YOUR GUIDE to everything about borrowing money in Australia to finance a home loan or property investment.

Transcription

1 YOUR GUIDE to everything about borrowing money in Australia to finance a home loan or property investment. October 2012 Copyright 2012 All rights reserved No part of this work covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, recording taping or information retrieval systems) without the written permission of the publisher. National Library of Australia Cataloguing-in-Publication entry YOUR GUIDE to everything about borrowing money to finance a home loan or property investment./ edited by Georgia Thomas 1. Mortgage loans--australia--finance. 2. Housing--Australia--Finance. 3. House buying--australia--costs. Thomas, Georgia Disclaimer No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is sold on the terms and understanding that: (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the

2 above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor. Published in Australia by Loans Finance Australia Pty Ltd, Suite 1, 427 Blackburn Road Mount Waverley VIC 3149 Australia. Editor Georgia Thomas, Contributors Chris Fasoulis Director Loans Finance Australia Pty Ltd.

3 Chapter one How does a home loan work? 5 What is involved in selecting a home loan 6 Home loans: The types 8 The features and options available in Home loans 10 What are Reverse Mortgages? 13 Self Employed and Home loans 14 Chapter two Easy Steps to borrowing money for a Home loan 15 Your Borrowing capability 16 What is a Deposit? & What are deposit bonds? 18 How do you secure the best deal? 19 Buying & Selling Costs.. Understanding these 20 The application process how to get through it 22 Your Australian Credit Profile - how does this work? 24 Buying Australian property if your are from overseas 26 The Valuation of Property 27

4 Chapter three Australian First Home Buyers 29 How you go about getting your first home in Australia 30 Australian Government Grants, assistance & your possible Entitlements 31 Chapter four Australian Mortgage Brokers: How they work 33 Australian Mortgage Brokers: What do they do 34 Australian Mortgage Brokers: getting them to work hard for 35 Chapter five How to make a priority of getting rid of your mortgage 37 Ways to paying off your home loan more quickly 38 Know the real cost of your loan: How come you could pay $740,600 for a $350,000 loan? 41 Changes to your work circumstances: Sickness or job loss? 42 Strategies regarding debt consolidation & refinancing 43 Refinancing property? What are the costs? 45

5 Chapter six Charts & notes 47 Resources & information 48 Loan Market Group lenders 49 Home loan repayment chart 50 Stamp duty summary 51 Income gross and net 52 Home inspection checklist 53 Legal and loan costs worksheet 56 Moving home checklist 57 Finance dictionary 58 Loan Market Group brokers 67 Notes 70 This guide is all about how to go about seeking and securing an Australian Home or Property Loan. The type of potential borrowers include: Home buyers, First home buyers, Investors, Retirees, High income, Low income & Self employed.

6 Chapter 1: Understanding how Australian home loans operate. Selecting your home loan When borrowing money to buy a property an overall loan amount is considered a total deal, however, each part is treated separately for loan contract purposes. People borrowing money to buy their home have the option of splitting their mortgage, in order to hedge their bets. What does a loan, which hedges (a borrower s) bets mean? This hedging based loan is commonly referred to as a Combo Loan, i.e. This type of loan means that you have a blend of fixed and variable loan rate costs for the one loan. The Combo Loan is divided in to two parts by the lender or bank. One part of the loan has an interest rate, which is fixed as to the actual percentage to be paid on the loan and for the period of time agreed ( eg: up to 5 years) and The second part or balance of the loan attracts and is charged to the borrower s loan at a variable interest / loan rate What does this variation in interest rates mean to you, the borrower? This means that for one proportion of the loan i.e. the fixed interest rate part of your loan: You will know what the actual cost of money will be for you, and you can therefore budget to meet your repayments accordingly. However, with regard to the variable loan rate charged for the balance of funds owed on the loan:

7 You will receive the financial benefit if and when interest rates are low because your repayments will be reduced for the period of time that variable rates are low. But on the other hand you will have be prepared to pay more for that portion of the loan if interest rates on that variable part of the loan, are increased, again for the length of time that those rates stay high. Line of credit/equity loans Line of credit or equity loans allow borrowers to borrow up to a specified limit, which is secured by a registered mortgage over a residential property. These loans provide access to funds, when required, up to the original limit set. Normally, the minimum repayment required is the monthly interest only, generally with no real requirement to reduce the principal. These loans can be used for pretty much anything. They are a creative way to generate and separately manage funding for investment purposes, renovations, other properties, loans to children to help them buy property, etc. LO DOC: Low or no documentation loans Low or no documentation loans are exactly what their headings describe. These types of loans require little or no documentation with regard to the income of the borrower in order to obtain an approval. Low doc loans are typically accessed by borrowers who are: Self employed Do not current have tax returns nor financial reports available.

8 Non-conforming home loans Specialist lenders offer financial products known as Non Conforming loans to those people who are unable to meet the bank or lending institution s normally strict lending criteria. For example: 55+: Older borrowers who are close to retirement and for whom a 25 -year loan may therefore not be appropriate; Bad Credit History: Those intending borrowers who have a bad credit history, or perhaps have a history of late repayments, loan defaults or are possibly even formerly bankrupt; New immigrants to Australia: Those who because of their new immigrant status have no Australian borrowing record; and Those involved in Seasonal or Casual Work. Those who are Self-Employed. No Deposit Home Loans Historically, No Deposit Home Loans were a common way to enter in to the home loan market, however this type of loans are very hard to secure and may now be offered by only one or two lenders. If and when available, these loans typically have a much higher interest rate and are have restrictive in such terms as: Limitations to the borrower s borrowing capacity, Limitations as to the geographical areas in which property can be purchased and Limitations as to the type of property that the No Deposit lender deems as acceptable security for such a loan. When available, No Deposit Home Loans do allow you to borrow 100% of the actual purchase price. However, the purchaser/borrower, would still be required to have their own funds in order to meet the other costs associated

9 with the property purchase, prior to the finalisation of such a purchase, such as the following costs: Stamp Duty (if applicable), Legal Fees incurred relating to the purchase & All other Statutory Charges. WHAT TO DO BEFORE YOU ACTUALLY BUY YOUR PROPERTY: It is commonly accepted that you, an intending buyer, should not enter in to any binding contractual agreement to buy a property without having secured a clear and unconditional offer in writing, to loan funds to you for your chosen property, from a bank, lender or finance company. So, it is recommended that you speak to your Loans Finance Australia Mortgage Broker well before you actually buy a property. Your Loans Finance Australia broker will: Meet with at your convenience and get to know you and Discuss your requirements Ask for and analyze your income and assess your borrowing capacity and then prepare a credit assessment, which will analyze your credit worthiness and will identify an appropriate level of borrowings based on your income and credit history. Then, subject to your capacity to borrow having been established, you will be offered the opportunity to select from a range of suitable lenders ( at least 3) and their respective range of home loan products, which will have been sourced by your Loans Finance Australia Broker and will suit your stated and perceived needs. Your Loans Finance Australia Broker will assist you be discussing the points of difference between the various lending products and explain the various features of the options available to you.

10 Once your have considered the variations in the options presented you can then choose a lender that suits you. Spending time with your Loans Finance Australia broker, choosing the right lender and home loan product that suits your circumstances, is something you should do before you buy your property. In this way you will be sure you re getting the best value and most appropriate home loan deal for you. It is widely recognized that the Australian home loan market is very competitive with local and international banks, building societies, credit unions and all manner of specialist lenders offering a seemingly endless choice of home loan options, including : Honeymoon Rates, Introductory Rates, No deposit Loans and 100% Home Loans, Standard variable rates, Fixed rates, Redraw facilities, Line of credit loans, and Professional packages with competitive rates for those borrowing $150,000 + to name a few. This variety in the types of loans available to borrowers, have been designed to target different consumer markets.

11 Money As A Commodity As a consumer, it is wise to think about money as a commodity. Because money is a commodity it comes with a variable price / cost at different times. This is despite the fact that money is a serious part of life. Your Loans Finance Australia broker knows that money is a commodity and that there are loan opportunities, which arise in the market at various times. Further, your Loans Finance Australia Broker will be able to advise as to whether some of these may well be the types of loans, which you may be in a position to take advantage. Your Loans Finance Australia Broker has the knowledge and skills to help you with advice as to if there are such suitable opportunities available. When looking for a home loan, you are in the market for the best value loan possible. Such a loan will be structured so that your lifestyle will not be too seriously affected, so that the size of the loan is commensurate with your income, and that the deposit you have is appropriate to the type of property you want to have financed. Both your Loans Finance Australia Broker and this e-book will help you to get a better understanding of what is available in the Australian market and as such will encourage you to be commercially prudent with your borrowing decisions. It is wise that you use the services of reputable broker such as your Loans Finance Australia Broker. Your Loans Finance Australia Broker is best placed to do the research and the loan negotiation on your behalf. Standard variable interest rates This loan type is a step up as a variation from the basic variable loan, and is very popular. As the name indicates, these loans have a variable interest rate, meaning it interest rate can fluctuate up and down. This rate variation is generally in

12 response to changes to official interest rates as set by the ( RBA ) Reserve Bank of Australia. However, it should be noted that, in the past, some major banks and lenders have chosen to raise their standard mortgage rates higher than official interest rate rises announced by the RBA. In some instances, this increase has been almost double the official rate rise quoted. The standard variable loan is a common choice for first home buyers. This is because its simplicity makes it is easy to compare lenders. Standard variable rates are also attractive to borrowers as they are traditionally the most flexible of all the home loans. These rates offer an array of features, which can be used to effectively reduce your mortgage / debt more rapidly. If you are able to reduce your debt rapidly then this means that you will have paid less interest overall and had a shorter loan term all good outcomes and a great way to save money. Popular features of standard variable loans include: Mortgage Offset Facilities, allows you to have the interest you owe on your home loan reduced by the interest you earn on your other deposit accounts, without any dilution to tax; and The option to make extra payments, which can enable you to pay your loan off faster and reduce overall interest costs. Another popular feature of most standard variable loans is the ability to redraw your additional repayments if you wish to. The main advantage of this mortgage loan type is its flexibility, however, it is important to remember that with variable interest rate loans that interest rates can and do rise, so if you do source this type of feature, you will need to be prepared for this eventuality, which means that you will need more funds to meet increased costs which will arise if interest rates are increased.

13 Despite all of the above, standard variable rate loans can ultimately be the best choice for all types of borrowers, including owner-occupiers, investors and first home buyers. The standard variable interest rate quoted by most banks and lenders is the lender s benchmark rate. Most of the lender s customers don t actually pay that interest rate, but it is the one typically referenced. If you choose a variable rate home loan, it would generally be offered to you by the lender with a discount of say 0.3% or 0.5% etc off the standard variable rate, depending on the amount of money you are borrowing and the loan features you choose to utilize. As a rule of thumb, discounting starts at around $150,000 borrowings and increases proportionately to 0.70% off as you borrow more. Basic Variable Rate Loans Basic variable loans are loans with lower interest rates, but with limited features. These loans are typically no frills although these days most have redraw for a fee (usually around $50 each redraw) and a couple of lenders even offer offset accounts at no charge. Honeymoon and Introductory Loans Honeymoon and introductory loans are usually variable interest rate loans with a discounted interest rate off the standard variable rate (com- monthly over 1%). They typically last a certain period of time, usually one year, but ranging from six months to three years. After the agreed period, they normally change to a slightly discounted, but higher standard variable rate, although many people are able to negotiate a lower rate. Sometimes, depending on the lender, rates can be fixed or capped during the initial or honeymoon period.

14 Fixed Rate Loans Fixed rate loans are where the borrower s interest rate and repayments are fixed for a set period, usually from one to 10 years, although one to three years is the most common. These loans commonly roll over for another fixed term (at prevailing rates), but some people go to a variable rate loan at the time the fixed-rate period has expired. Combination Fixed and Variable Loans Split loans allow borrowers to take part of their loan as a variable rate loan and the other part as a fixed rate loan. Web link For more information on home loans visit Home loan types pros & cons Loan type: Advantages Disadvantages Variable rate If interest rates drop, repayments might drop. Generally extra repayments, reducing the principal, can be made without penalty. Additional repayments can usually be taken back by you Usually offers more features If interest rates rise, repayments might rise along with the amount of interest paid Generally attract a higher interest rate than basic loans

15 Basic Variable Lower interest rate loans (usually around % less than the standard variable) If interest rates drop, repayments might drop Usually not as flexible as higher interest variable loans Less features (e.g. may charge for redraw) If interest rates rise, repayments will most probably rise Honeymoon and introductory Among the lowest rates available Any extra repayments made during introductory rates can reduce principal and save significant interest Repayments increase after the introductory period, since the interest rate normally reverts to the standard variable rate May have higher early repayment fees (or exit fees) Fixed Rate Borrowers have certainty of repayment amounts. Even if interest rates rise, repayments stay the same, as the interest rate is fixed for the duration of the loan Allows for precise budgeting Reduced flexibility If variable interest rates fall, repayments will not - picking the right time to fix is tricky Additional repayments are limited, and exceeding limits may incur break costs/fees Early termination can attract hefty exit fees

16 Combination/Split, Fixed and Variable Rate Offers borrowers a chance to hedge their bets in times of rising interest rates and gives a blend of repayment flexibility and interest rate security Variable portion is still vulnerable to interest rate rises. If interest rates rise, repayments on the variable portion also rise Line of Credit/Equity The most flexible product available Money can be used as needed and paid back without structured monthly minimum repayments. In most cases the minimum required is the interest on the outstanding principal Since it is secured by residential property, the interest rate is less than commercial or business loans, credit cards or personal loans Lines of credit are like giant credit cards and require discipline to ensure that over time the principal/balance of the loan is reduced rather than run at its limit Interest rates can be slightly higher than for other types of loans Interest rates will rise with the market as they are variable rates Low documentation / No documentation Borrower completes a simple income declaration form Limited or no tax returns required Limited or no financial reports required Can attract higher interest rate (but increasingly lenders will revert to standard variable rates after consistent, on time repayments).

17 Regular rates can often be achieved by paying lenders mortgage insurance LVR (loan value ratio) is typically significantly lower than a full document loan (around 20% lower) Interest rates are higher than most full document loans With some lenders, more documentation is required than in the past and LVR ratios are dropping Non-conforming Non-conforming loans can be fully featured Great way to rebuild a poor credit rating Rates are usually around 1.5 4% higher than a traditional loan, but rates depend on your level of credit impairment and LVR You might have to pay a hefty deferred establishment fee if you pay out the loan early LVR is typically significantly lower than a full document loan (around 20% lower) Interest rates are higher than most full document loans No Deposit Loans You can buy property sooner without waiting until you save a larger deposit Most come with features such as additional repayments and redraw Stricter lending criteria makes approval more difficult You are limited to certain types of properties As you are borrowing more money, you ll pay more interest in the long term Mortgage insurance will be higher than deposit based home loan products Interest rates are typically higher Available from a very limited number of banks and lenders

18 Reverse Mortgage Loans For anyone aged 60 or over, a reverse mortgage can free the equity in their property without it being sold. Depending on their age, applicants can borrow up to 45 per cent of the value of their home with funds advanced in one payment on settlement, or as needed. No repayments are required over the life of the loan. Interest fees and charges are capitalised to the loan and repayment is deferred until the property is sold, the borrowers are no longer living in the house, or the borrowers are deceased. Lenders apply strict conditions to reverse mortgages. For instance, before funding can take place, all applicants are required to seek independent financial and legal advice. Aged Care Accommodation Bond Finance An Aged Care Accommodation Bond loan provides a flexible solution for senior clients who wish to retain the benefits of owning their own home and at the same time secure a place in a residential aged care facility of their choice. An Aged Care Accommodation Bond enables you to continue to own your own home, whilst renting it out to generate additional income, allow family members to move in, or simply arrange a more orderly sale of the property. It also enables you to retain your Centrelink entitlements for longer. Split Loans If you are attracted by the certainty of a fixed rate, but would like some flexibility, then you might consider a split loan. You can choose which proportion of your loan you would like at a fixed rate and which you would like at a variable rate. You benefit from the lower rates and flexibility of a variable loan, but also give yourself some protection against potential rate increases.

19 Professional Packages Professional packages can offer substantial discounts and special benefits, but are only available to those who satisfy specific criteria. The key criteria for most professional packages are that the home loan be in excess of $150,000, and that you earn more than $50,000 per annum. You do not actually need to be a white collar professional to qualify. The benefits vary between lenders, but in general can include interest rate discounts of between 0.50 and 0.75 per cent for the life of the loan, lower fees and discounts on other bank products. These are generally great products and well worth considering if you qualify. Redraw facility Loans with a redraw facility allow you to put extra money into your loan. You can take the money back out again when you need it. Over time these payments can significantly reduce your interest payments and the life of your loan. If you think that you might be able to pay a little bit extra into your mortgage, either regularly or intermittently, then this type of loan might work well for you. Some lenders charge a fee to activate this feature, and/or a fee each time you redraw, so you need to take these costs into consideration. Home Loan Features & Options Choosing the right home loan features, along with a good interest rate, will help you save money and pay off your mortgage quickly.

20 Typically, the more flexible the loan, the more interest you ll pay. For instance, a variable loan, which allows you to re-draw against extra repayments or offset savings without charge or conditions against the mortgage, will generally have a higher rate than a basic loan. But it may be that this kind of loan is far better for you if you need the flexibility. Additional repayments If you are likely to have extra cash at any time, make sure your home loan has additional repayment features that allow you to use that cash to re- duce the outstanding principal and interest. Don t leave dollars sitting in a savings account when every dollar you pay off your home loan is working much harder than a dollar saved in the bank (roughly, you may get 3-4% interest on savings, but a loan is costing you 4-6%). It may not sound like a lot of money, but over time, small amounts turn into thousands of dollars. If you are concerned about being able to access the extra funds you pay into your loan, don t be. Most variable loans allow you to take back those extra payments via redraw facilities if needed. Portable loan Home loan portability allows you to take an existing loan to another property without having to refinance, i.e. pay out the old loan and take out a new one. This can save application and legal fees. Be aware that portability does not allow you to take your loan from one lender to another. Home Loan Based Redraw Facility A redraw facility allows you to access additional repayments you have made. The money can be used for pretty much whatever you like without having to explain or apply for it. Many lenders have a minimum redraw amount and a fee every time you use it.

21 Repayment holiday Many lenders now offer either full or partial repayment holidays for periods of time. They can be useful if, for instance, you find yourself taking time off work in a career change or building a family. Using Salary Credit (Direct) This feature allows you to pay your salary directly into your home loan account. With interest calculated daily, this effectively reduces the principal amount owing for the time your salary is in the account, thereby reducing the amount of interest paid. Many couples use this facility with second salaries. Switching (to fixed rate) Switching allows you to switch from a variable to a fixed rate. This can be a good option if, for instance, you are not sure what rates are going to do. Professional Packages

22 Professional packages are available from most lenders and offer discounts on interest rates, fees and other products in exchange for an annual fee which usually ranges from $300 to $400 per annum. Most packages have a minimum requirement of $150,000 in borrowings and offer discounts of up to 0.7% off the lender s standard variable rate, dependent upon how much you borrow. They often also include no application fees and no ongoing fees on any loans, fee free transactional banking, and waivers of annual credit fees. Some lenders will also offer you financial planners and discounts on home and contents insurance, discounts on financial planning and reduced rates on margin lending products. Interest Only Loans Interest only loans pay interest during the term of the loan and all the principal remains outstanding at the end. These loans are usually for a short term of one to five years. Interest only loans are often used by investors for tax management purposes. Loan features should be considered in the context of both your personality and your life over at least the next five years.

23 It sounds like a long time to a lot of people, but different features and options can have a big impact on the final cost of your loan. Are you disciplined and good at sticking to a budget? Are you likely to get any kind of incremental bonus or financial windfalls in the future? Is your objective to pay off the loan as quickly as possible? Is the loan for an investment or a private home? How much margin do you have in your monthly spending (to account for, say, an interest-rate rise)? Are you planning on having a baby or increasing your family dependency in the next five years? How will your family situation affect your income and expenditure? Most people know the answer to these questions and if you don t, just act on what you know right now, as often that is enough. The answers to these questions give you guidance to decide the level of flexibility you need with a home loan without paying for features you don t need.

24 As you now read through the most common loan features outlined here, you will see how different life events act in parallel to your loan. OFFSET ACCOUNTS: An offset account is simply a separate savings account attached to your loan account. If your banking and your loans are at the same bank, an offset account is a great way of being disciplined with- out too much effort and is particularly good for people who are paid monthly. As the name suggests, your offset account balance works in tandem with your home loan, with its balance being subtracted from the outstanding home loan principal when calculating the daily interest charges. For example, if you have a $300,000 mortgage and $20,000 in your offset savings account, you will only be charged interest on $280,000, even though your loan balance is $300,000. From a taxation perspective, interest paid to your savings account is taxable, but the same interest used to offset home loan interest is not, so you effectively save tax and reduce your home loan at the same time. Look for lenders who offer 100% offset. Be aware that some lenders require a minimum balance to be in your account before the offset applies, otherwise they will charge you fees. 12 The ultimate guide to home finance. H How do home loans work? 13

25 Top-Up Loans A top up loan allows you to increase the limit on your home or property loan and is typically something you would negotiate when you first take out the loan in order to save fees later on. Construction Loans While the structure and anatomy of Construction Loans is in reality just a standard home or property loan, you should note, that not all the features available on the loan product you choose will be available during the construction phase. eg : The Payment Frequency and Redraw Facility. During the actual construction phase, you will not be able to use the Redraw Facility. Further the interest payable will typically be paid monthly on an interest only basis ( i.e. no payments reducing the principal amount borrowed are expected ). It is only when the property / house construction phase of the project is complete, that all the features of the loan become available to you.

26 Limited Guarantor Loans Equity Guarantee, Family Pledge Limited Guarantor Loans, are also known as: Equity Guarantee Loans or Family Pledge based Loans. Both of these types of loans allow for an immediate family member to pledge financial assistance to the borrower, either: as a guarantor providing support through repayment assistance or as a guarantor providing additional security. Family Pledges can typically be applied to most loan types. A well negotiated Limited Guarantor Loan will allow the guarantor of the loan to set the amount they are guaranteeing. This has the effect of limiting their exposure to losses.

27 Please note: It can be difficult for the Guarantor of a Limited Guarantor Loan to remove themselves as Guarantor from the loan agreement if the main borrower cannot service the loan themselves. If you are considering becoming a Limited Guarantor seek advice prior to entering in to a Guarantor agreement. You should seek legal advice from your own independent solicitor or advisor. Either of these professionals should understand your personal situation and have only your best interests at heart. Comparison rate schedules When looking at a loan, there are two interest rates to consider: The interest you are paying & The comparison rate. Comparison Rates: These take into account a number of things including: loan establishment fees, account fees

28 & interest rates over the term of the loan. Under Australian law anyone advertising a specific loan product cost is required by Australian law to show comparison rates. This is designed to help consumers borrowers understand the real cost of the loan being offered. By way of example, it might therefore mean that an advertised interest rate on a $450,000 loan of 5.3%, comes up on the comparison rate schedule at 5.6%. Whilst this information is helpful you should not rely solely on comparison rates when choosing a loan. Please Note: Comparison Rates only take into account: many standard fees & interest rates What else should you consider? When trying to understand what is being offered to you, you should also speak with your Loans Finance Australia Broker and consider significant fees such as:

29 Early repayment charges or fees Use of Loan Features Early Payment Penalty Fees Loan Suitability ( for You ) & Ongoing redraw fees REVERSE MORTGAGES Reverse mortgages are generally available to residential property owners aged 60+ and allow eligible home owners to access and use the available equity they have stored up in their homes. Reverse Mortgages as financial products were created to allow asset ( house) rich / cash poor 60+ / retired homeowners to: Hold on to their homes (i.e. not sell & thus hold on to their homes ) Access the equity built up over their working lives Support emergency bills and living expenses How do Reverse Mortgages Operate? Banks and lending institutions have:

30 Different age entry levels & Different allowable percentages of equity or amount of money that you can leverage or borrow. ( This means that the lender s policy on this will depend upon your age.) These Reverse Mortgages allow you to: & Release funds ( cash ) to you by accessing and using the equity in your property Are generally secured by a registered first mortgage on your principal place of residence and potentially, your residential investment property. This again is dependent upon the bank or lender. An Example of how a Reverse Mortgage works: You are 60+, you own a property, valued at $600,000. You agree to take out a reverse mortgage and borrow $200,000. You can take the $200,000 as a lump sum, regular income or a combination of both depending on the policy of your lender. Are there interest costs on Reverse Mortgages? Both options ( i.e. Lump sum and income ) accumulate interest costs on borrowings as funds are drawn and used by you.

31 What else do I need to know? or, Your bank / lender generally will not allow you to rent the property connected to the Reverse Mortgage. You are still the legal owner of the property so you remain responsible for maintenance and similar costs. If you sell the property that is connected to the Reverse Mortgage, upon sale your lawyer simply discharges the mortgage in the normal manner. Upon your death, the bank / lender or trustee of your estate sells your home and upon the settlement of the sale of that property the bank / lender takes what it is owed : remaining principal amount plus capitalised interest (see Wiki Finance Dictionary below ). Reverse Mortgages: No repayments! It is a general feature of Reverse Mortgages, that no repayments are required on a reverse mortgage until such time as the borrower sells their home, dies or permanently moves out. Please Note with interest payments owing on the funds used are in most cases being added to the balance ( i.e. Capitalised). Some bank/lenders will allow you to make regular repayments or lump- sum repayments if you choose to do so.

32 Reverse Mortgages: Erode the equity you have in your home Many of us are living longer, and while the concept of a reverse mortgage is tempting, it may not be for everyone. Under Australian law, you are protected, with borrowings being limited to a small proportion of the overall value of the home. However, it is important to understand that, unless the rate of growth in property values associated with your house, is reasonable, there may well be faced with the possibility that you will see your home equity eroded each year. Under Australian Law t is mandatory that you speak to your solicitor. Your solicitor will read your Reverse mortgage terms and conditions and explain exactly what type of agreement you are signing up for. Your solicitor who is an independent professional will know your personal needs and will support only your interests. Home loans for Self Employed More and more people are Self Employed. Historically, obtaining a home loan has been difficult It is now much easier. I am Self Employed, So What do I need?

33 Full income verification and Two years of profitable trading and Demonstrated capacity that you can meet your lender s terms for the loan. By providing all such information, obtaining a home loan will with the assistance of your Loans Finance Australia Broker will be similar to the process of those who are PAYG (i.e. traditional employees ). If you are not able to supply the information quoted above, lenders may: see you as a higher risk. and it may become more difficult, or cost you more, at least in the short term. Your Loans Finance Mortgage Broker will discuss this with you when making an assessment of your circumstances and advise. Your Loans Finance Australia Broker will have researched all the options available to you. You might be surprised with what is available to you. What kind of home loans are available?

34 If you are self employed and do not have full income verification, there is still a range of very competitive home loans available through numerous lenders offering low or no document home loans and non-conforming home loans. While these loans might cost you a little more, they can pro- vide a reasonable solution until your business is more established and you are in a position to negotiate for a full document loan. Do Non-Standard Loans have higher interest rates? Along with lower LVRs (loan value ratio), typically low documentation loans and non-conforming loans have higher interest rates than full document home loans in line with the lender s view of you as a risk. (Variances are usually around 1-3% higher than a traditional loan, but rates depend on your level of credit impairment or perceived risk.) No and Low Document Loan Features Many no or low doc loans now combine all the features of variable and fixed rate home loans. Access to loan features such as flexible repayment options, redraw and 100% mort- gage offset on variable and one-year fixed-rate products are also now reasonably common.

35 And they are available to home buyers and residential property investors. Increasingly, low doc loans with LVRs greater than 60% now also require you to produce more documentation: An ABN that has been active for at least 24 months GST registration active for at least 12 months Past 12 months Business Activity Statements (BAS) obtained from the ATO and inclusive of lodgement receipt number Past six months personal transaction account statements (for primary account only) Is there a limit to low document loan borrowing levels? You can borrow up to $2.5 million on low document loans, but it is unlikely that you will get any more than 60% LVR, meaning your property security needs to be worth at least $4 million. LVRs of up to 80% are available, but most lenders will not lend you more than $1 mil- lion and you will have to pay LMI (lender s mortgage insurance) over 60% LVR. Chapter two Home loan borrowing made simple. Great tips on how much you can borrow, getting a deposit, negotiating the lowest interest rate and the right options.

36 How much can I borrow? Most of the time, you will have worked out the amount you can borrow well before beginning your property search. As people get closer to purchase, many things conspire to influence what they eventually borrow. (Not least of all that many of us end up purchasing properties at prices greater than we initially intended!) How do lenders assess you? Lenders take into account the maximum cost of the property (including purchase costs if these are to be included in the loan), the size of your deposit and the loan repayments at current interest rates. (Most lenders use a higher stress rate, which factors for potential rate rises.) Lenders will typically review all your income sources and expenditure, add a margin for safety, and then calculate your uncommitted monthly income. The most important factor to a lender is your level of uncommitted monthly income. The greater it is, the larger your borrowing capacity overall. Factors that can impact your borrowing capacity include: Loan value ratio Income and types of income, e.g. casual vs full-time Other loans Credit card limits Loan terms Number of dependents and their situation

37 Loan products Tax Rates Rental income Lenders calculate maximum borrowing capacity differently When it comes to the cold, hard facts of how much you can borrow, it might surprise you to know that lenders calculate your borrowing capacity differently, so it pays to consult a mortgage broker, especially if you have been knocked back for a loan that you believe you had a good opportunity of getting. You can influence your borrowing capacity When you are starting to plan for a mortgage, there are a number of things you can do to improve your borrowing capacity: Pay off outstanding term debts (e.g. personal loans) Pay off and close or reduce any credit cards, store cards, overdraft or line of credit facilities Consider reducing the limit of any other loan facility you maintain Work out and stick to a budget to improve your deposit and savings history Borrowing Capacity Schedule

38 If you are the kind of person who needs a general rule as a guide, you could safely assume that most major lenders will draw the line at allowing you to have a loan where up to 50% of your gross income goes towards your loan repayments. If two people are applying for a loan, then incomes are added together and treated as one amount, although outgoings are treated separately. The size of your family will of course also impact your assumed out- goings. The schedule below gives you an indication of what you would typically be able to borrow. While you can t present these numbers to the bank as evidence to support your application, they are a useful guide. 1. Get Pre-Approved First Home loan pre-approval is something you should definitely get if you have the time. Most lenders offer it and it is usually valid for three months. Get formal pre-approval if you can afford the application fee because it is the only pre-approval that you can rely upon.

39 As you would expect, it is subject to the conditions under which it is approved, but it does give you a very clear framework within which to work. Online calculators Most good mortgage broker websites have borrowing capacity calculators that will readily give you an indication of your borrowing capacity based on your current income and expenses. You will also find a range of other calculators including repayment calculators where you can calculate your repayments in weekly, fortnightly or monthly installments, for any amount borrowed. Lenders will typically accept 5% deposit or in one case, no deposit, on a home loan. You will need other funds to cover the costs involved in the purchase such as stamp duty, legal fees and registration fees. And your property valuation will need to stack up. Up to 95% home loans Provided you can make the payments, you can typically finance up to 95% of the property value from a lender on their normal competitive terms. Some may then offer to add the mortgage insurance costs to your loan as well, thereby lending you up to 97% of the property value. 100% home loans or no deposit home loans

40 A very limited number of lenders still offer 100% or no deposit home loans. If you haven t got a deposit, but have a good income, a no deposit home loan could be for you. There are slightly tougher approval rules surrounding where you can buy (the location of the property), the type of property and your repayment requirements. You will still need to have saved enough to pay for legal and transfer fees, stamp duty, insurance and other costs so this type of loan is really not for someone who has no money at all. Do I pay a higher interest rate on no deposit loans? If you can get one, a no deposit loan will almost certainly attract a higher interest rate and because of this, it is well worth considering alternative options to find the deposit you need. There are many ways of covering your deposit If you are a first home buyer, you are pretty much in the most fortunate position of all as you can use the Common- wealth Government grant and your State Government grants (if applicable) and other entitlements to limit the size of your required deposit and funds to cover fees. (See page 29.) For everyone else, apart from saving the required amount, the following is a list of options available to you to offset the need for a deposit: Limited guarantor loans - family pledge, equity guarantee

41 Monetary gifts Personal loans (but remember a personal loan will reduce your overall borrowing capacity) Deposit bonds Deposit bonds are an alternative to a cash deposit and are pretty much available to everyone. They are effectively a guarantee to the vendor equal to the amount of deposit required between signing the contract and settlement of the property. Deposit bonds cost about 1.2% of the deposit and can be issued for all or part of a deposit, but are usually for 10% of the purchase price. For example, a 10% deposit on a $500,000 property will cost you $600. Deposit bonds are valid for anywhere of up to four years and some can be used at auction. Even if you are using a mortgage broker to negotiate for you, it pays to understand a few of the basics about negotiating your mortgage so you are in the most confident position. Use Your Assets If you have a good deposit and low LVR, you are in the best position to negotiate for a good deal. Lending policies have tightened substantially over the past year, so relationships count. Whatever your circumstances, use an experienced broker who knows what he is doing and can leverage his relationships and experience on your behalf.

42 Discounts on loans greater than $150,000 Most major lenders will offer a discounted interest rate of up to 0.7% off the standard variable rate, starting at borrowings of around $150,000. Officially, discounts start at 0.5% at $150,000, but often your broker can negotiate more. Negotiating interest rates creates the greatest advantage. For every $100,000 you borrow, a 0.1% discount will roughly save you $100 p.a. in interest. A $300,000 loan with an interest rate discount of 0.70% p.a. on a 30 year loan, will reduce your aver- age annual interest by approximately $1,660. Over the loan term, this will save you approximately $49, Avoiding upfront fees When you only have a small deposit and need the funds, avoiding up front fees can be very useful at the time you need it most. Some lenders have products with very minimal upfront fees and instead offer a deferred establishment fee (DEF). The DEF is only required to be paid if you repay the loan early (within the first three or four years) and would typically cost you between $700 and $1,000 in that event.

43 Mortgage Counter Offers A good mortgage broker with experience and contacts can be especially useful for receiving and assessing counter-offers from suitable lenders, including your current lender. Negotiating Property Purchase Price Once you have a clear understanding of your borrowing capacity and com- fort level with repayments, make sure you know how much difference incremental increases in your property purchase offer will make to mortgage repayments. As you can see in the table below, the difference can be quite small. Buying & Selling Costs Buying a home and getting a loan what are the costs? Along with the costs of checking out the property you are buying and physically moving from the one you are now in, there are a number of government fees, taxes, legal fees and lender fees incurred when you go for a home loan and buy a new home. Remember that most of these fees are paid before or around the time your property settles, so your savings or loan will need to cover these amounts as well.

44 Typically, you would plan for these fees when you are purchasing: Stamp duty, Mortgage Registration, Mortgage Stamp Duty and Registration Fee These taxes/fees are state government - based fees and are applied according to the law of the state where the property is, i.e. not the property that you live in, if you reside in another state. Each state government calculates these fees differently. Stamp duty is payable in all states, but some groups such as those below are entitled to different exemptions or reductions on stamp duty: (All states) First home buyers (Victoria) Home buyers with concession cards (WA/NT) Principal residence rebates Individual state government revenue offices web site addresses can be found on page 48. Mortgage stamp duty has been abolished in most states where the lending relates to residential housing (owner- occupied and investment). A good mortgage broker and your solicitor can help you work through these. Lender Fees Sometimes lenders will negotiate on fees, but it is becoming less common. As a rule of thumb, the complete absence of up-front fees generally means a higher interest rate or ongoing fees.

45 Look out for these fees: Loan application fees Loan establishment fees Service fees Valuation fees Legal fees (mortgage related) Account transaction fees Exit fees (or deferred establishment fees) Fees differ a great deal among lenders, so it is extremely important to be very clear on these costs up front and en- sure your home finance broker negotiates on your behalf where possible. 5 Reasons You Should Use Chris Fasoulis, as your Qualified Mortgage Broker The home and investment loan market in Australia has and continues to become increasingly complex. Consequently, more people are turning to qualified mortgage brokers as the solution for their lending needs. Professionally qualified mortgage brokers, like Chris Fasoulis are required to complete rigorous training to gain the appropriate qualifications as a minimum and further additional training is also required by some lending institutions.