Mortgage brokers are intermediaries between you and a chosen lender. A good mortgage broker assists homebuyers to pre-qualify, select a particular home loan, and complete any necessary documentation regarding that home loan. It is the role of a good mortgage broker to hold your hand through the process and do all the heavy lifting for you.
Mortgage brokers will save you time and money by linking with the banks and other financial institutions or lenders to find the best available loan for your circumstances.
It is important to see a mortgage broker as early as possible when buying your first home or re-mortgaging. The earlier that you see a mortgage broker, the earlier any red/orange flags can be identified in the process. This will allow for the red flags to be corrected earlier on in the process. The home loan process is complex with many moving parts. Brokers are the experts when it comes to securing home loans, they filter out the irrelevant or old information that you may be getting online or direct from the lender. This will assist First Home Buyers, the self-employed and those who are looking into investment properties, as good mortgage broker will provide smooth sailing of those loans. Therefore, it is extremely beneficial to utilize mortgage brokers as this is the most efficient and effective route to obtaining a home loan.
Mortgage brokers can help in a variety of ways to ease the process of acquiring your first home loan. Mortgage brokers have robust relationships with lenders, which puts the broker in a position that they can negotiate pricing. The broker will also tap into their policy expertise to help clients with bad credit, unusual employment and non-residents obtain a home loan. Mortgage brokers can help you assess your financial situation to give you the best chance of acquiring the property you desire. Brokers can also help you to strategize and plan for any future investment properties.
A good mortgage broker will not only provide all the above, but they will also check in on your loan annually after settlement to make sure that you still have access to a competitive interest.
There are a range of reasons to why you should use a mortgage broker rather than going to the bank directly.
Mortgage brokers have a wider access to lenders, this gives you a variety of choice when choosing a home loan. On top of this, the policy may vary between lenders, a mortgage broker will differentiate these policies and find the policy that best suits you. Mortgage brokers will use their industry knowledge to find suitable solutions to ensure that you can acquire a home loan and provide ongoing support to ensure that any home loan enquiries are sorted. Ultimately, you’re going to receive a better service and customer experience with a small business who has a greater relationship with their clients, opposed to a big bank.
Applying for a loan is easy. To apply for a loan, you need to contact the mortgage broker. The broker will engage in a short phone call to understand the clients wants and needs. Once the client and broker are on the same page, the client will need to send through the necessary documentation in order to complete the loan. The documentation and information provided by the client is analysed. From here, the mortgage broker and client will schedule a face-to-face meeting to discuss the best options for the client. The broker will then apply for a loan completing all the leg work on behalf of the client.
Home loan pre-approval, also known as conditional approval, is the preliminary step in the home loan application process. Pre-approval is essentially approval from the lender stating that they will lend you a specific amount based off certain conditions. The pre-approval however is not a guarantee that your home loan application will be approved. Rather, a statement that you fit the criteria that the lender is looking for. Pre-approval needs to be obtained before making an offer on a property, this will give you confidence in the home loan process to therefore be able to participate in auctions etc. There are two types of pre-approval, online pre-approval and full assessment pre-approval.
The online pre-approval can be done within a matter of hours. Although, the documents and credit report do not get assessed in depth by the credit assessor. Online pre-approvals usually have conditions attached based on the details attached. However, online preapprovals cannot be relied upon because buyers don’t know which lenders are doing full pre approvals or online.
The full assessment pre-approval is completed by the lenders credit accessors, this includes reviewing documents and conducting credit checks in depth. This process may take a few days to be completed. Full assessment preapproval is ideally what you want as it gives you the most certainty that the loan will be approved.
The first homeowners grant (FHOG) is available for first home buyers who choose to buy a newly built home or a house built within the last 5 years. The FHOG is worth $10,000 and must be used to purchase a house, townhouse, apartment, or unit valued at less than $750,000. The home must also be sold for the first time and less than 5 years old at the time of purchase.
There are a multitude of other costs that you may incur when taking on a home loan. The largest cost you will incur on top of the property itself is the stamp duty. Stamp Duty is a state government tax based on the purchase price of your property and typically needs to be paid within 30 days of settlement. A land transfer registration fee will also be attached to the stamp duty, this fee covers the cost of the land transfer into your name.
If the amount borrowed from the lender is greater than 80% of the property value, the borrower will also incur a Lenders Mortgage Insurance (LMI) cost. The LMI is a policy that protects the lender in situations when the borrower defaults on the home loan. The more expensive your property is, the higher LMI you must pay.
Other smaller fees that may be involved in the home loan process include:
Conveyancing fees cover the transfer of a property’s title from the vendor to you. Conveyancing is an important part of the loan settlement process and fees surrounding it are usually estimated by the conveyancer.
A property inspection is something every home owner should consider when purchasing a home. A property inspection can include pest, land, building and strata report inspections. These inspections ensure the safety and structural integrity of the home, and can save you thousands of dollars in future repairs at a later stage.
Late payment fees
Late payment fees are exactly that. When you miss your monthly repayment you will be charged with a fee.
A discharge fee/cost may be incurred when closing your home loan with the lender. This could be due to settlement, refinancing and/or transferring your home loan to another lender. Although the Australian Government has banned exit fees, some lenders still have similar fees in their home loan products with fixed interest rates. You have to settle this fee to finally acquire your title deeds.
A switching fee is a fee that you will be charged with when switching from a variable interest rate to a fixed interest rate or vice versa.
A valuation is the process of having your property assessed by a third party. A valuation is required by some lenders to reach settlement, as it helps the lender determine if the amount you’re borrowing, and the size of your deposit are appropriate. The cost of this fee varies between different brokers. With some lenders, the valuation can be free of charge.
Search Processing Fee
The search processing fee is often charged by banks in order to search titles and any other searches in relation to the home loan application.
There are multiple actions that you can take to improve your chances of being approved.
- Save regularly for deposit
When saving for a home loan, the size of the deposit is one of the biggest deciding factors when saving in whether your home loan will be approved. It is common belief that you need a 20% deposit to be approved for a home loan. This is because the bigger the deposit you have, the less you have to borrow. Many lenders also require a 20% deposit to meet the lender’s minimum loan-to-value (LVR) requirements. Having a 20% deposit also shows the lender that you’re a disciplined saver and are therefore more likely to have your home loan approved. There are exceptions to this in the form of grants such First Home Owners Grant and Family Home Guarantee.
- Control your spending
Controlling your spending can be directly linked to saving for a deposit. Lenders will look into your recent bank statements and examine how you spend your money. When lenders view your statements and see over-drafts and or services like afterpay, this is not a good look. Therefore, it is important to consistently exhibit good spending habits, especially in the months leading up to the time that you apply for a home loan.
- Build a good credit score
Building a good credit score is another key factor when applying for a home loan. The mortgage broker or the lender will require a credit check to be completed to identify and red flags in the form of debts or bad spending. The higher the credit score, the better the chance you have at being approved as the lender will view this as you’re less likely to default on repayments. The most common reason that people forget to pay their bills is because they forget by the due date. Ensure that you’re paying bills on time. Services such as Latitude Finance, Zip Pay, Flexicard are not a good look to the lender, it would be ideal to pay them off asap as it has a detrimental impact on your credit score.
- Clear your debts
If you haven’t already, before applying for a home loan it is very important to clean an unnecessary debts or credit you may owe. These debts could include credit cards, car loans, personal loans and subscriptions. The more debt that you have obtained, the less likely the lender is to approve the home loan. This is because from the lender’s perspective, the more debts you have, you’re much more unlikely to pay all repayments.
- Use a guarantor Another way to improve your chances of being approved for a home loan is to use a guarantor. A guarantor is someone (usually parents & family) who put’s their house up to help secure your home loan. Guarantors can be used when you do not have the 20% deposit required by most lenders, or you can use a guarantor to avoid paying Lenders Mortgage Insurance. Using a guarantor gives confidence to the lender that if you were to default on your payments, the lender could use the guarantor’s property as security. Using a guarantor comes with a risk, the lender does have the ability to repossess the guarantors property, however this is rare.
- Choose the right lender There is a large variety of lenders with a diverse range of home loan products out there on the market. Different home loan products have different criteria’s and policies. Using a good mortgage broker will help you determine which home loan products are best for you as they will assess your financial situation and use their expertise to find a suitable home loan for you. It is common for borrowers situation to only fit in with 2-3 lenders, and this is another reason why using a good mortgage broker is essential.
The home loan process will usually take 4-8 weeks from the time you engage with the mortgage broker. There is a range of factors that will determine how long the process goes for. These factors range from how complex your financial situation is, to preparing the correct documents, use of a mortgage broker and how busy the lenders are. We recommend that you reach out to a mortgage broker as early as possible and prepare yourself to the best of your ability. This not a process that you want to make errors on as it will only lengthen the process significantly. Many lenders and brokers will tell you this can be done in a matter of weeks or days, they’re wrong.
A fixed rate home loan is a home loan where the interest rate is locked in (fixed) for a certain period of time. Depending on the lender, lenders could offer fixed home rates between 1-10 years. At the end of the duration of the fixed rate, you can either repeat the process or change to a variable home loan rate.
A variable home loan rate is a home loan rate that varies in response to market interest rate changes, decisions made by the Reserve Bank of Australia and business decisions made by the lender.
A fixed variable rate home loan rate provides peace of mind to borrowers concerned about interest rate rises. This allows the borrower to precisely budget and maintain a certain standard of living. The major disadvantage of a fixed variable rate is that the borrower will not benefit from falling interest rates nor can you set up an offset account with a fixed home loan. Another disadvantage of fixed home loans is if you decide to exit from a fixed home loan, you can be charged significant fees to do so.
Whereas a variable home loan rate provides flexibility. In most cases this will allow you to pay off more than the required monthly repayment. This will result in the borrower being able pay off their home loan faster with less interest over the duration of that home loan. The disadvantages of variable home loan rates is that the interest rate can fall at any time. For borrowers looking to plan ahead and budget this can be detrimental as there is no certainty around the cost of the monthly repayment.
Yes, the only part of the home loan process that is hindered due to the distance between client and broker, is the face-face meeting at the start of the process. The purpose of the face-face meet is to build trust in the relationship with the client, better understand the client’s situation and sign any necessary documents. It is important to build trust due the large amounts of money that will be borrowed, better the trust equals better the results. However, this can be done over Zoom if you’re not in the area.
There are hundreds of lenders in Australia. We deal with roughly 30-40 different lenders, varying from the large players to the small players. This allows us to find a home loan product for every financial situation we may encounter from a client.
Yes it possible to get a home loan with past credit issues or a poor credit score. Following on from the previous question, we do not expect every client that comes to us to have a perfect credit rating, that’s why we find and use lenders that have leniency towards bad credit ratings in their policies. Going through the credit repair process can remove past credit defaults from your file and improve your credit store. The flip side to this is, because you have a bad credit history, you’re likely going to be exposed to a higher interest rate and a larger deposit.
If you’re currently bankrupt you have no chance of obtaining a home loan. However, if you have been discharged after bankruptcy than there are policies on the market that will cater for you. These policies generally come with a much higher interest rate as you have a history of showing poor financial decisions.
Yes. Although applying for a home loan can be a little bit trickier when you’re self-employed. When you’re self-employed, your income is harder to verify. The lender will require you to show tax returns or other documents that assert that you’re earning a high enough income to be able to secure the loan.
This is where having a good mortgage broker will pay dividends, as the client can work with broker to understand what the lenders requirements are, so when you lodge your next tax return, you’re aware of the requirements you need to meet in order to facilitate a home loan.
An offset account is a bank account that’s linked to your variable home loan.
You can deposit your income and savings into the account to use it for day-to-day transactions and expenses, it operates like a normal everyday bank account. The balance of the account is then offset against the amount that is owed on your home loan. For example, if you’re owing $400,000 on your home loan and $60,000 in your offset account, you’ll only be charged interest on the loan balance of $340,000. This allows the borrower to bring down the balance of their loan and pay it off faster.
Negative gearing is a practice that is common when investing in property. This is the process of buying an asset (usually properties) and the income made from the purchase of a new investment/asset/property (the rent) is less than your expenses, which leaves you at a loss.
On the surface, this would seem to be a bad investment to make financially, however, Australian law allows investors to deduct any losses they make on an investment property as part of their taxable income. In particularly, the investors can claim depreciation as an expense. Depreciation happens when an asset declines in value over time, in an investment property this may include fittings and fixtures as well as depreciation on the building itself. This means that it is far easier for people invest in the property market as they can claim any losses on tax. Furthermore, this will often lead to a larger supply of rental housing available as more ordinary Australian’s are able to invest in the property market and put their investments up for rent.
As a general rule, those who are making investments in the property market don’t have the expectation of making money on the rent of that property. This is because when they purchase the investment property, they have the intention of making their profit by cashing in on the long-term capital growth that the housing has to offer. So rather than making their profit through the rent of their property, the profit comes from the sale of the property later down the track. The rent is essentially there just to cover the cost of loan payments, any maintenance and interest or depreciation.
The overall goal of the investor is to limit their losses and hopefully gain an positive cash flow until the appropriate time to sell comes along, which the real profit can be made from. This is made significantly easier by the Australian laws revolving around negative gearing.
An example of negative gearing is when an investor buys a property for $500,000 and takes out a loan from a lender for $450,000 with an interest rate of 5% over a 30 year period. The annual interest repayments on the loan would be $22,500. If the investor charges $300 per week in rent, the total annual rental income would be $15,600. This leaves the investor with a loss of $6900 for the year. Once you factor in any maintenance and other costs of the running of that property, the investor will experience a shortfall. This means that the investors property is being ‘negatively geared’. The investor can offset the loss against their taxable income, meaning that their taxable income would be reduced by the amount of the loss they experienced and therefore would pay less tax.
Capital growth is of utmost importance to investors who are using negative gearing because if the properties value increases by 10% a year later, the property would now be worth $550,000 ($50,000 gain in value) meaning that the investor would be experiencing a serious profit of $50,000 depending on costs of renting the property.
However, when the investor does eventually sell the property, the capital gain they make on the sale is incorporated into their overall income tax assessment at the end of the financial year.
For negative gearing to work for you, you must have a reliable cash flow to cover the costs/fees and meet the loan repayments as well as be in a position where you can hold the property for long enough so it can increase in value to the point a profit can be made.
The borrower must figure out what their goals are when it comes to property investment, from there you can work towards your goals and figure out what you need to do achieve them. Negative gearing may not be a strategy that is right for your current situation. We recommend that you surround yourself with advisors such as accountants, financial advisors and a good broker.
When planning to buy an investment property, it is possible to use the equity in any current home that you own to assist in the purchase of the investment property. Simply, equity is the difference between the current value of your property and the amount you owe against it. In order to use the equity to purchase an investment property you need to work out how much equity is available.
The equity that you can access in your property is equivalent to 80% of your property’s value minus the remaining balance on your mortgage. Therefore, if you owned a property that was valued at $500,000 and you had $250,000 outstanding on your mortgage, 80% of that $500,000 would be $400,000, minus the $250,000 mortgage that is still owed and your total useable equity will be $150,000.
If you’re planning to buy an investment property, the lender will need to order a property valuation. The property valuation report will determine how much equity you have available in your home, keeping in mind the valuation is not the market price nor the price that the owner may have in mind. The valuation is completed on the lenders behalf and therefore the lender can be quite conservative with the valuation. Knowing the amount of useable equity you have in your property will allow you to budget accurately for your investment property.
There are two major strategies when purchasing an investment property. The most common strategy is one where you use the equity in the owner-occupied property to take out an additional loan against that owner-occupied property which will fund the deposit for an investment property. For example, if you had $250,000 left on a mortgage for a property valued at $500,000, you could access and borrow $150,000 in equity for a deposit on a home loan for an investment property. The benefit of this strategy is that it is far easier for your accountants to calculate your tax deductions at the end of the financial year. This strategy also allows for more flexibility as you have more options due to the loans are kept separate, unlike cross-securitising. For example, if you needed to sell one of the properties or take out another loan this can be easily done. `
The other strategy is called cross securitising, this strategy can put you at a higher risk as it involves the use of your existing owner occupied property security as equity on the owner occupied property as security for the loans on both the investment and owner occupied properties.
This means that if you default on your repayments then the lender has the ability to repossess all properties that have been grouped together under that cross-collateralisation. The benefit of this is that it is less risky for the lender, therefore the lender may be more likely to approve the loan. Although grouping together the loans may be simpler for the borrower to make repayments etc, it will not be beneficial when it comes to tax time.
The equity that you access in your property can not only be used to buy an investment property or a second home, but can also be used for maintenance/renovations, other investments such as shares or to improve lifestyle through other purchases.
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