Your home loan what the banks don't tell you

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2 Your home loan what the banks don't tell you Our homes are the biggest purchases we make, and the home loan you choose can make a significant difference to your ongoing mortgage costs. Mortgage brokers have access to a large panel of lenders, and can help you find the best loan for your circumstances all at no cost to you. Blackburne Mortgage Broking was named AFG s Mortgage Broker of the Year in 2012, and has been a finalist every year since. This booklet reveals 10 things you should know about home loans that your bank won t tell you. 2

3 1 It's not all about the interest rate When choosing a home loan, a lot of people are focused only on the standard variable interest rate (SVR) that the loan offers. However, many lenders offer additional discounts in areas such as ongoing fees and account keeping fees, as well as various other features that might make the loan more suitable for you. Comparison rates are published to take into account all fees and charges associated with a loan to arrive at a real interest rate. Successful mortgage brokers who write high volumes of business often have access to additional lending discounts which are not advertised publicly. So, it s not all about the banks published SVRs it s the discounts you can access for the life of the loan that are often far more relevant. 3

4 2 Brokers get the best deals It might be surprising to know that banks do more business through brokers than with customers directly. Over 55% of banks loans are referred through brokers, so it s really important for them to provide incentives to brokers who refer business to their bank to pass onto the clients. Any incentive provided to the broker results in a better deal for you. For instance, it is quite common for broker loans to include rewards to customers which you are unlikely to get if you deal directly with the banks. For example, these rewards may be in the form of fee waivers, rebates at settlement or additional rate discounts. Blackburne Mortgage Broking approaches several banks on your behalf, and will request additional interest rate discounts which the banks are often happy to provide to win your business and hopefully secure continued referrals from your broker. Banks also give brokers status rankings based on how much business they refer to them. For premium status brokers, this can result in even further interest rate discounts, as well as priority processing and the ability to order upfront valuations. Your broker could be worth his or her weight in gold! Brokers' rewards may be in the form of fee waivers, rebates at settlement or additional rate discounts. 4

5 3 LMI what you need to know LMI stands for Lenders Mortgage Insurance, a fee charged by finance lenders, including banks, if your deposit is less than 20% of your purchase price. The level of the fee depends on how big your loan is, and the percentage deposit you can pay. For example, if you have a 10% deposit on a property of $500,000, the LMI payable will be nearly $8,000. In most cases, LMI is added to your home loan, so you don t have to pay it upfront. However, this means your loan amount is increased and the interest you pay will increase as well. What the banks don t tell you is that in certain circumstances, the LMI may be wholly or partially refunded. This depends on the arrangements between your lender and their LMI provider. If you terminate your loan early in the life of the loan usually within two years you are likely to be eligible for a refund on some or all of the LMI that has been paid. The level of refund is assessed on a case by case basis, but generally around 40% of the LMI premium is refunded within one year of the loan being paid out, followed by a further 20% in the second year. However, this won t happen by itself. You have to chase your lender for the refund, and Blackburne Mortgage Broking will help you submit the relevant request. This is just another way mortgage brokers can help you stay one step ahead of the banks. 5

6 4 The right valuation makes a big difference If you don t have a lot of equity in your property, then every valuation dollar counts. If you are trying to stay under an 80% loan to value ratio (LVR) to avoid paying LMI, then a few thousand dollars in home valuation could be the difference between having to pay LMI or not. In addition, bank policies often use the 80% LVR benchmark to satisfy other lending criteria. For example, some lenders will not lend on particular property types or in certain postcodes if the loan exceeds 80% of the home s value. Also, you can quite often access a better interest rate if your LVR is less than 80% because you are seen as being a lower risk for the bank. Here are a few tips that your bank won t tell you about how to get the most out of their valuation: Make sure your property is clean and tidy Maximise space and remove clutter space is the key to adding value. Organise your furniture to create a feeling of openness If you have areas needing obvious maintenance or improvement, or unfinished renovations, a little money or time spent on these areas can have a significant affect on value Focus your attention on the kitchen, bathroom and outdoor areas as these can be critical in value being added or taken away A few thousand dollars in home valuation could be the difference between having to pay LMI or not. 6

7 Let the valuer do their job pointing out highlights sometimes alienates them rather than assists them. It is, however, a good idea to provide them with house plans if you have them. If you are unhappy with your valuation, you can contest it, however you will need to have compelling information such as details of comparable sales in your area. Banks do not usually offer this option unless you ask for it. If you believe your property has particular features which make it stand out from the rest for example, extra bathrooms or larger land size make sure you include these features in your submission. Blackburne Mortgage Broking can help you approach your lender to get the very best valuation possible. 7

8 5 Offsetting pay off your loan sooner An offset account is a transactional account attached to a home loan with the same lender. The interest payable on your loan is calculated only on the balance of the loan less any amount in your offset account. This can save you significant amounts in interest payments. Banks often do not fully explain to their customers the benefits of offsetting because what it does is help you to pay less interest and to pay your loan off more quickly. And they want to keep you as a customer for as long as possible! Many banks also allow for multiple offsets, meaning you can include the balances of more than one account to offset your loan balance such as children s accounts, holiday accounts and additional savings accounts. A great tip is to use your credit card to pay your day-to-day expenses, leaving funds in your offset account for as long as possible, to gain the greatest benefit from offsetting. However, to ensure this works in your favour, you need to pay off the entire balance of your credit card at the end of the month, before the interest-free period ends. Offsetting combined with sensible credit card usage is a great strategy to maximise every dollar earned. Blackburne Mortgage Broking can help you set up the necessary accounts to make your dollar go further. Offsetting combined with sensible credit card usage is a great strategy to maximise every dollar earned. 8

9 6 Take a repayment holiday Sometimes, life springs surprises on us that cause a sudden change to our financial situation and it can become more difficult to make mortgage repayments. Under certain circumstances, you can arrange a repayment holiday, for up to 12 months. Interest will still be incurred but it will simply be added to your loan balance rather than you having to find the money each month. While you will usually find this option in the fine print, banks are unlikely to point this out upfront, so it s a good idea to ensure your chosen loan provides the ability to defer mortgage repayments should your life take an unexpected turn. Perhaps you re going on maternity leave, or your job has suddenly changed, or you have unexpected medical bills for a few months. Reducing your monthly outgoings can really make a difference in during these times. Your ability to take a repayment holiday usually depends on being ahead on your repayments, and having not missed any previous payments. There are a number of quite simple and painless ways to get ahead with your repayments, and Blackburne Mortgage Broking can help you with various strategies to achieve this, and therefore set you up for a repayment holiday should you ever need one. Of course if you do take a repayment holiday, you will continue to incur interest on your loan over this period, so the loan will cost you more and take you longer to pay off. But if you re really struggling to make payments, the downside may well be worth it. Another alternative offered by some lenders is to temporarily reduce your repayment amounts, or to allow interest-only payments on your loan. Both these strategies mean you have more income to play with, but you are still making some repayments, so the downside is lessened. 9

10 7 Weekly, fortnightly or monthly repayments? How often you make your loan repayments can make an enormous difference to how much interest you pay and how quickly you pay off your mortgage. Most people are just happy to align their mortgage repayments with the frequency of their salary payments but there s a lot more to consider than just convenience. If you switch to paying fortnightly, instead of monthly, you can pay off your mortgage quicker by one month a year, for the life of your loan, without stretching your budget. For a 30 year loan, that means you pay it off two and a half years sooner, giving you that desired mortgage-free living and saving you thousands in interest! Here s how you do it. If you currently pay $1,000 per month, that s $12,000 a year. If you change your repayments to $500 a fortnight only slightly more than $1,000 a month, which you ll hardly notice you actually pay back $13,000 per year, because there are 26 fortnights per year. And because interest on home loans is usually calculated daily, and you re paying more frequently, you ll also be reducing the amount of interest you accrue over the lifetime of your mortgage. And you can save even more if you switch to weekly repayments! Just ask Blackburne Mortgage Broking to show you how this works and we can help you save thousands. 10

11 8 Fixed interest rates not always the way to go Fixed interest rates can be attractive because you can budget your repayments over a long period without having to worry about interest rate movements. However, banks often seduce customers with attractive fixed rates without fully explaining the downsides of fixed versus variable loans, such as: If the variable interest rate goes down, you won t get any benefit Generally, fixed interest loans do not allow for additional repayments to reduce the loan balance, so you cannot pay your loan off sooner if you get a bonus or unexpected windfall If your loan does allow for additional repayments, it is unlikely that the loan will allow for any redraw of those funds, or a repayment holiday Fixed interest loans rarely allow offsetting and if they do, it is likely to be a partial offset for only a small percentage of the loan value. If you want to pay a fixed interest loan out early either due to a windfall, selling your house, or refinancing you are commonly charged exit fees which can be quite substantial depending on the variable interest rate at the time. It is only prudent to fix your loan rate if you are certain that your lending requirements are not going to change during the fixed rate term. But who can really ever be sure of that? Banks often seduce customers with attractive fixed rates without fully explaining the downsides of fixed versus variable loans. 11

12 Blackburne Mortgage Broking has years of experience in finding you the most suitable loan, and will run you through all the advantages and disadvantages of variable rate versus fixed rate loans. It s about so much more than just an attractive interest rate. 12

13 9 Your credit score not always a skeleton in your closet Your credit details are held by credit bureaus, which lenders can consult to find out if you have a good credit history or not. This is a critical part of banks assessing your suitability for a home loan. Banks have their own credit score systems which allow them to standardise their assessment of your credit history. The score takes into account any defaults, your use of credit, the number of credit enquiries you ve made, and personal details such as your employment history and how long you have lived at various addresses. To maintain a good credit score is relatively easy pay your bills on time, don t make too many credit enquiries and live a relatively stable lifestyle. What banks don t tell you is that their system can often access your application automatically, and decline it based on an adverse credit score, before it has been reviewed personally by a loan assessor. If you think your credit history may highlight some adverse issues, it s a really good idea to speak to a broker first who will be able to help you decide the best strategy for your loan application, as they know which lenders are most likely to give a favourable response. Blackburne Mortgage Broking has developed strong relationships with many loan providers, and can ensure that your loan is assessed personally, presenting your application in as positive light as possible. To maintain a good credit score is relatively easy pay your bills on time and live a relatively stable lifestyle. 13

14 10 Pre-approval does it make a difference? When you re house shopping it can feel pretty good to have your finances pre-approved so you know exactly where you stand. But did you know that just because a bank issues a pre-approval, they are under no obligation to approve your loan when the time comes? What your pre-approval does mean, is that based on the information you have provided, the bank is willing to consider your application for finance when you find the property you re after. It s certainly prudent to have a good idea of how much you can afford to spend, but there are very different types of pre-approvals available in the marketplace and it s much more likely that your pre-approval will result in confirmed finance if you use a mortgage broker to help you. Not all banks do a comprehensive assessment of your financial position when they provide a pre-approval. Often it is just a computer-generated, on-the-spot approval that assesses only a few of the many lending criteria. If you ve walked into a bank and walked out half an hour later with a pre-approval, that s a pretty good indication that the pre-approval is no guarantee of your future loan application being approved. Blackburne Mortgage Broking will ensure that any pre-approvals are based upon a full assessment of your financial position, giving you peace of mind when you find the house of your dreams. In addition, bank lending policies and rates can change significantly during the period between your pre-approval and your full loan application. If the goal posts move, your bank is unlikely to let you know how this may affect your pre-approval, however a broker will keep you updated if the terms of your pre-approval change in any way. 14

15 Are you ready to find your perfect loan with Blackburne? Contact us and we can discuss your options with you. Call (08) or

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