries other than their co-owners, as stated in their will. What happens if your co-purchasers fails to pay their home loan payments? When you buy a property together you become co-borrowers on the same mortgage, which means that each borrower is jointly and severally liable for the home loan. This means that is one person defaults on the home loan, the other person/s listed on the mortgage will be held responsible also. CAN YOU AFFORD TO BUY? Answering this question will be dependent on a number of factors specific to you, these may include: Your income The income of your co-purchaser Your lifestyle assets and liabilities Your plans for the future In the long term, buying a home is more cost-effective than renting one. However in the short term, buying a home is always more expensive. Below are some of the costs associated with buying a home. Deposit: usually ten percent of the purchase price of a property used to indicate an intention to buy. If you don t have spare cash sitting around for deposit you may be able to use a deposit bond. Deposit bonds are issued by insurance companied to provide a guarantee to the vendor that the deposit will be paid usually at settlement time. The cost of a deposit bond is approximately one percent of the value of the deposit. For example, you might be planning on buying a house for $300,000. A ten percent deposit on this property would be $30,000, so the deposit bond would cost $300. If you need to get a deposit bond, most banks and mortgage providers will be able to assist you. Closing costs: some of the fees that lenders charge for processing range from one to five percent of the overall purchase price. Rates: property taxes vary from jurisdiction but expect to pay at least one percent of the purchase price of the home per year. Insurance: insurance costs vary depending on the value of your home and its contents. Homeowner s insurance covers your new home and contents. Moving costs: the further you move the more money comes out of your pocket. Transfer duty: a state government tax paid on the purchase of properties. It is determined by the sale value and varies between states/territories. Body Corporate: a body that collectively manages the sub division of a building or land that is registered with the state. A body corporate may be created in any sub division residential, retail, commercial, industrial or mixed use. Mortgage duty: a state government tax based on the loan amount. Necessary savings are required to cover the down payment of the house. In addition, a steady income is essential to cover ongoing expenses, such as repairs and maintenance. If you don t have the saving and income stream, you may want to continue renting and save up for your deposit. FIRST HOME OWNER S GRANT The First home owner s grant is a one-off payment towards the purchase of a home for anyone who has not previously owned a property. The grant is provided tax-free to all new home owners regardless of their income or the property being purchased. For more information, visit Mortgage basics Some home buyers are able to pay the entire purchase price of a home up front. The majority pay a deposit, or percentage of the total purchase price of the home and get a mortgage loan to cover the rest. A mortgage is an offering of a property as security for a loan. The loan finances the property, with the property being owned by the lender until payment has completed. By obtaining a mortgage, the borrower is able to buy a house or other real estate. Loan: a lender, such as a financial institution, lends the home buyer an amount equal to the difference of the deposit and the full purchase price of the home. The amount of the loan is called the principal, if a home costs $400,000 and the buyer pays a 20% deposit of $80,000, the principal is $320,000. InFront Home Loans offers dozens of lenders and hundreds of home loan products that find you the best solution to your situation. Visit Repayment: the buyer pays back the lender by regular mortgage payments. These payments pay down the principal plus interest. If the buyer fails to pay the mortgage, the lender can foreclose on the house, taking it back from the buyer. TWO TYPES OF MORTGAGES FIXED RATE Fixed rate loans generally have the interest rate fixed for a term from one to five years with lenders occasionally offering a ten year term. Step by Step Guide to: Mortgages 2

3 Advantages and disadvantages of fixed rate mortgages Advantages: allows peace of mind that interest rates and repayments do not change for the duration of the fixed period. Disadvantages: provide less flexibility; as your circumstances change the loan is not as adaptable. A fee may be incurred. You may be ineligible for any package rate discounts. VARIABLE RATE Variable Rate Loans will vary from time to time depending on the interest rate set by the lender. FIXED VERSUS VARIABLE WHICH IS BEST FOR ME? Fixed rate home loans provide you with the comfort of knowing how much your repayments will be regardless of what interest rates do. While variable rate home loans may benefit from interest rate reductions, it s difficult to accurately predict which direction interest rates will move. Fixed home loans are not as flexible as variable rate home loans. For example, fees may apply if you want to break your fixed rate period or pay off your loan early. PAYING OFF A MORTGAGE BOTH FIXED AND VARIABLE There are some basic terms you should know when paying off a mortgage. Principal: The original loan amount borrowed. Interest: The fee paid on borrowed capital Lenders mortgage insurance (LMI): LMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80% of their new home s value. In other words, buyers with less than a 20% down payment are normally required to pay LMI. Fees: There are different types of fees involved when purchasing a home including government fees, legal fees and those charged by the lender. A PRINCIPAL AND INTEREST HOME LOAN What s the difference between a Principal and Interest loan and an Interest-Only loan? Principal and Interest means that you make repayments against both the original amount borrowed (Principal) and the interest that is charged. Interest-Only means that for a set period of time, at the beginning of the term of the mortgage, repayments are made to the interest portion of the loan only. It is important to understand that interest only payments do not reduce the balance or principal amount of your loan. A mortgage will have limited interest-only period, which can last from between one and ten years. DOCUMENTATION Most people who purchase a property are asked to provide documentation that proves their ability to pay back the loan, such as income and employment history. However, there are many lenders who provide alternative avenues of funding known as Lo Doc and Specialist loans. These forms of funding attract a higher interest rate than standard Full Doc loans. Lo Doc loan Lo Doc means low documentation. These loans are usually offered to self-employed clients who may not be in a position to indicate current earnings. Specialist loan A loan is non-conforming if it does not meet normal bank funding. There are lenders who will allow funding for these borrowers. A mortgage broker has access to dozens of lenders as well as information on the lending market that is of help to you. INVESTMENT LOAN Residential Investment Loan A residential property can be purchased as an investment for owners, who seek to resell the property for a higher price, or rent the property to tenants. Any property that is bought for the purpose of gaining profit is known as an investment property and the loan that finances this property is called an investment loan. Construction Loan This is a loan used for the purpose of building a house or commercial property. There are two categories to this type of lending: Owner builders these are not liked by the banks unless the customer has experience or fixed contract with a registered builder. Initial preparation for a mortgage WHAT S INVOLVED IN THE PROCESS? 1. Find a home that you d like to buy To research homes available for sale, visit real estate agents and search internet sites to find areas that have potential for growth. 2. Determine how much you can afford To determine how much you can afford, you must first analyse your current income and expenditure to decide how much you have left over for mortgage repayments. To help you review your personal financial situation, create a monthly budget worksheet to track your expenses and discover where you spend your money. Create a monthly budget worksheet 1. Determine your expenses Compile a list of your fixed and variable monthly expenses into subcategories shown below in a spreadsheet. Add your fixed expenses with your variable expenses for the month to calculate your total expenses. Fixed Food Housing (rent or mortgage) Travel expenses (petrol, car maintenance etc.) Utilities (mobile phone, water, heat etc.) Insurance (car, home owners, health etc.) Taxes (income etc.) 2. Add up your income Variable Credit card Clothing Entertainment (restaurants, movies etc.) Vacation Alcohol and tobacco (if applicable) Pay TV and internet expenses This amount is your take home pay after all taxes and other income related expenses are taken into account 3. Compare your expenses with your income To find your discretionary income subtract your total expenses from your income (your take home pay, the amount of money you actually receive after all taxes and other income related expenses are taken into account). The amount left is money through which you can save or put towards your short and long term goals. 3

4 3. How much can you borrow? The amount you can borrow is dependent on a number of factors, such as expenses, income and current debts. Most lenders will base the size of your home loan on your capacity to meet monthly repayments. 4. Do you need a deposit? If so how much? Just like loan amounts, the deposit required may vary from lender to lender. For most lenders, a minimum of 5% of the purchase price is required as a deposit. Depending on the location of the property or the type of loan, you may need a deposit as high as 20%. However, there are times where no deposit is required, such as, if you already own a property, you have a reasonable income, or you have a guarantor. Alternatively, you will need to demonstrate the following (as a guideline): Genuine savings: By saving 3% or the purchase price (from your regular income) over a period of six months, you will be able to show the lender that you are able to budget appropriately to afford repayments. Non-genuine savings: These include prize winnings, gifts and inheritance. They are not included as savings but can be used towards payment of a deposit. 5. Review your personal financial situation Expenses: these include both fixed and variable costs. Fixed costs include school fees, travel to and from work and rent or mortgage repayments Variable costs include groceries, entertainment and going to restaurants Income: These include sources of monthly or fortnightly income such as wages, commissions, bonuses, social security and retirement benefits. Assets: An asset is property or possession you own either partly or wholly; such as a car Debts: Money, goods or services owed by one person to another. For example, credit cards, car loans and student loans. 6. List your short and long term goals Establishing your short and long-term goals is important so that you ensure you put enough money aside to pay for these expenses in conjunction with your mortgage repayments. Long-term goals include real estate purchases, future education and retirement. Short-term goals include home improvements, a new car and travel. You should also take into account other desired investments including shares, bonds and mutual funds. FIRST HOME OWNER S GRANT The First Home Owner s Grant is a one-off payment towards the purchase of a new home or one that has been substantially renovated for anyone who has not previously owned a property. The grant is provided tax-free by the Australian Government to all new home owners purchasing a newly built home. The grant amount varies from state to state. Also stamp duty concessions also apply to first home buyers but again vary from state to state. Please check with your accredited mortgage broker InFront Home Loans for further information. GOOD DEBT VS. BAD DEBT Many borrowers want to take advantage of tax deductions it helps to structure your debt properly see your accountant for advice on obtaining deductions. Good debt Some of your debit might be considered an investment providing an income source Business/Investment use Tax deductions on interest charges Car loan for business use Loan to purchase rental property Loan to purchase business Bad debt TRICKS AND TRAPS IN LENDING Debt that creates an unhealthy financial situation. Personal/Consumer use No tax deductions on interest charges Car loan for personal use Loan to purchase home Loan to purchase holiday There are many things to consider when dealing with loans. The following points concentrate on some of the tricks and traps that you need to consider before taking that initial step. TRICKS IN BORROWING: Think not only of what you want the loan for now, but how you might use your loan in the next five to ten years. Switching between loans can be expensive therefore preplanning your needs is essential. Speak openly with your lending specialist if he or she understands more about you, their advice will be clearer and more closely aligned with your needs. Would you use all the loan features on offer For instance would you use an offset account or a debit card? Extra features which you do not use may be costing you additional money. Think carefully about what features you actually use and need, aim for a product to fit those needs. Are you planning on using equity in your home for wealth creation? Obtain a loan product which offers sub accounts with an easy way to transfer your balance from one sub-account to another. A sub-account can be used to break down an account into multiple smaller accounts for better tracking of detailed budgets and expenses. This will assist in your wealth creation process (if used sensibly) and help claim your tax deductions. Want a home loan product that offers what you need at a competitive rate? Ensure that your lending specialist analyses your needs with you as well as conducting the necessary research for your requirements. They will come up with different lenders and products to meet your needs and you can choose which lender you go with. Honeymoon rate Some lenders offer a reduced interest-rate period at the beginning of the loan. This is an ideal time to make extra repayments so that you pay of your loan quicker. Switching the facility of your loan If you change the way your loan is paid off, for example using a fixed interest rate period for part of the loan, there may be an offer of a lower interest rate upon switching the facility. Make extra repayments whilst discounts exist. Are you trying to sell your home to buy another and are you concerned about a lender s valuation? Whilst no one has control of what a valuer says your home is worth, it is important to take care of the following before an inspection: 4 infronthomeloans.com.au

5 Mow the lawn and ensure gardens are clean and tidy If you have leaking taps or back door that does not lock, consider getting them repaired If you are not selling as a knock down ensure your home is clean If you and your partner earn a high salary package together, ask about a professional package. The home loan rate is usually discounted and there are other benefits that may be available. If your present lender is one of the big 4 banks you should not think that they will definitely have the best offer. Often lenders with lower retails presence are highly competitive and will offer greater service. Read your loan documents Whilst reading a loan document is not everyone s idea of a great night in, it is important you understand what you are signing and the implications. Also ensure your solicitor sees the contract before you sign. If you are refinancing consider including all debts in the amount It will generally cost you more if you refinance your home now, include your car loan later and again later pay off your credit card debts. Organising the initial limit on your loan to cover all debts can save you money. At this time, consider the product you already have and what is available in the market place. TRAPS IN BORROWING Fixing your entire home loan If you want to make extra payments or a lump sum payment you may be penalised. Similarly if the interest rates go down you will not benefit from the lower rate being offered. Picking the cheapest interest rate Interest rates are not the only cost associated with a loan. Many loans include application fees, variation fees, settlement fees, valuation fees, monthly fees and other transaction fees. Choosing a product with no frills Whilst a no frills or basic home loan may suit you and your lifestyle now, does the product offer the features you will require in the next five years? Going back to the same lender every time You re a regular valued customer of the bank, you ve been loyal for years, you may even know the local managers name. But do they have access to more lending product than you do? NO. Banks can only use their banks products. If the bank down the road had a better deal, would they refer you there? I don t think so. This is why companies such as InFront Home Loans exist and thrive. Choosing a lender who offers different services than you want Are you the kind of person who likes to do their banking on the internet or by phone? Perhaps a lender who does not have a branch on every corner is not for you. Opening up opportunities in this way can lead to you receiving service in the way you want and potentially saving money in the long run. What if you prefer to walk into a branch and speak to a person face to face? Then consider this need when choosing a lender. Portability Many loans are not portable, for example; if you are in one home, sell it to buy another and wish to just swap the loan from the first to the second home you need a portable loan. There are many fees associated with opening and closing loans which can be avoided with a portable loan. Be careful of honeymoon rates Home lenders entice borrowers to their home loans with attractive low introductory rates. These rates may be up to two percentage points below the standard rates for home loans and therefore look very attractive. These honeymoon rates only last for six or twelve months before automatically reverting to the standard rate offered by that lender and will always have DEF if paid out. In the current climate consider the following, depending on whether you are a new borrower or an existing one. New borrowers Allow for interest rates of up to one percentage point higher when budgeting for repayments over the next two years Maximise your deposit and try to keep your LVR (loan to valuation ratio) as low as possible, 90% at the most. Ensure personal debts like credit cards and car loans are under control before committing to a property loan Buy for the long term, short term speculation is more risky now than ever. Existing borrowers Make extra repayments where possible to reduce your exposure to higher rates and falling prices Consider switching at least part of your loan to a fixed rate but check the flexibility of such arrangements. Consider further borrowing against equity built up in your home can you afford higher repayments if rates rise? Rather than further spending, you may wish to consider using your home equity finance to pay for repayments at the current, lower, home loan rate. How to choose a mortgage lender 1. HOW TO FIND A MORTGAGE LENDER On your own Involves researching all bank and non-bank lenders through the internet and visits to lenders branches. Through a mortgage broker Look for someone who is accredited to write loans with a range of lenders and is a member of the Mortgage & Finance Association of Australia (MFAA) ) or the Finance Brokers Association of Australia (FBAA). 2. WHAT TO LOOK FOR IN A MORTGAGE LENDER Reputation Fees Rates Specialisation 3. WHAT TO TELL PROSPECTIVE MORTGAGE LENDERS Tell the lender Security offered, personal financials (any current loans, any current property owned, credit card limits, genuine savings, salary, pensions, shares, rental income, inheritance, super, home contents, unit trusts, private loans, cash and term deposits, personal effects) REVERSE MORTGAGES EXPLAINED WHAT IS A REVERSE MORTGAGE (ALSO KNOWN AS SENIOR LOANS)? Seniors Loans/Reverse Mortgages are loans taken out against existing property that has been paid out in full by the owner. 5

6 Full repayment of the loan is required on the: 1. Death of the last surviving borrower where the loan will be repaid from the borrower s estate. Full repayment is required within three to ten months from the date of death (depending upon the lender involved). 2. Sale or transfer of the security property. 3. Material decrease of the value of the property which is a result of the borrower s act of error. 4. Any other act of default under the loan Terms and Conditions Note: a. Properties need to be reasonable maintained. Some lenders value the property every three years with the cost being added to the loan. b. In the event that the loan is repaid in full and the Term and Conditions of the loan have been met, the amount required to discharge the loan cannot exceed the value of the security property at the time of the discharge. PRODUCT OVERVIEW Reverse Mortgages are only available for persons aged over 60. The money received can be used on whatever personal or investment purpose you wish. Some examples what borrowers use the money for are: Replacing their car Funding travel to visit family overseas Assisting family members Refinancing existing loans Paying an accommodation bond for a nursing home Renovating a bathroom Daily living expenses The loan is subject to approval from the lender, who will take into account the location and condition of the property. Loan to value ratio (LVR) The LVR is based on the youngest applicant s age and the value of the property. LENDERS THAT PROVIDE THIS TYPE OF FINANCE There are a number of lenders that provide this type of finance, speak to your accredited broker to find out the best one for you. CENTRELINK IMPLICATIONS Retirees who receive any Government Income support, such as the Age Pension, should carefully consider what they plan to do with the funds from an equity release loan. If the amount is spend immediately on day to day items, repairs or improvements to the principal place of residence, a retiree s Age Pension may not be affected. If, on the other hand the loan amount is invested a retiree s Age Pension may be affected. This complicated area requires careful planning. This is general information only and it is strongly recommended that anyone considering an equity release loan should speak to Centrelink or obtain independent financial advice specific to their individual circumstances. InFront Home Loans WHY INFRONT HOME LOANS? Simply a better way of doing business. InFront Home Loans operates as a provider of personal and business lending services, specialising in residential back mortgage origination and broking. If you re look for a mortgage broker that offers you personal service look no further than InFront Home Loans. InFront Home Loans recognises that getting a home loan in different for different people. We have the experience to understand which lending options will suit your needs. InFront Home Loans can take the hard work out of finding a loan, with experienced consultants and smart technology they can instantly identify the loan that best meets your needs. Whether it s for home or investment loan, a business or commercial loan, or asset equipment finance. With many lenders and hundreds of home loan products to choose from, you can be confident that InFront Home Loans will help find the right loan for your circumstances. InFront Home Loans provides access to: Over 30 residential loan lenders Investment Loans Personal Loans Over 20 commercial loans lenders Business loans Industrial loans Property development Over 15 leasing and equipment finance lenders P E info@infronthomeloans.com.au infronthomeloans.com.au The information contained in this document has been compiled from sources considered to be reliable but is not guaranteed. The information is for general information purposes only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific professional advice. We recommend that you obtain your own independent professional financial, taxation and legal advice before making any decision in relation to your particular requirements or circumstances. Neither FNX Residential Pty Ltd, it s related bodies corporate nor its or their directors or employees warrant the accuracy, completeness or currency of this information and shall not be liable on any ground whatsoever (including for negligence) with respect to decisions or actions taken as a result of you acting upon this information. Step by Step Guide to: Mortgages 6 07/15