Which Home Loan is right for me?
Determining which loan is best for you is a complex question and finding the answer may seem like a daunting prospect. However, with the right guidance, this process can be very simple and stress free.
Before deciding on a loan, you should first consider what lending strategy will best suit your needs.
To develop a strategy with one of our professional consultants, you will be determining:
- How much you will need to borrow,
- How long you will need the loan,
- What sort of loan flexibility you will require,
- What potential traps to avoid,
- What future plans you may need to cater for.
Most importantly, you will also have an understanding of why that lending option is suitable for you. To make a time to discuss your circumstances with one of our lending specialists, feel free to Contact us
Types of Mortgage Loan Products
The advantage of a variable rate loan is that you have more flexibility with the loan; for instance, you can make extra repayments without penalty. The disadvantage is that your loan interest rate can vary up and down which will affect your repayments and is more difficult to budget for.
As its name suggests, this type of loan is a variable rate loan without the bells and whistles. Generally, this rate is a cheaper rate than the standard variable loan, however it may be more limited for flexibility or you have to pay extra for basic features. On the flip side, you’re not paying a premium for loan options you may not use.
Your interest rate is fixed for a period of time that you nominate (generally 1-5 years) so your repayments will remain the same irrespective of economic cycles. While it is easy to budget your repayments, you may also have restrictions regarding changing the loan, including making extra repayments. It is also worth reviewing your loan when your fixed term expires as usually the interest rate will revert to a standard variable rate which is often higher than other available variable rates.
Line of Credit
In this case, you have a credit limit, much the same as with a credit card. You can keep a nil balance and then use the funds as needed. You’re required to repay the interest only that you’ve accrued over a month and if you want to make large lump sum payments, this is easily done. The challenge is that this very flexible loan type may be slightly more expensive than other variable loans available.
These loans are designed to allow an initial low rate which reverts to the standard variable after a short period (usually 1-3 years). The benefit of this loan is that you are able to pay extra off the loan during the discounted/honeymoon period, and allows lower repayments for the first year or so.
These are loans for people who have a poor credit history or don’t fit the normal lending criteria of the major banks. The interest rate is usually higher or the loan restriction are greater, however, it may be a short term lending solution that suits your needs if other lenders won’t meet your funding requirements.
This refers to the length of time the loan will exist. A 30 year loan term is now standard; a shorter loan term will increase your ongoing repayments as you’re committed to repay the loan off more quickly.
Principal & Interest (P&I):
This refers to how your repayments are made; specifically, that over the term of the loan, repayments of the interest plus the reduction of the actual loan (principal) are made. Therefore over time, the loan is reduced to zero. With additional or more regular repayments, the principal is paid off faster and therefore less interest is paid.
Interest Only (I.O):
With most lenders, there is the option to not reduce your debt and simply repay only the interest on the loan. This might be suitable for investors wishing to maximise their tax deductions or to assist with managing cash flow. This option can be available for a nominated period (i.e. 1 to 5 years) which reverts to P&I following the IO period.
Interest in Advance:
In some instances, it is advantageous to prepay the interest repayments for the following year in a lump sum. This saves some interest costs, can have some tax advantages for investors, and negates the need for regular repayments throughout the year. Not all lenders have this option, but it is available through most of the major banks.
This is a lending option where traditional income documents are not required. Most Lo Doc loans are designed for self employed persons who have the income to service a loan but their financial documents (ie tax returns) are not available as evidence of income. Instead, the borrower is required to declare their employment status and sign a declaration that they have the income to service the debt. While initially this seems risky, the borrower is required to contribute far more equity/cash towards the purchase than the traditional borrower. It is also available for PAYG employees, however the restrictions are greater again.
Lenders have many differing names for this option but simply it is a package where the borrower pays an annual fee and receives benefits in the form of discounted interest rates and loan fees. This is designed for those who have enough debt to justify the annual fee and want to retain the maximum amount of loan flexibility. The greater the level of debt, the greater the amount of interest rate discount. It is also suitable for borrowers with multiple debts who can benefit from discounted loan fees.
Variable and Fixed Rate loans both have benefits and disadvantages and in many cases it is suitable to split the loans to have both types jointly. This means that you gain from the flexibility of a variable loan and the stability of a fixed rate loan, without being overexposed to the disadvantages of each. A split loan does require management of two or more loans, however, most lenders are well set up to offer split loan packages.
In some cases, a person may wish to buy a new house before they have sold their existing one. With Bridging finance, the lender will fund the purchase of the new home until the old home has been sold. This overlap is known as the bridging period and upon selling the old home, the bridging period is finalised and any extra bridging funds are repaid. When timing property transactions is difficult, Bridging Loans are a convenient way to ensure you can secure a new property. This loan option is a little more difficult to set up and it is important that borrowers have a comprehensive understanding the requirements.
This option is generally available with most standard variable loans. When building a house, a lender will make a series of ‘progress payments’ throughout the construction process, rather than handing all of the funds to the builder up front. With each progress payment, the debt accrues until the loan is fully drawn down on completion of construction. Borrowers are usually required to make Interest Only repayments during this construction period which then revert to a standard loan upon the final progress payment.
There are three types of housing guarantees: Security, Servicing and a combination of the two. There is also Directors’ Guarantees for commercial lending. This is where a person or entity other than the borrower allocates a portion of their equity (ie home) or their income towards a loan. The most common example is a parent offering to guarantee a loan for a purchase of a property in their son or daughter’s name. There are many scenarios to consider with guarantees so it is highly recommended to discuss this with your lending consultant.
There are many other options including Offset Accounts, Redraw, Additional Repayments, Direct Salary Deposits, Loan Increases, and Product Switching, that your consultant can comprehensively discuss with you.
How much deposit is required?
There are two types of deposits in property lending: deposit as a contribution towards a loan, and a deposit when purchasing a home. Both are very different.
A Loan Deposit
A loan deposit is the difference between the purchase price and the loan amount; specifically the borrowers contribution to qualify for a loan. All lenders are slightly different, however most have loan products to borrow up to 90% or 95% of the property value; this is often referred to as the loan to value ratio (LVR). A 90% LVR would mean that the borrower is contributing the other 10%.
For loans above an 80% LVR, the bank is required to have Lenders’ Mortgage Insurance (LMI) on the loan. Mortgage Insurers are separate entities to the lender and provide protection to the lender for lending a high proportion of the value of the property. LMI attracts a premium that the borrower generally pays however this fee is often able to be added to the loan so it does not require the borrower to contribute further funds upfront.
There is also a requirement with most lenders for evidence of genuine savings. This is in the form of bank statements or similar, showing that a minimum proportion of the contribution (usually 5%) has been saved up over a three or six month period.
One of the greatest benefits to using Mortgage Express is that we are able to take advantage of lenders who may provide cheaper LMI premiums, or will allow higher loan to value ratios meaning you are able to purchase your property sooner.
A Home Deposit:
A home deposit refers to the amount of deposit required as part of the purchase contract and this is often either negotiated as a dollar amount (ie $25,000) or a percentage of the property value (ie 10%). This type of deposit can be discussed with the real estate agent when negotiating on price.
In some cases, having the cash for a home deposit may be difficult to obtain, especially if it is tied up in a house that is yet to sell. Under these circumstances, a Deposit Bond may be an option. A deposit bond is where you pay a nominal fee to purchase a ‘bond’ which is issued by a specialised Insurance business. There is some criteria required before a deposit bond is issued, however one of our lending specialists can discuss this with you.
On top of the loan deposit, each state’s revenue office will charge some fees relating to the purchase of a property. Every state’s stamp duties, taxes and fees are varied and in some states there are concessions for certain types of buyers (ie First Home Buyers).
On our links page, you can click on each state and territory’s revenue offices to look up the fees that may apply. Some fees related to property include: Land Transfer (Conveyancing) Stamp Duty, Title Transfer Registration fees, Mortgage Registration fees, Lenders’ Mortgage Insurance Stamp Duty and Land Tax.
Alternatively, contact one of our Finance Consultants for a more detailed discussion on fees.
How much can I borrow?
The Lenders use two key determinants when looking at how much you can borrow: Your Loan Deposit (see above) and your income (also known as your servicing capacity). Assuming you have enough deposit to qualify for a loan, the Lender will look at how much you earn and therefore how much you can afford in repayments. This calculation also takes into account any current debt (including credit cards), how many children or dependents you have, and any other ongoing commitments you may have (ie Health Insurance).
Our Mortgage Express Finance Consultants have access to the borrowing capacity calculators of over 30 lenders and can calculate which lender will best suit your needs. You can also calculate your loan repayments if you wish to consider your own budgeting requirements.
Pre-approval may also help determine which lender will be the most suitable. This may provide some confidence when negotiating on your new property.
The Pre-approval Process
A pre-approval allows you to apply for a loan and have the lender make an initial assessment on your financial position. Whilst it is not a full approval, the lender will consider most aspects of your application including your income, equity, savings history, employment status and credit history.
The biggest advantage of a pre-approval is that you have the confidence to bid at auction and you are more aware of your lending position when negotiating through the purchase process. It also means that the ball is already rolling so you are more likely to meet a shorter settlement time and have less stress through the approval process.
The application process is straightforward and requires only a few simple forms to be completed. In some cases, your pre-approval may only take a matter of minutes from the time it is submitted.