Mortgages and Loans. Huonville: 8/16 Main St, Huonville 7109 DX 70754, Huonville PO Box 239, Huonville 7109 Ph:

Transcription

1 Mortgages and Loans Huonville: 8/16 Main St, Huonville 7109 DX 70754, Huonville PO Box 239, Huonville 7109 Ph: Hobart: Level 1, 18 Elizabeth St, Hobart 7000 DX 231, Hobart GPO Box 16, Hobart 7001 Ph: ABN Fax:

2 Contents What is a mortgage?... 3 What does a mortgage do?... 3 What are my obligations under the mortgage?... 4 What if I break a mortgage?... 4 How are mortgage loans recorded?... 4 Why are there so many different bits of paper?... 5 What should I do before I sign?... 5 Where I do sign?... 6 Who can I trust?... 6 Who are you doing business with?... 6 Types of Home Loan... 7 Variable... 7 Fixed Rate... 7 Capped Rate... 8 Discounted variable... 8 Bank Billed Linked... 8 Low Start... 9 High Start... 9 Split Loans... 9 Home Equity Interest Only Loans Reverse Equity Loans Managing Your Mortgage Pay The Loan Off Quickly Make Repayments More Often Swapping to a lower rate? Increase your repayments Getting your money back Run an Offset Account

3 The following information describes a typical mortgage. It is not specific advice on any particular mortgage. You will need to read your own mortgage document and understand its specific terms. You should resolve any of the terms of the mortgage that are unclear or unsatisfactory before signing the mortgage. What is a mortgage? A mortgage is an agreement which burdens a property with repayment of a loan. By signing a mortgage you agree to observe its terms. What does a mortgage do? The mortgage burdens all of the buildings and other improvements erected on or attached to the land detailed in the mortgage, including any other rights relating to the land. By mortgaging the property you are tying it up so you cannot deal with it freely until the loan is discharged. The lender is not obliged to discharge the mortgage until you have no further obligations to the lender. Usually the mortgage secures payment of any money that you owe to the lender at the time the document is created, and later while the mortgage is still current. For example, if you obtain a loan to purchase a home, and later another loan from the lender to purchase an investment, the mortgage will secure repayment of both loans. This may be cheaper than discharging the original mortgage on repayment of the loan and taking out a fresh mortgage later on. The lender can require both loans to be paid out in full before releasing the mortgage. Mortgages also secure the payment of any money due to the lender which you have guaranteed for someone else. Every mortgage is different but there are typical obligations of the borrower under a mortgage. 3

4 What are my obligations under the mortgage? Typically a mortgage will bind you: To keep the property in good repair. To pay all rates and taxes and other expenses. Not to change the property or its use without the lenders prior written consent. Not to leave the property vacant for an extended period without the lenders prior consent. Not to deal with the property without the permission of the lender. You cannot mortgage, sell or lease the property without first getting permission from the lender. To insure the property. To pay the enforcement costs of the lender if you fall into arrears. What if I break a mortgage? If you break your obligations (default) under the mortgage, the lender may take possession of the property and direct any tenants to pay the rent to the lender. The lender can also sell or lease out the property. In addition to being able to take control of the property, the lender can sue you. Court judgments can be enforced by laying claim to money owed to you, organising the Bailiff to sell property that is owned by you or having the court order you to make a specific payment on a regular basis. If you are unable to pay your debts the lender can apply to have you declared bankrupt. If you fall behind in your payments or otherwise break the mortgage, you should promptly contact the lender. Lenders are reluctant to exercise their powers to enforce a mortgage and usually do so only as a last resort. Usually, they are anxious to enter into an agreement that is acceptable to both parties, for example to reschedule the loan. How are mortgage loans recorded? Typically, the process begins with an application from you to the lender setting out your details, usually followed by a loan offer from the lender. 4

5 Often the letter of offer is a complete statement of the loan conditions themselves. There may sometimes be a separate statement of loan conditions but usually they are integrated in the loan offer. If your borrowing is for a personal or household purpose, the loan offer will need to satisfy the National Credit Code. The Code requires a standard table giving the particulars of the loan and the loan conditions must be set out in a clear and comprehensive way. When you sign the loan offer you make a contract for the loan. Often the mortgage document is in two parts - a one or two page document that is lodged at the Land Registry containing the basic description of the property and the parties, and a set of standard mortgage conditions which may be in a separate document that is lodged once at the Land Registry and referred to in the individual mortgage documents. You may need to sign: statements to confirm your circumstances and the circumstances of the property. written authority from you to allow minor additions or corrections to the documents after they are handed over by you. specific authority as to how the funds are to be applied. Why are there so many different bits of paper? The National Credit Code, requires certain minimum information in a specific form. Some documents are standard to everybody, while some meet requirements specific to you. Some documents involve lodgement with the Land Registry and others do not. What should I do before I sign? You need to read and understand your mortgage and loan documents carefully. Consumer lending, by law, must be recorded in plain English but they are still likely to be long and complex. 5

6 Your lender is not likely to change the standard terms of lending by negotiation with you. Your objective is understand your obligations to reject unacceptable deals or comply with those you agree to Discuss the mortgage and loan documents with your lender. If any queries remain unsatisfied, talk to Tierney Law. Where I do sign? The loan documents usually indicate where parties are required to sign and what witnessing is needed. If this is not obvious see your lender or talk to Tierney Law. Your lawyer will not incur the cost to you of analysing and advising you in detail on standard loan terms unless you ask. If you have any queries make an appointment to discuss the loan documents with Tierney Law. Who can I trust? In the good old days, your bank manager was like your lawyer and your accountant. He was a trusted adviser who had your interests at heart and there was an important relationship with your bank valued by both you and the bank. That relationship overlaid the legal rights under any loan. It was sensible to rely on that relationship in the knowledge that banks were usually reluctant to exercise the full extent of their legal rights. Sadly, the world has moved on and banking is no longer based on a professional relationship. Lending is now a deregulated competitive market. It is no longer possible to rely on your lender to give independent advice in your best interest rather than the lender s. Who are you doing business with? Many loans are now written on the basis that the initial lender has the right to transfer the loan to someone else. Managers borrow money in bulk and lend it out on a number of small loans as a package which they then sell to other investors. This is known as securitised lending. Under a securitised loan, you will not necessarily have the same lender for the full length of your loan and the loan may be transferred to someone else. 6

7 This will not directly affect you. The terms of the agreement will remain the same. You cannot rely on any overlying relationship with the lender. You must rely on the written contract. It is the written contract that will set down your rights and obligations. Types of Home Loan There are many different interest rate arrangements under a mortgage. There is no magic "best loan for everyone. You need to choose the one that is most suitable for you. Variable The most popular type of home loan. The interest rate varies over the term of the loan. Advantages of Variable Home Loan If interest rates fall, you will pay less. Ability to make additional repayments without penalty. Disadvantages of Variable Home Loan If interest rates rise, you will pay more. Uncertainty Fixed Rate These loans have fixed interest rates and repayments for a set period. Advantages of Fixed Home Loan When rates are rising, your interest rate will not go up. You are safe knowing how much your repayments will be. Disadvantages of Fixed Home Loan When interest rates fall your interest rate will not. Often you incur a financial penalty to pay extra amounts off your principal, or to change to a variable loan or new lender. The banks charge a slight premium for taking the risk of rate changes. 7

8 Capped Rate A capped rate loan has an interest rate ceiling. The rate cannot exceed this ceiling. The interest rate can, however, go beneath this ceiling. Rates are normally capped for one year or less and then revert to the variable rate. Advantages of Capped Rate Loan If interest rates increase, your interest rate will not rise beyond its ceiling or cap. If rates generally fall so will your rate. Disadvantages of Capped Rate Loan Capped rate loans are generally only offered as honeymoon rates to new customers. While your capped rate may be lower, the variable rate it reverts to may be high. Discounted variable A discounted variable loan is the same as a variable loan but with a discounted rate. Advantages of Discounted Variable Loan A discounted interest rate. If interest rates fall, you will pay less. Ability to make additional repayments without penalty. Disadvantages of Discounted Variable Loan There are usually penalties for discharging your loan early. If interest rates rise, you will pay more. Bank Billed Linked Interest rates on these loans are directly linked to the cost of funds on the money market. Advantages of Bank Billed Linked Loan Popular when bank bills are trading low. Rates based on an independent benchmark. Disadvantages of Bank Billed Linked Loan 8

9 More chance of interest rate fluctuations. Low Start Low start loans allow your initial repayments to start low and increase over time. Advantages of Low Start Loan Attractive to borrowers with low incomes, who expect their incomes to increase. Disadvantages of Low Start Loan Little principal is paid off in the early years. This will result in increased interest costs over the life of the loan. Even if your income does not increase as expected, you will still have to make higher repayments later on. High Start The reverse of a low start loan, under a high start loan your payments will decrease over time. Advantages of High Start Loan Good for borrowers with good incomes now,, eg future parents, allowing a sizeable reduction in the principal early on. Disadvantages of High Start Loan Income trouble in the early stages of the loan could cause problems. Split Loans Split loans have part of their loan as a fixed loan and part as a variable loan. This can be a very good combination. It allows some reduction of the debt ahead of schedule without fee as with a variable loan, but has the remainder of the loan locked in to give protection against rises in interest rates. Most people cannot expect to repay the entire loan quickly, but having some of the loan left as variable provides flexibility to at least repay some of the loan. Advantages of Split Loans Borrowers can hedge their bets on rates. A mix of repayment flexibility and interest rate security. 9

10 Disadvantages of Split Loans A mix of the disadvantages of fixed and variable loans Home Equity These loans give a line of credit secured by a registered mortgage, like an overdraft. Advantages of Home Equity Loans You can use the money as it is needed and pay it back when you have it. Rates lower and credit limits higher than credit cards or personal loans. Disadvantages of Home Equity Loans Easy access to borrowings can tempt you to waste your savings. Interest Only Loans These loans require only the interest to be paid as it is due and do not require a regular capital repayment. Advantages of Interest Only Loans Regular repayments are lower. Interest payments are sometimes required quarterly in arrears. Strong cash flow benefits. Mostly used for investment property. Disadvantages of Interest Only Loans Need to be renegotiated every 3 to 5 years. May need to sell the property if the loan is not renewed. Not generally suitable for owner occupied homes. Reverse Equity Loans These loans do not require regular payments of interest. The amount owed increases if no payments are made. These loans are designed for short term lending, in particular to the elderly Advantages of Reverse Equity Loans No required repayments. Mostly used for Seniors. 10

11 Disadvantages of Reverse Equity Loans Debt increases. More expensive. Generally suitable only for borrowing small amounts relative to the value of the property. Talk to Tierney Law about a guide booklet dedicated to Reverse Equity Loans if they appeal to you. Managing Your Mortgage Pay The Loan Off Quickly Your home is probably your biggest financial investment and your mortgage is probably your biggest financial commitment. If managed carefully substantial savings can be made. If you pay off your loan earlier you will save money. If for instance you borrow $100,000 at 10% over 20 years instead of 25, you will save over $40,000. Make lump sum payments whenever you can. A $5,000 repayment off a $100,000 loan assuming a 25-year term and 10% interest, if made at the end of the first year it will save over $39,000 and you will repay the loan 4 years earlier. There is a tax advantage paying off your home loan. Because you cannot claim a tax deduction for your home loan repayments, saving 10% interest on your home loan is like earning as much as 18% (depending on your rate of tax.) For most of us paying off our home loan is our best investment. It is simple, it is safe and it works. Make Repayments More Often If you divide your monthly repayment into two equal parts and pay that amount every fortnight, you will make your repayments a little earlier and also pay the equivalent of an extra month s repayment every year. Making greater and earlier repayments will save thousands of dollars in interest. 11

12 By paying off a $100,000 loan over 25 years fortnightly instead of monthly you will save over $53,000 (assuming a 10% interest rate) over the term of the loan and repay the loan 6 years earlier. Swapping to a lower rate? Watch out for the lowest interest rate. It may be worth taking your business elsewhere. But before switching lenders, tread carefully. A lower rate doesn t necessarily mean that it will be cheaper to swap. Work out how much you will save in interest and the changeover cost. Check the fees. Will the costs of the changeover exceed the interest savings? Increase your repayments While wages increase with age and inflation, for most loans, the number of dollars you are repaying will remain the same. If you find cash in your wallet at the end of the week maybe you can increase your regularly payment. If the interest rate drops, your required repayments may also drop, consider maintaining your repayments at the old level. That buffer of the increased payments is a good safety net and will save interest. By increasing your monthly repayment on a $100,000 loan over 25 years from $909 to $1,009, the term of your loan will be reduced by over 7 years and total repayments by $60,000. Before making any extra payments, check with your lender that there is no penalty for early repayment of the loan. Getting your money back Mortgage buffer loans, sometimes called a redraw facility, allow borrowers to draw on extra money they have paid off their loan above the standard repayments. This flexible type of loan offers the comfort of knowing money that has been paid off your principal is still available. 12

13 Most mortgage buffer loans operate like an overdraft. You have access to the money you have paid off, but you don t pay any interest on it until you draw on it. The interest you pay on any money you re-draw will be at the same rate as the prevailing rate of your home loan rather than a standard overdraft or a personal loan. As well as interest, some lenders charge a redraw fee. Don t forget the tax advantage when you compare a buffer loan with operating a standard deposit or savings account. With a deposit account, you have access to the money but you are earning interest on this money at a lower rate and this interest is subject to tax. Run an Offset Account Offset accounts work like buffer loans. The difference is that the money you have in your account belongs to you and you can access it any time, for any reason. Offset accounts also save tax. With an offset account, any interest that you earn is used to reduce - or offset - the interest charged on your mortgage. Say, for example, that the interest rate on your mortgage is 10% and you have $5,000 in an offset account earning 4%. In this case $5,000 of your mortgage will only incur an interest rate of 6% (10% on the mortgage minus 4% offset). Instead of receiving interest and paying some of it in tax you get a tax-free reduction in your interest charge. Debt Consolidation Consolidating all your debts allows you to pay your home loan, credit cards, car and personal loans and any other debts with a single monthly or fortnightly repayment at a single interest rate. This can be easier and cheaper. For example, instead of paying your credit card debts at 17%, with a consolidated loan you can repay them at the prevailing variable housing interest rate which would be much lower. However, don t forget paying all your debts with a single loan means that this loan will take longer to repay and consequently be more expensive than a standard home loan. 13

14 Packages Your bank may offer packages with your mortgage which can save you money on other common bank products, such as insurance, your deposit account or credit card. Be wary of schemes based on transfers out of credit card accounts, which are based on the interest free period that applies to some credit cards. There is some opportunity for saving but you need to check carefully to see how significant the saving is and whether it justifies the extra fees and hassle of making the various transfers. Be careful to keep an eye on the big picture and include all of the costs. A cheaper rate or an interest free period might get eaten up in fees and expenses. Fees and Charges Fees are one of the most significant one-off expenses involved in obtaining a mortgage and can make more of a difference than a slight variation in interest rates. Make sure you know what these charges are. But Then: As you battle to beat the mortgage, don t forget your quality of life and don t be too hard on yourself. Life is for living. This booklet is not a complete statement of the law. It does not deal comprehensively with your particular situation. This booklet is to provide general information to supplement our specific advice to you. Do not act in reliance on this booklet without our specific advice. We are responsible only if you give us specific instructions and for the specific advice we give. This booklet was originally prepared in 1995 and has been updated as at the 30 th August It does not reflect changes to the law after that date. You need to take specific advice on the possibility or effect of any such changes. 14