Things You Should Know!

Introduction

 

Welcome to Your Mortgage Options.  Thank you for choosing us to assist in getting your home loan. 

 

We understand that buying a house, be it for investment or to make it your home, is often a daunting and sometimes complicated task and that’s why we bring to you experience, independence and a wide range of lenders that will give you a number of options to assist in realising your dream.

All the running around is taken care of by us and of course there is no fee to you, our client.  Lenders pay us a commission which does not in any way add to your loan costs.

Our service extends beyond simply finding the loan that suits your situation, we guide you through the whole process of buying a home and make it as simple, seamless and as straightforward as possible.

We are available 7 days a week and to ease the running around on your part, we come to you and just to let you know that we are not a pop up business, we have been serving the local area for over 17 years now and have all the relevant qualifications, training and experience to make your journey buying a property a smooth one.

We look forward to working with you

Your Mortgage Options Team

​Why does my broker ask for so much documentation?

 

No one likes paperwork; however, providing your broker with the right documentation will save you time and money.

 

What information will your broker ask you to provide?

 

When you ask to enlist the services of a broker, they will probably ask you for the following documentation:

 

Identification, including photo ID such as driver licence and

  • Income verification documentation such as recent payslips

  • Birth certificate, if you are applying for a government funded first home owner grant
     

Depending on the lender or bank you would like your broker to apply to for your loan, you may also be asked to provide:

  • A recent PAYG Summary

  • A notice of assessment from the Australian Taxation Office

  • Tax returns (personal and/or company)

  • Proof of your contribution toward the transaction, such as savings or deposit statements

  • Purchase contracts for a home loan, including building contracts, or plans if building

 

Why is this information important?

 

While it may seem that you are collecting of paperwork, a broker will ask for all of this to ensure they are protecting you and that they get the best possible deal.

  

This is the process by which brokers ensure that they match a client with a loan that helps them achieve their property goals, whether that is buying a home to live in, one to renovate and sell, or a long-term investment, and one that matches their financial positions.

  

Will a bank ask for the same documentation?

 

If you apply for a loan directly through a bank, they will require the same information as a broker would. With the advent of recent legislation, the banking royal commission and the constant surveillance of the banks by AISC and APRA lending institutions are making sure they cover all bases.

 

 

 

A guide to home loan paperwork

All lenders require certain documents and other information.

Putting together the paperwork needed for home loan approval is a task many prospective home buyers dread.

We see many happy faces when we tell people that as your mortgage broker, we can help simplify the paperwork process because we know what lenders are looking for when it comes to assessing an application.

The paperwork that lenders require can be significant, and it is important to give them not only the correct documentation, but also the full list they require. Sending your home loan application to the lender with missing documents can result in the loan application going back and forth without result or even derail the application altogether.

Lenders assess your application by evaluating the risk involved with repaying the loan. While requirements vary from lender to lender, here is some of the key criteria commonly used to assess the risk of a client.

1. Income

Lenders want to know how much you earn as well as how stable these earnings are. They are interested in whether your employment is continuous and consistent. Bank statements, payslips, group certificates or tax returns are among the documents required to give evidence of income.

2. Assets and liabilities

To determine your financial situation, lenders want to see proof of your assets and liabilities, including savings, shareholdings and motor vehicles. Lenders often differ in their requirements, but as your mortgage broker we can advise you of the specific paperwork required. Some lenders, for example, ask for documentation relating to insurances and personal cover to see whether your assets are protected.

3. Credit

Lenders will look at copies of credit card and personal loan statements to see that you've been able to make any previous credit repayments and bill payments on time.

 

Keep in mind that it's not just your credit card, home loan or personal loan repayments they'll look at, but also any mobile phone and utility bills.

 

Credit file monitoring organisations supply lenders with a credit report detailing your credit history, and this will be used to work out how much of a risk you are and assign you a credit rating.

4. Savings

It's not just the dollar figure that lenders look at, but also whether you are capable of saving over the long term. A bank account statement showing regular deposits is an example of documentation required. Applications can be rejected if a savings history is deemed not to be genuine, for example savings which were a gift.

 

Time frames for the home loan process

Before an application can be submitted, your details and relevant documents need to be gathered, processed, a lender selected and lender application produced for your approval and signature.  Depending on a number of factors, this can be achieved in a few days or for more involved applications, a little longer.

 

​From the time your home loan application is submitted to conditional approval can take as little as a day or two. It can also take four or five business days depending on the lender and delays they are experiencing.  Formal or final approval may take another week or two for most applications.  Complicated applications may take longer.

 

 

 

 

Pre approvals

 

Not all pre-approvals are alike.  Some lenders don't provide a fully verified pre-approval and a number of things could go wrong relying on one that has not be fully assessed. 

 

 

Why should you get your home loan pre-approved?

It is a good idea to get your home loan pre-approved before setting out to find your dream home. Why? You are in a better bargaining position when dealing with real estate agents if you have a full pre-approval from a lender.  You will know how much you can borrow therefore how much you can offer on a property.  The first question many agents ask you is "Have you got pre-approval yet?"  If not, some agents are less likely to want to deal with you and may give other potential buyers priority over you.

 

Care needs to be taken with obtaining a proper pre-approval.  Some lenders do not offer a full pre-approval, in other words they don't fully review your personal financial circumstances and the approval provided is subject to many conditions that may or may not be able to be complied with when you find your new home.  Lenders who offer a full pre-approval carry out checks regarding your ability to repay the loan, employment and income checks, credit checks and more.  The one thing they can't review is the property (if you have decided on a particular property, a full loan application would be submitted instead of a pre-approval application).

 

With a full pre-approval you can be pretty confident that your home loan application will be approved (subject to the property being acceptable to the lender including a satisfactory valuation). You will be able to search for properties within your price range instead of spending time on homes above or even well below your expected purchase price.

Pre-approvals usually are valid for a period of 90 - 180 days.  After that period a further application will need to be made or the original application updated.

 

The home loan process

 

There are a number of steps to obtaining your new home loan.  Your broker with assist you with each and every step making the whole process smooth and effortless.

1. Information gathering

We need to obtain certain information about your current financial situation in order to help you select the right home loan for your needs.  In addition to providing information about your financial situation, copies of a number of documents are required (the originals of some, such as your ID will need to be produced to your broker for verification). Go to http://www.ymo.com.au/documents-required  to obtain the full list of information and documents that ordinarily would be required. A credit check will also be carried out to satisfy the lender of your creditworthiness.

2. Lender selection

Once all your information has been provided, your broker can work out which loans are suitable for your needs and wants.  A short list is provided with the most suitable loans. You select the lender and your information is then loaded onto the lender portal and the lenders application forms are printed for your signature and submission.

3. Submission to lender

Once the lender application form is signed, it can be submitted, along with supporting documents such as your payslips, ID and other documents for assessment by their credit team.

4. Conditional Approval

After the lender's credit assessor is satisfied that the application meets their criteria, conditional approval is granted.  If the valuation hasn't already been ordered (some lenders allow valuations to be ordered at the time of application) the lender will arrange for a valuation to be conducted.  This may take the form of one of three types of valuation. Full valuation - where the valuer will require access to the property, Short form - where the valuer just inspects the exterior of the property and lastly, Desktop - this is where the valuer relies on information that is keep on data bases such as RP Data.

 

5. Formal (or final) approval

Once any outstanding conditions are met and the valuation has been returned and is satisfactory to the lender, formal (or final) approval will be issued.  This is normally the time when any remaining "cooling off" period can be waived and if contracts have not been exchanged, they can be at this point.

 

6. Loan offer documents sent to borrowers

The next step, the lender or their lawyers, will sent out the formal loan offer documents for you to sign and return.  These are the legally binding documents in relation to your new home loan. 

 

7. Settlement

When the lender and your solicitor are ready settlement of the transaction occurs and you will then own the property and your get the keys to your new home.  Settlement is typically scheduled for 42 days (6 weeks) after contracts have been exchanged.  By agreement with the vendor, settlement can occur earlier of later than the standard 42 days.  Every now and then there can be a last-minute hitch and settlement will not take place on the appointed date.  You may incur penalty interest for each of the day’s settlement is delayed.

 

 

Time frames for loan approvals

As outlined above, there are two approval milestones with you loan application:

  • Conditional Approval

  • Formal (or final) approval

 

Once an application has been lodged with the lender it can take a “few” days for them to respond.  The “few” can vary from 2 through to 7 or 8 depending on a number of factors, the most common one being the backlog they are experiencing.  Your broker can often give you a guide as to what delay is being experienced by a particular lender.

 

After all the conditions (a satisfactory valuation is always included) are met, the lender will issue Formal/Final Approval.  This can take another week or so after Conditional Approval has been issued.  Some lenders allow your broker to order the valuation “upfront” (normally at the time of submitting the application to the lender or just before) which helps speed things up.

 

One thing to be aware of is your loan application will definitely take longer to process if the correct documents are not provided to the lender.  The lender will issue a request to your broker for the correct documents and your application will be taken out of the queue until those documents are provided to the lender.  Then the “few” days may start all over again.

 

 

The property purchase process

 

Determining your borrowing power

Purchasing your dream home or investment property can be an exciting process but there are a few things you need to look at carefully.

The first thing you should do is determine how much you can borrow.  That will determine the maximum purchase price you are able to pay.  To do that you need to establish what you currently spend each month, what your financial ambitions are and what you can comfortably afford to pay each month in home loan repayments.  Use ASIC's budget planner to work out how much you really spend.

Obtaining a pre-approval with a suitable lender before seriously looking for your property is preferable as you will be in a much better position to negotiate with real estate agents.  In a busy real estate market, the first thing many agents ask " Have you got a pre-approval".

Your broker will be able to assist with determining your realistic borrowing capacity taking into account your personal situation and the various policy guidelines that lenders use.

Finding your home

Once you establish what city, suburb or town you want to live in or have your next investment property in, you should contact the local real estate agents and let them know what sort of property and what price range you have in mind.  Another obvious source of research is on the internet.  Nearly all properties for sale, both private sales and agents’ listings, are now on real estate websites.  If possible, you should physically look at as many properties as possible to get a good feel for the market and what you should offer when that "must have" property comes along.  A good source of property values is Home Price Guide - http://www.domain.com.au/property-profile

 

Property Inspections

 

A number of inspections may well be recommended once you have found your new property.  The normal inspections include pest and building and if your new property is a strata title unit or townhouse, a strata inspection.  Some people get the inspections done prior to making an offer and others prefer to make an offer and if accepted will then arrange for the inspections.  Doing it this way can reduce the costs as the vendor may not accept your offer and you have already paid out for the inspections.

 

It may be advisable to get a survey of the property depending on the layout of the buildings or boundaries.

Making an offer - paying a deposit

Private treaty sale

After finding your new home and decide how much to offer, simply contact the agent and put forward your offer - the amount and any conditions you wish to include such as a delayed settlement or early access to the property.  Don't offer the maximum you are prepared to pay to begin with (unless the market is quite hot and you fear that you will lose the property if you don't). You can only go up but you can’t normally come down.

If your offer is accepted there are 3 possible ways to put a deposit on the property.  The first and most common (especially in a hot market) is by signing the contract of sale and paying a non-refundable deposit of 0.25% of the purchase price (e.g. $400,000 purchase price - deposit will be $1,000).  A cooling off period of 5 business days automatically applies unless it is waived.  If the cooling off period expires or it is waived you are legally obligated to complete the transaction unless other provisions apply.  We suggest that a 10-day cooling off period be sought having regard to the time frame to obtain formal approval on your loan application and most real estate agents are aware of the need for a longer cooling off period in the current climate.

A deposit of 10% of the purchase price (less any holding or 0.25% deposit already paid) is due and payable when the cooling off period expires or if the cooling off period is waived upon signing and exchange of the contract (sometimes this is done by signing what is called a 66W Certificate).  The deposit is typically paid and held by the agent (in their trust account) on behalf of the vendor until settlement when it will be transferred to the vendor.  On occasions, vendors will accept a 5% deposit or a deposit bond in lieu of the standard 10% deposit.  A deposit bond will cost 1.2% of the guarantee amount (e.g. $20,000 deposit x 1.2% = $240). Ask your broker if you think you might need a deposit bond.

Auction

Buying at auction is a little different to a private treaty sale.  There is normally no cooling off period and you will be required to pay the 10% deposit on the fall of the hammer.  So, you will need to have sufficient funds for the deposit or have a deposit bond that can be used at auction (there are different types of deposit bond).   Many vendors will accept deposit bonds but again, you must check will the selling agent prior to the auction.

 

You should get a fully verified pre-approval from your lender and it is recommended that you also have the property valued if possible.  If the valuation obtained after the auction does not satisfy the bank's criteria one of two things normally happen, the bank may lend you less or won't lend at all.

 

All research and inspections need to be undertaken prior to the auction date as there is no leeway to do it after.  You can normally arrange to have the pest and building inspection with your chosen inspector and the selling agent who will arrange access to the property for the inspector.

 

It is therefore essential to have your finance arranged by way of fully verified pre-approval or conditional approval prior to auction day. Talk to your solicitor or conveyancer about any other potential issues.

 

N.B. The process above is NSW based.

 

Diagram 1 represents the timeline that both the Property Purchase Process and the Home Loan Process takes.

 

You will note that most of the milestones do not align except for a couple, these being Unconditional Exchange/Formal Approval and Settlement.  In most cases you should ensure that Formal (or Final) Approval has been received before the end of any cooling off period or unconditional exchange.  You will be guided by your solicitor/conveyancer as to the timing of any unconditional exchange.

 

Diagram 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common loan types & features

 

There are a number of loan features offered with home loans at present. Here are some of the common ones:

 

Variable Rate Loans

Variable rates as the name suggests can vary from time to time, up or down, normally in line with market sentiment.  This means your repayments on a variable rate loan can move up or down depending on the interest rate change. 

Advantages of a variable rate home loan: 

  • Extra repayments can be made – Extra repayments, either lump sum or regular extra repayments are normally allowed on variable loans without penalty or cost.  Paying extra over the life of the loan will reduce the amount of interest paid and therefore assist in paying off the loan more quickly.

  • Added features - Potentially beneficial features such as a redraw facility or an offset account can be selected with many variable loans.

  • Ability to switch or change loans – Variable loans have more flexibility and you can change or switch loans more easily as there as less restrictions and less cost than fixed rate loans. 

 

Disadvantages of a variable rate loan:

  • Budgeting more difficult - If rates move about it can make budgeting more difficult.

  • Mortgage stress – When rates rise it puts more stress on the household budget, especially if rates rise quickly.

 

Fixed Rate Loans

 

The rate with fixed rate loans remains the same for the fixed period.  You have a choice of how long you wish the loan to be fixed. At the end of the fixed rate loan, it will revert to the lenders default product.

 

Features of fixed rate loans:

  • Interest rates can be fixed for a nominated period (usually between 1 and 5 years)

  • Repayments can normally be either Principal & Interest (P&I) or Interest Only I/O (although some lenders are placing restrictions on I/O repayments on owner occupied loans.

  • Loans can be fixed in full or only a portion of your loan e.g. 50% fixed & 50% variable.

  • Extra repayments can normally be made with most fixed loan but only up to a limit.

  • A downside of fixed rate loans is that if you have to repay a fixed rate loan there can in certain circumstances be significant charges applied.      

                                                                                                                                                                                                                                           

For a simple example:

Rate at which you fixed your loan at                                                       6.50%

Equivalent rate at the time you want to repay the loan out                        4.50%

Remaining fixed period                                                                          2 years

Current loan balance                                                                             $100,000

Original fixed period                                                                              5 years

 

(6.5% - 4.5% =)2.0% x 2 (years left) x (current balance) $100,000   =   $4,000

 

 There are often other administrative charges that will be charged on top of the difference is interest over the remaining term.

 

  • Monthly fees are commonly charged by lenders for fixed rate loan with a couple of exceptions.

  • When a fixed rate loan expires, your loan will automatically rollover into the lenders default product unless you make other arrangements with the lender prior to the fixed rate period ending.

  • A rate lock fee can be paid to ensure that you get the rate that exists at the time of application. 

 

Rate Lock Fee

There is often a six-week period between the time you sign a contract of sale and settlement.  The fixed rate that is available at the time you make an application to a lender may not be available by the time settlement comes around. 

 

If you decide to fix a portion or all of your loan and want to make sure the rate that is available at the time of application is available at settlement you can pay a rate lock fee which locks that rate for a period, normally 90 days. 

 

The rate lock fee is normally 0.15% of the loan amount that is fixed.  E.g. if you fix $300,000 then the rate lock fee will be $450.  Some lenders charge a flat fee of $699 or $750 to lock the rate in.

 

Split loans

Some people like to have a bet each way.  You can have a portion of your loan which has a variable interest rate and another with a fixed interest rate & therefore fixed repayments.

 

Bridging Loans

Bridging loans are designed to help people complete the purchase of a property before selling their existing home by offering them short-term access to money. The term for these loans of this type are typically for only 6 -12 months, enough time to sell you existing home.  The interest rate is not normally discounted but will be the lenders standard variable rate.

 

When you get a bridging loan there are either two separate loans or two loan splits under the one loan.  One loan or split will be the “Bridging loan” and one will be what is called the “End Debt”.  These two loans or splits are what is called the ‘peak debt”.

 

Once you sell your first property, the net proceeds of the sale (sale price minus any sale costs such as selling agent's fees) are used to reduce the Peak Debt. The remaining debt then becomes the End Debt, which is repaid as a standard mortgage product from this point onward

 

Borrowers should be aware that it is riskier to have a bridging loan during a flat or falling property market.  Whilst you know what the purchase price of the new property is, there is uncertainty as to the price you will get for your existing home.  The price you ultimately accept may be lower than you first anticipated.  In a rising market you may have the benefit of locking in the purchase price and getting a higher price than expected on your existing home.

 

Lenders that offer bridging loans often allow the interest on the bridging loan to be capitalised.  That means that you don’t pay any repayments on the bridging portion until you sell your existing home and then out of the proceeds of that sale you pay the interest that has accumulated over the time you take to sell your home.

 

Not all lenders provide bridging loans and the ones that do have varying guidelines in relation the levels of peak debt

 

Here’s how it all works

 

Existing home sale price                                    $  500,000

Existing mortgage                                             $  150,000

                       

New home purchase price                                  $  800,000

Plus purchase costs                                           $    33,500

                                                                       $  833,500

 

Total value of both properties                             $1,300,000

 

 

Offset accounts

 

What is an offset account?

A mortgage offset account is a savings account that is linked to your home loan.  The offset account is with the same financial institution as your home loan.  Using an offset account is a great way to pay off your home loan quicker and potentially save $000’s in interest over the life of the loan.

 

How does it work?

The savings account is linked to your home loan and your income is deposited into it.  While you still have access to money in your savings account, when the interest is calculated on your home loan, the balance in our savings account is offset against what is owing on your mortgage. 

 

If you had $100,000 mortgage and you had $10,000 in an offset account, interest would be calculated on $90,000 and as a result over a period of time you reduce your mortgage sooner and will pay less interest over the term of the loan. Interest is not paid on a savings account whilst it is being operated as an offset account and therefore you will not be taxed on any interest that would otherwise be paid. 

 

A redraw facility is a good alternative to an offset account if lower amounts of funds will be sitting in an offset account.

 

 

Redraw facility

 

What is a redraw facility?

Firstly, to understand the benefits of a redraw facility, we’ll quickly explain what redraw is and how it works in simple terms. Redraw is a feature of a home loan which allows you to use your home loan like a savings account. It gives you the ability to make extra payments (by putting all or some of your income and savings) into your home loan and then have the ability to "redraw" (or withdraw) on these extra payments whenever you need to with a debit card, cheque book, electronic banking etc.

 

The beauty is, by depositing all of your salary and any extra income you have into your home loan account (which you can

redraw whenever you need it again), you will be reducing the balance of your home loan with all the money you have at any given time, which means you get charged less interest because interest is calculated daily. At the same time, you always have the ability to withdraw any surplus or extra funds you have added (via your redraw facility) whenever you need to with a debit card, cheque book or electronically with phone or internet banking.

If you plan to make extra repayments or lump sum payments into your home loan at any time throughout the term of your loan, having a redraw facility will enable you to put all your extra money into the loan to reduce the balance of your loan (so you pay less interest) and at the same time, gives you access to these extra funds if you ever need to buy things.

 

Principal & Interest Loans

 

There are 2 main components to a principal and interest loan.  The “principal” being the amount you borrowed from the lender and the “interest” which is what the lender charges you for borrowing the money.

 

Your repayments are made up of these two components.  Initially, your repayments will be mostly interest and a little bit of the principal (or sometimes called capital) which comes off the amount you owe.  As time goes by the repayments slowly have a smaller interest component and a larger principal component.  As you near the end of your loan, most of the repayment will be principal and very little interest.

 

Your repayments with a principal & interest loan are higher than an interest only loan but the benefit is that you are paying the loan off whereas with interest only loans you still owe the same amount at the end of the interest only period as you borrowed in the first place.

 

By choosing and principal & interest loan you will be paying off the loan from day one.

 

Interest Only loans

There are 2 types of loans as far as the way payments are made.  Principal & Interest repayments repay or pay down the loan as a portion of the principal is paid off each time a repayment is made.  Interest only payments only pay the interest that has accumulated for the month.  The principal amount does not reduce if you continue to make interest only repayments. 

You can select the period you wish to make interest only payments, normally up to 5 or 10 years.  At the end of the interest only period you will owe the same amount as you borrowed in the first place.  Lenders often allow a 5-year interest only period with an extension of 5 more years. After that you will be required to start making principal and interest repayments so you begin to pay the off.  Rates for interest only loans are now higher in many cases than principal & interest rates.

You should be aware of what the principal & interest repayments will be after the interest only period expires as there is a significant difference between the two.

What you should know about interest only loans:

  • No interest only loans for owner occupied loans – in recent times most lenders have stopped offering interest only loans for owner occupied loans.

  • Cost of interest-only loans – You will end up paying more interest over the life of the loan if there is an interest only period (normally at the start of the loan).  You will be paying nothing off the loan for the interest only period therefore the overall interest will be higher than if you started to pay the loan off from the beginning.

  • Higher repayments at the end of the interest-only period – as pointed out above there is a noticeable difference between interest only repayments and principal & interest repayments for the same loan. E.g. interest only repayments on a $500,000 loan at 4% over 30 years will be $1,666.67 per month as opposed to the higher principal & interest repayment of $2,387.08 per month.

  • Equity – If you are paying interest only payments, you are not building equity in the property.  If the property market drops, then you may end up owing more than the property is worth at that point in time.

Positive aspects of interest only loans can be:

  • Lower repayments at the start of the loan - This may help you maximise the amount of money you can borrow or give you the opportunity to pay off another high-interest debt.

  • Tax – Property investors often use interest only loans due to their approach to making profits.  Some investors will use interest only loans simply to keep the property until the property’s value has increased to a point where the investor will sell and realise their profit. 

  • Bridging and construction loans – Bridging and construction loans are normally based on interest only payments.  After the bridging period the end loan will revert to principal & interest repayments whilst lenders allow borrowers to pay interest only payments based on the progress payment amounts until completion.  Once the property is completed the repayments normally change to principal & interest repayments.

As the time approaches for you to make principal and interest repayments you should adjust your budget

First Home Buyers

Buying your first home is often an exciting but daunting task.  Your Mortgage Options can help ensure the whole process runs smoothly, and with minimum stress.

​By assisting you with programs like the First Home Owners' Grant Scheme we are making sure that you and your family is getting all the benefits available to you.

​ Many of the lenders on Your Mortgage Options panel are agents for the FHOG. We can help with the "First Home Owners' Grant" and ensure that the grant money is available for settlement.

State and Territory governments have introduced the First Home Owners' Grant to offset the effect of the Goods and Services Tax (GST). The Grant of up to $10,000 is available to eligible applicants who are purchasing or building their first home in Australia.

Being a guarantor for a loan

Many families like the idea of helping out the kids get their first home but there are things you should know before going ahead.

 

Most people become guarantors for family members by providing extra security (property) to the lender to guarantee the loan for their relative.  By providing the extra security the loan amount versus the total security amount means that the Loan to Value Ratio (LVR) is reduced typically below 80%.  This means that no Lenders Mortgage Insurance (LMI) is required.

You should be aware that there can be consequences by "going guarantor" for a family member and it is strongly recommended that you seek independent legal advice before taking the plunge.

 

Many clients ask when their parents (or whoever the guarantor is) can be removed as guarantors.  The simple answer is, when the LVR (Loan to Value Ratio) drops below 80%.  This means the property will have to appreciate in value or the loan is reduced (or a combination of both) to the requisite extent.  The other option may be that the borrower can pay for LMI (Lenders Mortgage Insurance) if the lender will allow that to occur (many lenders would).

 

​Debt Consolidation

 

Whilst consolidating short term debts may be a solution in the short term, there is a downside if not done correctly.

 

Many people consolidate short term debts like car loans or personal loans to reduce their overall monthly loan repayments.  What is not obvious to some is the fact that by consolidating short term debt into their home loan (usually a long-term debt of 20 to 30 years) the end result will be that you end up paying interest on the car loan or personal loan portion over the same period.  This makes it a very expensive exercise in the long run.

 

To get the benefit of consolidating short term debt into your home loan you should aim to make repayments as close as possible to the equivalent of what your home loan would have been without consolidating plus an amount which is equivalent or very close to the car loan or personal loan amount before consolidation.

 

Here is an example:

 

Brett and Jane have a:

Car loan of $40,000 over 4 years with repayments of $500 per month

Personal loan of $25,000 over 5 years and paying $380 per month

New home loan of $480,000 will have repayments of $2,361 per month

Total repayments at present are $3,241 per month and total interest over 30 years (@4.25% interest) is $369,960

 

If they consolidate both debts, the new home loan amount will be $545,000, the minimum monthly repayment will be $2,681 but the total interest over the 30-year loan will be $420,160, an extra $50,200.

 

By paying as close as possible to the original $500 and $380 repayments in additional repayments will see that figure of $50,200 reduce accordingly.

 

Before you apply for a debt consolidation loan:

  • You should talk to your lender to see if they can assist by reducing your repayments or making some other arrangement

  • Look at changing lenders if you can getter a better deal elsewhere

  • Perhaps as a last resort you may consider selling your home and getting into a more affordable property

  • If your credit cards are an issue, you may be able to secure a better credit card interest rate with another credit provider.

 

Make sure:

  • You do not put yourself in a position where you end up borrowing too much and therefore creates a bigger problem long term.

  • Financial discipline will be required when getting a debt consolidation loan so you do not waste the benefit of such a loan.

  • You understand the terms of a debt consolidation loan and how it will affect you in the short term and the long term.

 

 

Lender panel

 

We currently use the following lenders. There is a wide variety of institutions, banks and mortgage managers (mortgage managers use banks money to fund their own products), reverse mortgage lenders, personal loan lender, commercial lenders and credit impaired lenders.  Some of these banks were previously credit unions or building societies and have taken steps to get full banking licences.

 

Due to the good cross section of lenders, we are almost certain to be able to obtain a loan that suits you.  We also have access to a number of private lenders who specialise in short term loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Glossary of terms

 

AAPR

Average Annualised Percentage Rate. Sometimes referred to as the Compulsory Comparison Rate, this figure takes into account the other costs associated with the loan etc, and expresses them as an average interest rate, to create a level field with which to compare like loan product interest rates.

 

Acceptance

Agree to the terms of an offer or contract.

 

Additional repayment

Extra funds paid into the loan in addition to the minimum monthly payments.

 

Agent

Real Estate Agent

 

Amortisation period

The period of time a loan is calculated over (and repaid).

 

Application fee

The fee charged by a lender to cover or partially cover the lender's costs of setting up or establishing the loan.

 

Arrears

An overdue account yet to be paid.

 

Assets

Money, property or goods owned.

 

Assignment

Legal transference of a right or a title to a property, to another party.

 

Bankruptcy

The legal financial state and individual is in, when unable to meet debts (for Companies it's known as being 'wound up'). A debtor may be declared bankrupt by the Federal Court at either the debtors or the creditors instigation, and the debtor’s estate will be placed in the hands of an official receiver who will distribute the estate in accordance to the provisions of the Bankruptcy Act.

 

Borrower

A person, persons, or entity borrowing money to purchase, payoff, or refinance a product or effect.

 

Buyer's Agent

Person to act on behalf of the buyer to find and negotiate on properties the buyer wishes to buy.

 

Capital

The current value of your assets, including car, property, business, or money etc.

 

Capital Gain

The financial gain you get when you sell something for more than you bought it. Maybe subject to the capital gains tax, which is paid on the gained amount.

 

Caveat

A notice of warning given to a public authority, e.g. Titles Office, claiming entitlement to an interest in certain land. The caveat is registered and remains on the books as a warning to anyone who contemplates dealing with the property. It therefore prevents any action being taken without the previous notice of the person entering the caveat (the caveator).

 

CIO

Credit and Investments Ombudsman Limited. Formerly known as COSL (Credit Ombudsman Service Ltd).

 

Collateral Security

Additional or supporting security given in addition to the principal security.

 

Comparison Rates Schedule (CRS)

Comparison Rate Schedule. The schedule displayed by a lender that give the annual percentage rate and the respective Comparison Rate, for the lender's loan products for specific amounts over specific terms.

 

Compulsory Comparison Rate

Or CCR, is the figure expressed an interest rate, that takes into account some of the extra costs of a loan product. The formula used to calculate the CCR is regulated by the Uniform Consumer Credit Code and all Australian lenders are required to use the same formula.

 

Consumer Credit Code

Legislation designed to protect the rights of the individual (personal consumer) by ensuring banks and other financial institutions all adhere to the same rules when providing personal, domestic or household credit. It should provide borrowers with complete and honest information. Also known as the Uniform Consumer Credit Code or UCCC.

 

Contract of Sale (COS)

A written agreement outlining the terms and conditions for the purchase or sale of property.

 

Conveyancing

The legal process for the transferal of ownership of real estate

 

Cooling Off Period

In NSW, the mandatory cooling off period allows purchasers to discontinue with the purchase after signing the contract of sale.  The standard cooling off period is 5 business days and can be extended by consent with the vendor.  The vendor does not have to agree to the extension.

 

CRS

Comparison Rate Schedule. The schedule displayed by a lender that give the annual percentage rate and the respective Comparison Rate, for the lender's loan products for specific amounts over specific terms.

 

Daily Interest

Interest calculated on a daily basis - varies according to daily account balance.

 

Debtor

Someone who owes money to another and can be compelled to perform an obligation.

 

Deed

A document in writing, which is signed, sealed and delivered by the parties thereto, to prove and testify the agreement of the parties whose deed it is, to the things contained in the deed.

 

Depreciation

The accounting practice where the cost of a fixed asset of a business is spread over the life of the asset. Depreciation is a non-cash expense which allows the money to be retained by the business, thus technically allowing the business the capacity to replace the asset over time.

 

Direct Debit

Where the Lender debits (deducts) a payment from client's bank, credit union or building society account.

 

Disbursements

Solicitors incidental costs involved when dealing with client on behalf of the Lender, e.g. searches, certificates pest reports, etc.

 

Draw Down

Act of transferring money from lending institution to the borrower after the loan has settled.

 

DSR

Debt Service Ratio.

 

Encumbrance

A charge or liability, e.g. a mortgage.

 

Equity

Generally used to denote the financial interest of a person in a property or business enterprise, e.g. a person's equity in his house is the difference between its value and the amount still owed to a Lender. A person's overall equity refers to his net financial worth, or the difference between what he owns and what he owes (i.e. Assets - Liabilities = Equity).

 

Estate

An interest in land.

 

Exchange

The legal point of time when the vendor and the buyer swap documentation with a view to settlement.

 

Fee Simple

The estate in fee simple is the highest estate in the land, and it is the closest the law comes to recognising absolute ownership for all practical purposes. However, while we refer to a proprietor of an estate in fee simple (who is the owner for all practical purposes), their ownership is not legally absolute, for absolute legal ownership of all and rest with the Crown.

 

Fittings

Items that can be removed from a property without causing damage to it e.g., carpet and curtains.

 

Fixed Interest (Fixed Rate)

An interest rate set for an agreed term.

 

Fixtures

Items that would cause damage to the property if removed. Their removal must be stipulated in the contract of sale, and damage made good by the seller e.g. Oven and bath etc.

 

Garnishee Order

A court order taken out by a creditor on a person's employer or banker for the deduction of funds from his wages or bank account to repay a debt.

 

Government Fees

State and government charges at the time of settlement, e.g. stamp duty.

 

Gross Income/Profit

Income from a person or company, before tax, superannuation or payroll deductions.

 

Guarantor

A person/s who agree to be responsible for the payment of another person's debts.

 

Holding Deposit

A refundable deposit based on the goodwill of the buyer to go ahead with the purchase.

 

Indemnity

Security against damage or loss; sum paid in compensation for loss incurred.

 

Instrument

Formal legal document in writing, e.g. a deed of conveyance.

 

Interest

The Lender's charge for the use of funds or the return on deposited funds.

 

Interest Only Loans

A loan where the principle is paid back at the end of the term and only interest is paid during the term. These loans are usually for a short period of time, 1 to 5 years.

 

Joint and Several Liability

The Bank's joint account authorities, guarantee forms, etc are framed to ensure that joint account holders with debts due to the Bank of joint guarantors liable to the Bank shall be SEVERALLY liable, (i.e. individually), as well as JOINTLY. With Joint and Several Liability, a creditor has as many rights of action as there are debtors; he can sue them jointly or severally until he has obtained payment, and an unsatisfied judgment against one debtor will not be a bar to an action against the others.

 

Joint Tenancy

Property in the names of two or more persons, where all persons have an equal interest in the whole property. When one person dies his interest passes to the survivor(s). They are known as Joint Tenants or Joint Proprietors of that property.

 

Liability

A debt which one is liable for; being responsible only to a limited amount.

 

Loan

An advance of funds from a lender to a borrower on the agreement that the borrower pays interest on the loan, plus paying back the initial amount of the loan at or over an agreed time.

 

LVR

(Loan to Valuation Ratio) the ratio of the amount lent, to the valuation of the property.

 

Maturity

The date a debt or investment must be paid in full.

 

Mortgage

A form of security for a loan usually taken over real estate. The Lender, the mortgagee has the right to take (repossess) the real estate if the mortgagor fails to repay the loan.

 

Mortgagee

The Lender of the funds.

 

Mortgagor

The person borrowing money in the terms of the mortgage.

 

Negative Gearing

Gearing your investment so that the cost to maintain it (loan repayments, council rates, maintenance etc) outweigh the income produced by the investment, leading to a reduction in taxable income.

 

Net Income

The income received by an individual AFTER TAX has been taken out.

 

Net Profit

The profit remaining in a business after all expenses have been taken out, but BEFORE TAX.

 

Off the Plan Purchase

Buying a property from the plans only, not the finished product.

 

Portability

Where a new property can be used as security for an existing loan, i.e. when the loan is transferred to a new security property without needing to repay the loan, reapply, or restructure.

 

Power of Attorney

A written authorisation to another person, or persons, to perform certain acts for the signer, as if they were the signer.

 

Principal

The capital sum borrowed on which interest is paid during the term of the loan.

 

Principal & Interest Loan

A loan in which both the principal and the interest are paid during the term of the loan.

 

Property

A person's property is "what is he or she owns to do what they like with." It may be tangible or intangible, and may be given a monetary value (e.g. house, car, goodwill). Property may be classed 'real' which relates to land or interests in land (except leaseholds) and buildings, etc or 'personal', which relates to other kinds of property such as cars, bank accounts, leasehold interests in land.

 

Redraw

Borrower is able to draw on pre-paid funds

 

Refinancing

To replace or extend an existing loan with funds from the same institution or another.

 

Search

An examination to confirm that the vendor is in a position to sell the property and that there are no encumbrances on the property.

 

Security

An asset that guarantees the Lender their borrowings until the loan is repaid in full. Usually the property is offered to secure the loan.

 

Serviceability

Ability of borrower to make and meet repayments on a loan, based on the borrower’s expenses and income(s).

 

Settlement

Finalisation of payment by the new owner, and assumption of possession. When you pick up the keys!

 

Surety

Person who makes them self-responsible for another's payment of debt; also knows as the guarantor.

 

Tenants in Common

Property in the names of two or more persons and in which each has a separate and distinct share. When one person dies his share is not passed to the survivor(s) but becomes part of his estate for disposal according to his will.

 

Term

The length of a home loan or a specific portion within that loan (expressed in months or years).

 

Third Party Security

Security provided for a mortgage by a third party (someone different from actual borrowers) who is legally different from the borrower or debtor.

 

Title Deed

Registration showing the ownership of property.

 

Title Search

Process to ensure that the vendor has the right to sell and transfer ownership.

 

Torrens System

System whereby ownership and all dealings on a property are detailed on the one document, i.e. a Certificate of Title or Deed of Grant. Under this system a mortgage is a charge or encumbrance on the title. Registrations is compulsory to effect legal transfer of an interest in property and each time the property is sold, mortgaged, or a mortgage discharged, the transaction is recorded on the Certificate of Title.

 

Unencumbered

A property free of liabilities, restrictions or mortgages.

 

Valuation

A report as required by the Lender, detailing a professional opinion of a property's value (not a market appraisal by a real estate agent).

 

Variable Interest Rate

A rate that changes in accordance with the rates in the marketplace.

 

Variation

Changing any part of the original loan contract.

 

Veda Advantage

The company which records and holds credit information on everyone, such as loan applications, credit defaults, and so on. Was originally known as CRAA, and may often be referred to as the 'CRAA Check'.

 

Vendor

Person selling a property who is the current owner.

Blue Line Solutions Pty Ltd ABN 40 849 727 422 PO Box 911 Picton NSW 2571

Australian Credit Licence Number 390 862

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