ARCHIVED MY MORTGAGE Q&A
| 100% offset vs line of credit |
 While I am familiar with the ins and outs of 100% offset home loans, I have also heard a bit about revolving line of credit home loans. My question relates to each type of loans ability to reduce the amount of interest payable by offsetting the balance of surplus funds against the principal of the home loan prior to interest being charged, I am unsure as to whether the revolving line of credit loans have anything over the 100% offset loans given the same interest-reducing mechanism seems to be a feature of both. Could you please help clarify this for me? |
 A line of credit usually allows you to make minimum repayments equal to the interest-only amount -although sometimes for the first 10 years of the loan only, The maximum credit limit a line of credit provides borrowers is given as a percentage of the value of the property, usually 75-80%, When you are given a line of credit you are given a maximum credit limit, This is one major distinction from an all-in-one loan. You should be able to continually draw back or down to this credit limit for the life of the loan or the first 10 years. Most institutions will call this line of credit a revolving line of credit.
An all-in-one loan is basically a loan combined with a daily transaction account, A 100% offset facility has a separate daily transaction account, Both all-in-one and 100% offset accounts work on the same principle - where the additional repayments made above the minimum repayments are used to reduce the balance of the loan on which interest is calculated.
You can deposit your salary and any other income into the account, use either facility as a daily transaction account and not be penalised by minimum withdrawal amounts or excessive withdrawal fees (apart from the standard ATM charges. The only funds available/accessibie for Withdrawal or redraw from an ail-in-one loan are the additional payments you have made above the minimum repayments. A line of credit can, but does not necessarily operate as an all-in-one loan, It may have a minimum redraw amount (anywhere between $50 and $2,000) and may have a redraw or withdrawal fee (typical maximum of $50), In regard to your question concerning interest calculations, assuming the rates and ongoing costs are the same, you are permitted to make more than interest-only repayments on a line of credit, there is no minimum redraw amount and no redraw fee, therefore the overall interest reduction effect should be the same.
However, lines of credit quite often have higher rates or ongoing, fees, approval may be more difficult to obtain, they often offer a lower LVP amount and they're usually not available with mortgage insurance - so unless you require the revolving line of credit facility, you may be better off look at a loan which is more suitable for your lifestyle.
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| Fixed vs variable |
| With the RBA cutting rates, have I lost my chance to get a good fixed rate deal? Is it too late to fix? |
Recent information and opinion suggest it could be time for borrowers to look at variable rates amidst speculation that more rate cuts are on the cards, However as always the choice depends on your personal and financial situation. The advantage of a fixed rate loan is that the borrower is protected from interest rate rises. The disadvantage is that they don't benefit when home loan interest rates fall.
For a borrower to be better off locking in a fixed rate, variable home loan rates would have to rise above the fixed rate such that the average variable rate for the period was greater than the fixed rate. While many analysts consider inflation under control, there have been reports that interest rates might rise significantly in the near term. While there are a variety of opinions on where interest rates are heading, the fact that variable home loan interest rates were around 7% a little over a year ago should remind borrowers how rapidly they can change. Locking in a fixed rate provides borrowers with peace of mind, and the knowledge that their payments will not change for the fixed period. The risk of course is that global economic uncertainties may prompt the RBA to cut the official rate further which will lower variable rates.
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| Buying off the plan |
| We have bought an apartment off the plan and it is due for settlement in March next year. We have been told if we shop around for a mortgage then we should be able to get a mortgage with no fees. We were also advised that moving from one mortgage to another after a few years would save us money and the mortgage broker should pay the fees for the move. Is this correct? |
Getting a mortgage with no fees is obviously ideal - but the reality is most mortgages, even the ones with very low rates, will charge fees. Of all the possible fees you may be charged, it's best to try and minimise monthly account-keeping fees.
A fee of $6 may look like small fry, but the average 25-year mortgage has 300 monthly repayments, so over time this measly $6 fee will total $1,800. You would be sensible to shop around for a mortgage. Compare interest rates, fees and loan features to find the loan which is the best value and suits your needs, A mortgage is a big financial commitment and it pays to make sure you get a good deal.
If you want to refinance after a few years to get a better deal, don't just do it for the sake of it. You should only refinance your loan if you weigh everything up and decide that the benefits of refinancing significantly outweigh the costs.
Unfortunately, mortgage brokers do not usually pay the fees if you decide to refinance. Sometimes the new lender might waive application fees, but there are other fees to watch out for, such as loan exit fees.
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| Role of a guarantor |
| l want to take out a home loan to buy a house for $500,000 but the banks are only willing to lend me $400,000. If I can get my partner who already has a property under his name to be my guarantor, would I be able to get approval for the whole amount I need? How does guarantor work and what are my other options? |
Where a borrower defaults on a loan and a lender seeks to enforce a guarantee; the courts require the lender demonstrate that the guarantor has received a benefit as a result of the loan having been made. Consequently, where a property is being purchased, lenders now will only accept a guarantee from the spouse or proven de facto of the borrower, the benefit to them being that in any family settlement they have a legally recognised 'share' in the property and in the meantime they are also living in it, If your partner is your de facto then his/her guarantee may be acceptable to lenders. If not, your other options could include:
1. Co-purchase: you buy the property jointly (50:50) or as tenants-in-common (75:25 for example) with your partner and he/she co-borrows with you.
2. Family pledge: a number of lenders have recognised the difficulty for young people wanting to enter the property market and as a result a new product has recently been developed whereby lenders will accept a 'family pledge' or 'family equity' by way of a guarantee for the shortfall (in your case the $100,000) on the purchase from a direct relative (parent, sibling or grandparent). The benefit of the family pledge arrangement is that unlike a traditional open-ended guarantee, the guarantee from the family member is limited to the shortfall amount ($100,000), The lender will require a registered first or second mortgage against the family member's property. While the family pledge only considers the guarantee from an additional security perspective, family equity will also consider the income of the guarantor when assessing servicing capacity.
3. Gifts: if you are lucky enough, perhaps someone may be willing to make a non-refundable gift to you for $100,000. The lender will accept this as the balance of purchase price (as opposed to previous lender policy that required you to show evidence that the balance was made up of regular savings).
Where a loan involves a guarantee it is very important to ensure that the guarantor fully understands the liability he/she is taking on and obtains independent financial and legal advice before proceeding with the arrangement. In an economy of rising interest rates, you should always be wary not to overextend yourself and borrow more than you can afford. It is sometimes advisable to wait until you can afford the loan you want and not risk potential financial hardship should rates rise or should you become unable to work for an extended period of time for whatever reason.
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| Professional packages |
| My husband and I are currently earning $100,000 per year and have been informed of the various professional loans, How do you weigh up whether these packages are better than the other highly competitive standard loans? |
Professional loans are sold as a package so in addition to your mortgage, it is generally necessary to take a credit card and establish a savings account with the same lender to qualify for the professional package rates.
The benefit of the package is that your day-to-day banking may be free, you enjoy a discounted rate while you maintain other business with the lender, but you should remember that the lender is seeking your additional business to offset the 'pro-pack' discount - it expects to make up for the discount through interest etc on your credit card and other facilities. Alternatively you could always speak to your current lender about their professional package - it may be that you don't need to move your banking at all. There are also many non-bank lenders who specialise in mortgages only and are in the market with interest rates that compete with pro-pack rates, They don't require that you move your other business to them so you avoid that hassle. As to how you determine which rates are better, lenders are required to give you a comparison rate - this is of some help in that it includes some fees in the rate calculation but it doesn't include those fees that cannot be ascertained at the time you take the loan out. Personally I am of the view that product features and service are equally as important as rate when deciding on which lender to run with - it's a long-term relationship - so you need flexibility and a lender that genuinely cares about your situation.
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| Mortgage Insurance |
| I purchased a property 18 months ago for $475,000 and borrowed $450,000 to pay for it. I consequently had to pay approximately $10,000 in mortgage insurance. If I were to change my home loan from my current lender to a new lender, would I have to pay mortgage insurance again? |
Generally speaking, mortgage insurance is not portable if you refinance to a different lender. For each new loan a lender writes, it looks at the loan to value ratio (LVR) to assess whether lenders mortgage insurance (LMI) is required. When you took out your loan 18 months ago, your LVR was very high at 95%. Your lender required you to take out LMI because with equity of only 5%, there is a significant risk of loss in a mortgagee sale situation. LMI protects the lender against such a loss.
Whether you would be charged LMI with a new lender depends on how much equity you have built up in the property over the past 18 months. If you have an interest-only loan, you will not have repaid any of the principal - so unless there has been an increase in the value of your property your equity has probably remained unchanged. If, however, you have a principal & interest loan and have been making additional repayments of principal then you may well have paid off a decent chunk and built up your equity.
As a general rule you will need to pay an LMI premium whenever your loan exceeds 80% of the value of your property. Depending on which mortgage insurer you're with, you may be entitled to a partial refund on your existing LMI policy. Some insurers refund borrowers who refinance within 12 months, but others allow refunds for those switching within 24 months, so check with your mortgage insurer.
In short, you'll need to work out the following to see if it is a viable proposition to switch at this stage or not.
1. Current value of your home
2. The equity you have in it
3. Cost of LMI with new lender
4. Likelihood of refund of any portion of existing LMI premium You should also check whether there are any exit costs for you to discharge early - the lender will not have recovered its establishment costs in 18 months and may have a provision in the loan document to recoup these when you discharge. Ask for a pay out figure before you incur any other costs.
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| Asset rich, income poor |
l lived in Perth between 1998 and 2000, then moved to Asia, and in January 2008 decided to make Australia home and moved back to Perth as an Australian permanent resident. I'm 'asset rich and income poor' and am not intending to take up full-time employment, but rather live off my investments.
I've committed to buy a new apartment in Sydney, which is due for completion in mid-2009, I'd like to get a mortgage for this investment but my current bank (ANZ) has unofficially advised me (in discussion with its mortgage specialist, but I haven't had an official sit-down with the bank yet) that it wouldn't be able to lend further to me. (I have four properties already with the bank including my home and three investment properties.) I'd prefer not to use a lot of my savings to fund the Sydney property, but I will if I'm unable to get funding. My question is: What advice do you have for people who are 'asset rich and income-poor'?
It appears that financial institutions traditionally view people for a mortgage based on their income. I have no income and no track-record of employment in Australia, having just moved here.
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lt's a little difficult to provide you with a definitive answer to this query as I don't have a full picture of your assets and liabilities, your investment income or details of the off-the-plan purchase.
This said, there are lenders in the mortgage market who will fund mortgages without requiring PAYG or tax returns as evidence of income Rather, they'll seek either a statement of income or a statement of affordability from you. They'll also consider your assets and liabilities in these circumstances, to give additional comfort in determining your borrowing capacity.
Taken that you aren't too highly geared on your investment properties, it would seem hat you could make a statement of affordability, and in the even-that net cash flow from rents and other investments you have aren't sufficient, it would be clear to the lender that you could sell one of the investment properties to generate surplus funds to service debt. Because of the additional risk associated with low-doc loans, the maximum gearing is generally 70%, and you may pay a small premium in price.
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| Sell vs hold |
l have a unit which was purchased for $310,000 and would currently be worth about $340,000. I have about $210,000 owing on this mortgage, My wife and I are now looking to buy a house which would cost approximately $580,000.
We've just had a loan approved for $600,000 on top of the current loan on the unit. We only have about $15,000 for a deposit on the new house at the moment and would get hit with approximately $14,000 in lenders mortgage insurance (LMI), We have to decide whether to sell the unit in order to avoid the LMI and reduce the monthly repayments, or keep the unit, rent it for approximately $350 per week (which would leave approximately $380 per month additional payments) and also buy the house. Furthermore, would it be best to move the unit to an interest-only loan?
Keeping the unit would stretch us, but I'm wondering about the tax benefits (negative gearing?) and the long-term benefit of having the two places.
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You should have a talk with your accountant to determine the negative gearing benefits you might have if you hold/sell the investment unit. Not knowing your annual income or tax bracket and the other maintenance costs associated with the property, I'm not able to quantify your negative gearing position.
If you sold the unit and reduced your home loan to $464,000 (80%), you'd avoid the high non-deductible LMI cost and minimise your non-deductible interest outgoing. Once settled into your new home, you could then look to purchase an investment unit, and maximise the investment loan portion/deductible interest. While your lender is satisfied with your ability to repay, you're concerned about cash flow. You should definitely consider interest-only on the investment loan.
In addition, you could go interest-only on your home loan for say a three to five year period. This would allow you to better manage your cash flow - being interest-only does not generally restrict you from making principal reductions on your home loan. If you proceeded on this basis you can set the monthly repayment as if it was principal & interest, but if stretched in a particular month you can reduce it to meet the lesser interest-only payment
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| Flexible fixed rate loans |
| Could you give me a list of lenders that will offer fixed interest rate loans on which you can make extra payments? We currently pay more than the minimum amount due, and are keen to keep this up for another few years. |
Fixed rate loans suit borrowers who like the security of knowing how much their repayments will be, as fixed rates insulate them from higher repayments if interest rates rise during the term of the loan, It's easier to budget for as repayments won't fluctuate, However, fixed loans are generally less flexible compared to variable rate loans, Some fixed rate loans offered by banks, for example, won't allow you to make extra repayments, while some lenders limit the dollar amount that you can repay over the life of the loan, Some lenders might charge you when you repay extra but this is generally not the case. The Home Loan and Investment Loan tables at the back of each issue of Your Mortgage detail which lenders allow you to make extra repayments on fixed loans and any limits. Loan conditions and fees vary greatly between lenders so it pays to shop around. You also need to check with lenders whether there are any break costs involved if you decide to pay off your fixed loan in a lump sum or refinance to a new loan. Break costs, or exit costs as they are also known, can be substantial compared to variable rate mortgages, so ask about them.
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| Empty pockets |
As a Baby Boomer who took on a mortgage in 2003, and then increased it to purchase a vehicle in 2006, ! find myself at 56 with no funds with which to maintain my property, I have a few thousand dollars in my redraw facility, but it costs $30 per redraw to access. Should I switch to an interest-only loan and change to a line of credit?
I have enough super upon retirement to pay out my mortgage but not much more, I can't get any help from the bank, which holds my mortgage. They've attempted to pass my questions onto a local advisor but I've received no response.
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The first thing I suggest you do is to see a qualified financial planner to get some expert advice on what can be done to ease or improve your situation both now and for retirement, For example, they may advise that selling the property, investing the proceeds and renting a smaller place might improve your situation. In any case, it would be good for you to know what options are available to you. Without having a better understanding of your existing loan, income, value of property and ongoing financial needs, it is difficult to make any meaningful recommendations, This said, here are some suggestions you might consider.
There are some institutions that will provide reverse mortgages or other products which can free up equity in your home, These equity release type products are targeted at the over-55s/60s who have a lot of equity in their home but little disposable income or cash, Homesafe (Bendigo Bank) is available to over 60s and it's different to many products in that Homesafe actually acquires a share in your property, which frees up some capital for you to maintain your home or otherwise enjoy. Check out our article on page 64 for an in-depth look at reverse mortgages.
Cash flow is your immediate problem and switching to an interest-only loan would alleviate things for you to some extent. Even though you might be in interest-only mode, most lenders do allow you to make additional repayments of principal if you wish to do so. Alternatively you could renegotiate a longer term on your existing loan (longer term, lower monthly repayments) or split your loan so that it is part interest-only, part principal & interest. Speak to your bank about your switching options. If they wont oblige or don't phone back - then check out other options through a reputable broker.
As you noted, a line of credit could work for you but you must be able to service any additional borrowings and if you're undisciplined then the loan can blow out over time and erode the retirement 'equity' in your home. Redraw is often a standard feature in the cheapest loans and many lenders offer a number of free redraws per month. Unless you're constantly using the redraw the fees shouldn't have a huge impact.
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| Dividing question |
My husband and I have a property in the Blue Mountains, NSW, worth $400,000, We owe $145,000 on it and have $81,000 available in redraw. We'd like to keep the property as an investment and buy a property in Sydney in which to live. We've considered refinancing the $145,000 with an interest-only loan, however, we have no other savings and would need to borrow 100% plus costs for the Sydney property. Does this make financial sense, or should we consider selling our existing home to buy the new one?
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An accountant will be able to show how you can implement your plans most cost and tax effectively. If you have sufficient income, are very keen to hold onto the Blue Mountains property and, taken that this is currently held jointly on a 50:50 basis, one of you could sell one half share to the other (the higher income earner) for its value of $200,000 (estimated stamp duty $5,500). The $200,000 proceeds of sale of the half share can then be applied to repay $75,000 (half share of the mortgage) with the balance of $127,500 going towards the purchase of your new home in Sydney so that your non-deductible home loan borrowings are reduced by $127,500.
The purchaser of the half share could borrow up to $320,000 or 80% of the total value of the property by way of an interest-only investment line of credit (some have a capitalising feature providing a buffer if cash flow is tight at any stage). The investment line of credit is utilised to meet the purchase of the half share plus acquisition costs (total, say $210,000), as well as providing an unutilised portion (up to $110,000) to meet any ongoing investment costs - rates, maintenance and other costs associated with the investment property. Depending on your incomes, this structure should reduce your ongoing costs.
After you talk to your accountant, speak to a reputable mortgage broker to see what options are available, and if you can afford both loans. You may find that you have to sell your existing property in order to buy the new one or, with rental income from the existing property, you can afford both, To find a reputable broker in your area, visit the Mortgage & Finance Association of Australia's website, www.mfaa.com.au |
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Comparison rates
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l'm thinking of taking out a home loan of approximately $300,000 and I want to know how comparison rates are calculated. Are they as important as what they're made out to be, or are the features of the loan most important?
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For a loan amount of $300,000, the law states the comparison rate is calculated on a 30-year term. This means it shouldn't be calculated over 12 months or 4-6 years. The comparison rate is calculated by taking into account the advertised rate of a loan (includes both honeymoon and revert rates over the loan term) as well as its upfront fees and ongoing quantiiable charges to represent them as one easy-to-compare interest rate.
When choosing a home loan, both the comparison rate and the features of the loan are very important. The comparison rate empowers you to compare 'apples with apples' when making those vital mortgage decisions. By the same token, a loan with product features such as redraws, direct salary crediting and the ability to pay weekly and fortnightly, can help make your mortgage work for you. By understanding such features and their benefits you can shave years off your loan and save money in the long term, even though the interest rate may be marginally higher on the better featured loan. If you would like to compare the different products based on comparison rates and features, you can simply jump on to the Your Mortgage website www.yourmortgage.com.au/rates/
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Portable loans
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I would like to know if there is such a thing as transferring loans. What I mean by that is if you sell your house for a certain price and the house you want is the same price, can you just transfer the loan across and if so what lenders might do this? We're in a situation where we have a line of credit of $80,000 for a deposit on an investment property in Melbourne. As things didn't work out we had to sell it at a loss. Now we have a mortgage of $300,000 plus the line of credit of $80,000. We'd like to sell up so we can get out of this mess, but currently our house would be lucky to fetch $300,000 - leaving us with no deposit. As we're paying our bills on time, could the lender pay out both loans and give us another for the same amount?
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Firstly, many loans are "portable" or able to be transferred to another property provided the new or substitute property is acceptable to the lender and its value equal to or more than the value of the existing property. Lenders may seek a nominal fee for the processing of substitution (around $200) and there will also be valuation and legal costs. If I understand your circumstances correctly you currently owe a total of $380,000 to your lender and this is secured over your home property worth only $300,000. I am assuming that your home loan lender advanced you the $80,000 for the deposit on your investment purchase and secured this by way of a variation of the existing first mortgage at a time when your property was worth around $420,000. Selling your home now for $300,000 not only leaves you with no deposit but also with a debt still owing of $80,000 to the bank. Selling and buying another property is only going to incur more costs in marketing, legal and government duties. I doubt very much whether in these circumstances your lender will entertain any substitution of security. You should discuss your options with your accountant or solicitor to determine the best way out of your financial difficulties.
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100% offset PLUS fixed rate?
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I'Ve been doing quite a bit of research about fixed rate loans as well as 100% offset loans. While individually, there appears to be several of these types of loans on the market, I'm yet to come across one that incorporates both features into the one loan. Does such a product exist? If so, why are they so rare?
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A very good question and I'm glad you asked. The simple answer is: yes you can. The reason you are having difficulty finding this type of product is quite frankly because not a lot of lenders offer it. Let's examine the reasons for this in more detail. I'll begin by identifying the benefits of each of these products individually: Fixed interest rate:
- Security of knowing that your rate won't rise in a volatile variable rate environment
- Security of knowing what your repayments will be during the fixed period
100% offset account:
- A savings account that is effectively earning you interest at your home loan rate
- Potentially saves you thousands of dollars in interest
- Reduces the outstanding balance on your loan at an accelerated rate using your offset benefit
- No interest to declare
- Unlimited deposit amounts
Therefore, if you were to combine the two products/features, the lending institution doesn't stand to gain much out of this type of loan:
1. If rates rise, they don't benefit by charging you additional interest
2. As your rate is fixed, you're reducing the 'fixed' interest charge each month.
You've probably noticed that there are a number of financial institutions that offer this type of loan, yet they may only offer it on a one-year introductory fixed rate - using it as more of a means of getting'the business rather than a long-term benefit.
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Can you help?
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This definitely sounds like the loan for me. Are you able to point me in the right direction as to where I might find such an outstanding product?
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In order for you to obtain an overview of what exactly is being offered in the market, I would recommend that you visit websites such as www.ymm.com.au or www.ratecity.com.au where you will find accurate and extensive research and information on a large number of lenders/financial institutions. Here you'll be able to refine your search to your precise needs.
Alternatively, why not visit our website at http://www.australmortgage.com.au/ and click on the Your Mortgage current edition image. Here you'll find comprehensive information about our 100% fixed offset loan and just why it's one of the best of its type on the market, as well as being supported by a Cannex five-star rating of our three- and five-year fixed rates.
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| How much can I save? |
| Well now it ail makes sense. I've never really understood just how cost effective this type of loan could be. I have a fixed loan of $350,000 with a major bank at 8.55% pa (which will revert to 8.77% variable). I also have $10,000 in a term deposit account with them. If I combine these two using a 100% offset loan with a fixed rate, can you estimate how much I can save over the term of the loan? |
Please bear in mind that the figures provided are for information purposes only. There are other costs/fees to consider when seeking a more concise comparison such as exit fees, legal costs, etc.
For the purpose of this exercise, I'll assume that your rate remains 8.55% and doesn't revert to a higher variable rate. Currently you have a loan of $350,000 at 8.55% pa. Assuming this is a principal and interest loan over a 30-year loan term, the total cost of your loan over that time would amount to $973,300, of which $623,300 is interest charged. If you were to apply your $10,000 term deposit to an offset account (and let's assume this balance remains for the term of the loan), the total cost of your loan over that time would amount to $871,988, of which $521,988 is interest charged. In summary:
- You would save $101,312 in interest over the term of the loan.
- You would reduce your loan term from 30 years to 26 years, and seven months,
- In the offset account, you 'earn' interest at 8.55% pa (loan interest rate) which equates to $855 pa. As it's offset against your loan account, there's no need to declare this at the end of the financial year.
- In a fixed term account at say 5% pa, you earn $500 pa and are required to declare this amount at tax time.
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100% offset versus line of credit
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My question relates to the abilities of 100% offset and revolving iine of credit home loans to reduce the amount of interest payable by offsetting the balance of surplus funds against the principal of the loan prior to interest being charged. I'm unsure as to whether a revolving line of credit loan has anything over the 100% offset, given the same interest-reducing mechanism seems to be a feature of both.
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A line of credit usually allows you to make minimum repayments equal to the interest-only amount -although sometimes for the first 10 years of the loan only. The maximum credit a line of credit will allow is given as a percentage of the value of the property, usually 75-80%.
The major distinction from an all-in-one loan is that a line of credit has a maximum credit limit. You should be able to continually draw back or down to this credit limit for the life of the loan or the first 10 years. Most institutions call this a 'revolving' line of credit. An all-in-one loan is basically a loan combined with a daily transaction account. A 100% offset facility has a separate daily transaction account.
All-in-one and 100% offset accounts work on the same principle - the additional repayments made above the minimum repayments are used to reduce the balance of the loan on which interest is calculated. You can deposit any income into the account, use either facility as a daily transaction account, and not be penalised by minimum withdrawal amounts or excessive withdrawal fees (apart from the standard ATM charges). The only funds available/accessible for withdrawal or redraw from an all-in-one loan are the additional payments. A line of credit can operate as an ail-in-one loan. It may have a minimum redraw amount ($50-2,000) and may have a redraw or withdrawal fee (typical maximum of $50).
Assuming the rates and ongoing costs are the same, you are permitted to make more than interest-only repayments on a iine of credit, and there is no minimum redraw amount or redraw fee, then the overall interest reduction should be the same. However, iines of credit often have higher rates or ongoing fees, approval may be more difficult, they often offer a lower LVR amount, and they are usually not available with mortgage insurance.
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Timing issues
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What can be arranged if your loan repayment day falls on the day before your income arrives? We're about to sign on the dotted line for the loan contract.
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The answer depends on your lender. Regardless of how often you make payments, many lenders will charge interest on your loan once a month. If we understand your question, you are asking what happens if it charges interest before you deposit income into your loan account.
This can be a problem and you need to determine what action it would take and what penalties would apply. Assuming your income is paid to you monthly, you should check with the lender to determine exactly what day they charge interest against your loan. This may be a fixed day every month, or the first business day after a set date each month. To ensure you don't miss a payment, you should have at least one extra payment made towards the loan at all times, and check with the lender that they are able to access this money if you are a day or two late with your regular repayment.
We understand that this could be difficult to achieve when you first apply for your loan, but your first repayment is usually due a week or so after you sign for the loan, use this time to save the extra amount required and put it towards your ioan as quickly as possible. This can also save you interest in the long term.
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Application blues
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I am married with four children. My wife and I have been renting for 15 years, the last seven at no less than $250 per week and currently at $300 per week. I am a self-employed musician and my wife doesn't work, but receives various government benefits. We desperately want to buy our own home and, as you can see from the rent we have been paying, can afford to, but are concerned about how our situation may look on paper. Apart from obviously needing a deposit, can you please advise us on the following:
1. Do home loan lenders take rental history into account?
2. Do they consider government allowances as income?
3. Does having a guarantor add to our chances?
4. What is considered minimum income for a loan of, say, $120,000?
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You can usually borrow approximately three to three-and-a-half times your combined income, although not all lenders will take government benefits into consideration. A number of lenders have calculators on their websites where you can plug in your income and expense details and it should determine the approximate amount that they will lend you.
Having a guarantor will certainly improve your chances, but it's also important to prove that you will be able to service the loan and this will require some documented employment and salary history. As a self-employed musician, this may not be possible, so you may want to talk to a mortgage broker who should be able to find a lender that will take your wife's benefits into consideration, and may also look sympathetically on the self-employed, in terms of documentation.
You haven't told me your income, but if it has averaged high enough over the years to justify the loan you are after there will be a lender out there who can help you - the trick will be finding one that won't charge too high an interest rate to justify the extra risk that you present to them. Take a look at the article on specialty lenders on page 46 for a discussion on lenders who cater to borrowers such as yourself.
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Put it in the bank?
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Our home loan is currently with a bank. My husband sought advice from them and they said it would be better if he put all of his income into the home loan and I do the same. The bank also told him that if all our wages go into the home loan it would be paid off much earlier.
I currently have my own savings account with a credit union and like things the way they are. My question is if I put my money into the bank and withdrew it straight away, would it still reduce the home loan? All of my wages are spent before the next pay day, so I can't see how putting my wages into the home loan would be any benefit.
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I think what the bank is referring to is what's called an all-in-one account or 100% offset home loan. These work by putting all of the household income into the account and drawing out funds as needed using ATM or EFTPOS facilities.
Even if all the money is withdrawn from the all-in-one or offset account before your next pay day, the total amount of interest you pay on your home loan can be reduced as your salary offsets your home loan principal for at least some days during the month and interest is calculated daily on your home loan.
The benefits can be extended by using a credit card with an interest-free period to pay for all your expenses, thus leaving your salary in the loan account for the longest period of time and then paying the balance off before interest kicks in.
These types of facilities can be useful and can reduce the interest on your home loan, as long as they're used wisely. Check to see what terms and features your bank is offering on these accounts, do your sums and see if this option is what's best for you. An offset or all-in-one account can be convenient if you keep your income in the account for a reasonable period of time.
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Keeping it in the family
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My husband and I are in the process of purchasing a property from my parents. Due to fortunate circumstances we're able to purchase the property at a price considerably below the market appraisals that my parents have received. Will our lenders mortgage insurance (LMI) be calculated on the value of the house (determined by the lender's valuers) or the purchase price of the property?
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When lenders are valuing a property for mortgage security purposes, the general rule of thumb they use is to take the lower value of either the valuation they have conducted, or the purchase/contract price. If your house is valued at $400,000 and you're purchasing it for $300,000, then the lender will take $300,000 as the value of the property. This is to minimise their risk against either inflated sales prices or inflated valuations.
You might be able to have the lender revalue the property after settlement and then conduct a 'loan variation' on your loan to have it secured against the new 'market' value. You may then be able to ask for a refund of a portion of the LMI, as the premium will be less if the lender values your property at a higher amount. Based on which lender you use, another valuation may cost between $175 and $300 and the loan variation may cost another $100 to $400.
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Interest Only Loan
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| Can you tell me about interest-only loans and over what period borrowers can simply repay interest, and not the principal amount of a loan? |
Interest-only loans are popular with investors as they allow them to claim continuing large tax deductions by way of negative gearing.
Only paying interest on a loan means that less of the investor's cashflow is tied up servicing the loans and can be used for other purposes.
Some lenders now don't require any principal repayment for 20 years, although a five-year period is still the most common. Most lenders now also offer loans on which one year's interest can be paid in advance, thereby allowing the investor to bring forward the tax-deductible interest payments.
These loans provide some limited year-to-year flexibility as to the timing of interest deductions, which can lead to a smoother income pattern and lower taxation. Some lenders provide a discount of around 20 basis points on fixed-rate loans on which interest is prepaid.
Often first homebuyers will also seek an initial interest-only period to reduce their cash flow commitments while they're setting up home. Even though you may be interest-only you're generally able to make additional partial repayments if you wish without penalty.
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Basic vs professional packages
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Are professional packages better value than basic home loans? |
The savings and benefits you get from professional packages (also known as packaged banking) can be substantial The most significant benefit is a heavily reduced interest rate Interest rate discounts generally start at 0.25% and can go up to 0.70% off the standard variable rate, depending on the size of your loan and on your lender.
Professional packages may also offer free setup fees, gold credit cards without annual fees, fee-free transactions and savings accounts, and a range of discounts on other banking products.
The downside? You have to pay an annual fee of around $400 for the privilege - which means if you don't use the bells and whistles, you will be paying for nothing.
On the other hand, basic loans offer minimum features with no ongoing fees and all the other services linked to your mortgage can be added on a standalone basis, which means if you think you are not going to use a certain feature, you do not have to take it and pay for it. This type of loan is suitable for investors or for first homebuyers who want a cheap and basic home loan,
As always, understanding your situation and carefully working out the costs and savings can help you pick the right type of loan.
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Fortnightly vs monthly repayments
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Like many borrowers, I'm interested in paying my mortgage faster and I've heard that paying 'half monthly paid fortnightly' is one way of getting rid of my debts sonner. How is paying fortnightly going to help me pay off my mortgage sooner?
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Loan repayments are generally calculated on a monthly basis. However, you often have the option of paying either fortnightly or monthly. Paying fortnightly is simply paying the equivalent of half of your monthly repayment every two weeks.
Paying fortnightly allows you to squeeze in the equivalent of one extra monthly repayment per year, The following example gives you an idea of how it works: Assuming your monthly repayments were $2,000, after a year you would have paid $24,000 (12 x $2,000). To pay fortnightly you split your monthly payment in half, snaking a fortnightly payment of $1,000 ($2,000 divided by 2).
As there are 26 fortnights in a year, you will pay $26,000 (26 x $1,000), This is $2,OOO (equivalent to one monthly payment) more than if you were making repayments on a monthly basis The extra amount comes directly off your loan principal, and reduces the amount on which future interest will be calculated. As the interest is less, more of your repayment will be going towards paying the principal off your loan which means that your mortgage gets paid off sooner.
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Share And Share Alike |
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I have approval to take out a mortgage in my own right and can buy a house in
my name only with the mortgage. If my partner decides that at some point in the
future she wants to live there too and share the mortgage and house costs |
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can I add her to both sets of records and effectively make her jointly liable for the mortgage, and also joint owner of the house? What would need to be done to
execute the changes to both sets of documents and what fees and timings
might be allowed? |
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I am sure this is common occurrence, as many couples do meet after one of
them has already acquried a home. If you and your partner were married, the
fees and procedure would be quite simple as you can remove or add a spouse |
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 at any time at minimal costs. However, if you are in a defacto relationship,
there would be stamp duties payable to
your state government for the transaction,
and depending on the value of the home,
this can be considerable. If you transfer 50%
of the value of the home to your defacto
partner you will have to pay duty on that value.
Generally, if you add a borrower to the mortgage
this will necessitate a new loan and stamp duty
on the new mortgage.If wedding bells are in
the wind I suggest you wait.
From YMM January 2007
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How Do Lines Of Credit And Offset Accounts Work? |
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A friend has told me about a type of home loan where you get your salary
credited into it, and you use this same account to pay all of your monthly
outgoings. Is it true that this can save you money on interest payments |
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and help you pay your loan off faster?
Do these facilities generally cost a lot - how much use would you need to
get out of them in order to break even? What happens if you accidentally
withdraw too much cash from the account in a given month? |
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A line of credit is easily explained as a big credit card. Let's say you borrow
$100,000 - then that will be your limit and as with credit cards you could use
it to purchase almost anything. |
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You can have your pay deposited or credited into the loan, and the outcome can
be that you'll save money on the interest charged on your loan. Basically,
interest on most home loan is calculated on a daily basis and charged to
your account at the end of each month. So while your pay is sitting in
your home loan you are not being charged on the equivalent amount
against your loan. For example if your balance was $100,000 the day before
pay day,the interest would be charged on that amount. However, if you had
$1,000 paid into your account, you would only be charged interest on
$99,000. By using a credit card to live on, and paying it out at the end of the
month, your home loan would have been reduced by $4,000, being four weeks
pay at $1,000.
But beware, as with credit cards, you could find yourself owing the same as
you borrowed many years prior. Principal and interest loans have an expiry date
set by the lender, so you know that in 25 or 30 years at worse your balance will
be zero. However, with a line of credit, you are only required to pay the interest.
Also, normally a line of credit will cost you more, and some way some sort of fee
charged to the account to manage them. If you withdraw more than the limit,
there will be a fee charged to your accountor the transaction will
be disallowed.
The offset account is my favourite as they do have an expiry date and work
much like a line of credit but safer. They basically work as a savings account
linked to a traditional loan - any funds sitting in the account is offset against your
loan. These loans are better explained to you face to face as they can be more
complicated, but once you understand them I am sure you'll be happy with the
outcome compared to a line of credit. Contact a lender that offers offset
accounts for more information, but remember to ask if it is a 100% offset as this
type of account will save you more interest.
From YMM January 2007 |
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Residential VS Construction Loan |
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I was wondering if there was any difference residential loan and
construction loan rates as well as any other the differences between the two. For
example, do construction loans also have fixed and variable style loans? |
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Most lenders should offer you the same or similar interest rates and types of loans
for both land and house construction loans and residential loans. Construction loans
can provide either fixed or variable options. It depends on the lender and the loan |
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product as a general rule the lender will want a variable rate to apply during the
construction period. Basically, it's a question of research. The main difference is
that the money is drawn down in stages as it is needed - a valuable feature. The
benefit of drawing down the loan in multiple stages is that it saves interest. This is
because interest is calculated on the outstanding balance, not the maximum loan
amount which has been agreed to. You only pay interest on money drawn down.
From YMM April 2007 |
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Professional Packages |
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My partner and I are currently earning $120,000 per year and have been informed
of the various professional loans. How do you weigh up whether these packages
are better than the other highly competitive standard loans? |
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Most of the professional loans are sold as a package so it is necessary to take
a credit card and establish one of their savings accounts. The benefits in the
package is that your day-to-day banking is often free. If you reduced fees on |
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your saving account and a discount on your mortage then it is well worth the
small amount of pain that is incurred by moving your accounts. Alternatively you
could always speak to your current lender about their professional package so
you don't have to move your banking at all. Furthermore there are some
non-bank lenders that don't require a package and will simply give you a
discount based upon the loan size a credit card is an optional extra.
From YMM March 2007 |
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Mortgage Fees To Consider |
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I have just done a calculation of the costs involved for the purchase of a
$400 000-plus property in Melbourne, a move which will be necessitated by
me changing jobs in a few months' time. I Have a 5% deposit (just) and can |
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cover some of the fees such as conveyancing and mortgage applications
fees however I am horrified at 
the amount of stamp duty payable
(in excess of $20,000) plus mortgage
insurance. I have had two mortgages
previously (both properties sold) and
each time the lender has inlcuded the
cost of mortgage insurance in the loan.
Since I haven't factored this $20,000
stamp duty bill into my calculations,
how likely is it that I will find a lender who will still approve such a mortgage?
What usually happens in these circumstances? Will the lender want me to
take out a personal loan to cover the costs or is there a means of having it
included in my mortgage? My partner and I are both professionals with steady incomes
with a combined salary of more than $170 000 pa. I have no debt
and my partner has less than $20 000 of personal debt. Are we just pipe
dreaming? |
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Obtaining a personal loan may affect your ability to service the debt of your
income loan plus your personal loan. Where mortgage insurance is involved,
most lenders will generally need to see genuine and consistent saving of at |
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least 5% deposit over a period of at least six months, and you will find that
you need to have an additional 5-7% of the purchase price put away to
cover things like stamp duty, lenders mortgage insurance and legal fees.
Some lenders offer a 100% lend (often called a 'no deposit home loan').
These lenders will lend you 100% of the money you need to buy the
property; however you still need roughly equivalent to 6% of the purchase
price to cover your associated costs.
There are a couple of lenders offering over 100% of the funds. However
you will generally pay a higher interest rate for these loans. Alternatively,
bide your time, save your pennies, and build up a larger deposit.
From YMM March 2007 |
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Redraw Accounts Explained |
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What is the benefit of having a redraw facility under your loan? |
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Your understanding of the redraw facility is excellent and the points you
have raised are absolutely correct. The beauty of having the redraw
account is that you are able to utilise the surplus you have deposited in
to your loan account funds held in this account at any stage. |
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These funds can be used for the purchase of a motor vehicle for example, or
the deposit for the purchase of an investment property, etc. Obviously this
will depend on how much you have built up over a period of time. Should you
not wish to undertake any of the aforementioned then will pay out your loan
faster and save on interest as a result.
From YMM February 2007 |
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100% offset versus all-in-all |
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What's the difference between 100% offset and all-in-one? Which type pays
off quicker? |
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Offset account loans are loans which have a linked savings (offset) account.
100% offset means that the normal interest rate applicable to the savings
account is the same as the interest rate applicable to your loan. So your |
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savings account balance is working for you and gaining you maximum benefit.
A further benefit is that as no interest is being earned on the savings
account,no tax is payable. An all-in-one loan is essentially a transaction account
and a home loan combined. It allows you to directly credit your salary or other
income to the account and then withdraw your cash via ATM, EFTPOS, linked credit
card or cheque book, as you need it. The major benefit of an all-in-one loan is that it
enables you to decrease your interest charges by keeping your funds in the
account for as long as possible. The interest rate on all-in-one loans may be
slightly higher and you may also be charged a monthly access fee.
The most significant difference between the two types of loans is that
available funds in the offset account are more readily accessible than the all-
in-one loan account.
From YMM May 2007 |
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Own Your Home Sooner |
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Like all people, I want to own my home as quickly as possible. I originally
borrowed $150,000 and still owe $110,000. I have a fixed interest rate of
7.15% until May 2008. Why don't I seem to be knocking off more of my loan? |
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I have heard about 100% offset and all-in-one loans, but do you recommend
this for someone on a small single income? What do you suggest is the best
option to own my home sooner? Should I simply refinance (moving to a new
lender) at a lower interest rate? |
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Offset or all-in-one accounts allow you to offset your savings, salary and other
cash resources against your home loan principal and therefore you pay less
interest on your loan. Making your monthly repayments in weekly or fortnightly |
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instalments will also cut interest costs as your outstanding loan balance is
reduced and as a result you pay less interest on that lower balance. Borrowers
often pay a higher variable interest rate on such loans because offset and all-
in-one accounts offer many features which ultimately result in higher
administrative costs to the lender.
If you don't have much surplus cash to offset against your home loan principle
your offset or all-in-one account may cost you more money than if saves
(because of the higher interest rate and/or changes). At the end of the day
the main way to owning your home faster is to make extra repayments into your
home loan over and above the minimum repayments required. Most fixed rate
loans allow extra repayments, although in limited amounts. Check with your
lender if you can repay extra and whether it will attract any fees. The more
extra repayments you can make, the faster you will repay your loan.
Refinancing is always a good idea if it saves you money. But you need to ask
your existing lender what break costs or discharge costs you will face if you
refinance with a new lender. You then need to balance the costs of breaking
your existing mortgage against the financial benefits of moving to a new loan
with a lower interest rate. Don't forget that if you're on a tight budget a fixed
rate loan offers you more financial security.
From YMM May 2007 |
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Overseas Borrower |
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I am a UK resident who is interested in immigrating to Australia on a Skilled Worker
Visa and would like some advice.
It would be my intention to sell my current property in the UK and use the equity |
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to part purchase in Australia whilst on a Skilled Worker Visa with the intention to
seek permanent residency for myself and family. I suppose the key question is am
I able to apply for a mortgage after only spending a short time in the country
without Australian citizenship? |
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As a non-resident applicant you are able to apply for a mortgage eventhough you
may not have been in the country for a significant time.
However,there are a few limitations on non-resident borrowing:
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- You can only borrow up to is 75% of the lesser of purchase price or value of
the security, to a maximum of $750,000, without incurring the cost of lenders'
mortgage insurance
- You can borrow only up to 80% of the lesser of purchase price or value of
security, to a maximum of $500,000, with mortgage insurance (cost depends
on loan amount but at 80% gearing this should be less than 0.50% once only)
- You must have Foreign Investment Review Board approval for the purchase
have a look the Board's website - firb.gov.au
- A Power of Attorney may be required (this generally applies to non-residents
living outside of Australia).
For any loan, where the borrower has only been in a new job (less than 12 months)
he must be employed within an industry in which he has at least 2 years minimum
experience. As you are intending to migrate under a skilled workers visa I am
assuming that you will meet this criteria.
If you have any other queries just send them through and we will help in any way
we can. Its the middle winter here in Sydney and the sun is shining...get that visa
application underway and come and join us downunder. Touch base with us when
you do!
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