Understanding Finance for House & Land
October 24, 2016

Understanding Your Home Loan & its Features

If you are a first-time property buyer either as an owner occupier or investor you don’t know what you don’t know, so to help you with understanding the basics, we have compiled a list of topics to get you started.

This information can be the beginnings of things you need to know, the rest we can teach you along the way and we are excited to be in a position to educate our clients on such things as how to pay off their mortgage faster they ever thought possible, turning first home buyers into investors and helping investors grow their property portfolios.

Whatever your ambitions we would love to be part of your journey.

BREAK COSTS

Break costs are fees charged by the lender if your contract with them is broken or the loan term changed. This may also be the case if you choose to:

  • refinance to another bank
  • make extra repayments on a fixed rate loan, or
  • pay the loan out before the fixed term has expired.

Break costs are determined by many factors, such as the term remaining, the current interest rate environment and the amount of the outstanding balance – they cannot be estimated when the contract is taken out.

BRIDGING LOANS

Bridging finance allows you to buy your new property first before selling your existing home. It means that for a short time, you will have your existing home loan as well as taking on the new home loan. During this time, you may be required to pay interest on both loans so we will work with you to make sure this is an affordable option before taking on this expense.

BUFFER

We want you to optimise your buying power potential but we also want you to sleep at night! So, we will always ensure that our calculations set aside some additional funds “just in case”.

BUYING POWER

We look at the combination of your income, assets and liabilities and the deposit funds you have available and optimise your potential, both now and into the future.

CONSTRUCTION LOANS

When constructing a new dwelling, not all costs need to be paid upfront – a construction loan allows for this with its drawdown feature. At the completion of each stage of construction (see below), the builder will send you an invoice for payment. Once you agree that the stage has been completed, you sign and forward the invoice to the bank. The bank will then release the funds to the contract builder as a “Progress Payment”. By utilising this method, you avoid making interest repayments on the whole amount until it is necessary.

Your draw down payments will generally be broken into six stages:

  • Deposit
  • Base
  • Frame
  • Enclose
  • Fixing
  • Practical completion

This process can be a little confusing, particularly if you are a first timer. See our more detailed other Information Sheet – “Understanding Finance For House & Land”

CROSS SECURITISATION

The process whereby the lender takes multiple properties and/or multiple loans and ties them all into one. This strategy can be used to leverage a higher loan amount from the banks and limit your exposure to mortgage insurance. However, it can have serious consequences if not understood and planned for in the beginning. As such, we have strategies that minimise these risks.

FAMILY GUARANTEE

The most common type of Family Guarantee home loan follows the 80/20 split loan. This is commonly used when a first home buyer wishes to purchase their first property but are unable to save up a substantial deposit. It helps them get into the market quicker as it can be done with a very minimal deposit. The 80/20 split is a common way to set up your loan allowing you to avoid mortgage insurance (you can also borrow the purchasing costs, eg stamp duty, legal fees, etc). The 80% is borrowed against the value of the property being purchased with the additional 20% of the loan being secured against the property of another family member (usually parents). This will help to keep your loan ratio at or below 80%. It also helps to limit the maximum exposure of the guarantor to at a maximum of 20% of the loan amount.

We can then show you how to pay off this family support loan in record time with a strategically structured loan and guided cashflow and debt management.

FIRST HOME OWNERS GRANT

The First Home Owners Grant is a scheme introduced in July 2000 aimed at offsetting the effect of the GST on home ownership. Under the scheme, a one-off grant is payable to first home owners who satisfy all the eligibility criteria. The grants are funded and administered by the state government in the state you are purchasing.

We can help you with the timely lodgement of your application to help ensure the funds are available to assist with settlement.

Check out the site below and select your state to see if you are eligible: http://www.firsthome.gov.au/

FIXED RATE MORTGAGES

A Fixed Rate Loan is a loan where the interest rate is guaranteed to remain the same during an initial term, regardless of what may occur in the market with variable rate loans. Fixed rate loans are popular with borrowers that want to take a conservative approach to borrowing, as they guarantee that the loan repayment will be the same for the Fixed Rate period.

Traditionally lenders have offered terms of between 1 – 5 years for fixed rates, however some Lenders may offer terms of up to 10 years.

LINE OF CREDIT

A Line of Credit is a loan that has with a maximum loan amount that does not need to be repaid until the end of the loan term. It then allows you to draw funds as you need them up to this approved credit limit. Whilst you can make additional repayments at any time, your only obligation is to pay the interest on the portion of the loan you've used.

Warning… management of this type of loan requires some discipline with your spending habits as it is no different to having a giant credit card!

LOAN APPROVAL STAGES

Whether you are buying your first home or releasing equity from your third investment property, the loan stages you can expect will generally stay the same.

When your loan is lodged to your selected funder, the below process will begin.

Loan Application - We will provide you with your most favourable funding options and will help you complete an application form for the Funder you have selected, and collect all supporting documentation.

Loan Submission to the Funder of your choice - We will submit your application to your chosen Funder for approval.

The Funder provides a conditional approval - The Funder’s Credit Assessment Manager will assess your application by attending to credit and other enquiries.

The Funder obtains a valuation of the property - The Funder will order a valuation of your property. (allow 3-5 days, however if access to the property is delayed it will take longer.)

Funder obtains insurance for your loan and provides an unconditional approval - All necessary documentation must be received before final approval can be given.

Solicitors Instructed - The Funder instructs their solicitors to prepare your mortgage and loan documents

Loan Docs sent to you - You need to complete, sign and return documents and any other requirements as soon as possible.

Loan Docs back with solicitor - If required, you will be asked to provide evidence that the property is insured. The Funder will advise any specific wording to be noted on your policy.

(If refinancing) Obtain payout amount on your old loan - The new Funder’s solicitors will contact your old lender and arrange to payout your old loan. The solicitors will also contact you and advise the payout amount.

(If purchasing) - The Funder’s solicitors will liaise with your solicitor.

Settlement Booked - You do not need to attend settlement. Fees and government charges will be deducted from the loan. The Funder’s solicitors will settle and collect your title deeds (and arrange for the payout of your old loan if relevant).

Settlement complete - If you are purchasing, your new property is ready to move into/for tenancy. If you are refinancing, the funds are available for use.

OFFSET ACCOUNTS

Designed to reduce the interest cost incurred in your loan account, an offset account is either a transaction or savings account which is linked to your home loan account. The amount deposited offsets the amount in your loan account. Details on how these accounts operate and whether they offer you a full 100% or partial offset, are available directly from the lender or we will assist.

REDRAW

If you have made additional repayments to your home loan and are ahead in your balance, this feature allows you to redraw the additional repayments you have made. Conditions to redraw will apply. Flexibility on this feature will vary between lenders and products.

REVERSE MORTGAGES

A reverse mortgage allows senior borrowers to borrow funds for any purpose or for day to day living expenses, secured against the equity in their property.

The main difference with this product to standard home loans is that the lender does not require the borrower to make any principal or interest repayments during the loan term. The debt instead capitalises and is traditionally repaid once the property securing the loan is sold however there is the option of repaying the facility through normal means.

Lenders will generally lend up to 20% of the value of the property, depending upon the age of the borrower.

STAMP DUTY

Stamp duty is a charge applied at the settlement of your property or land by the state government of which you have purchased in.

There are a few things that will determine the amount you are charged for stamp duty – these include the state you have purchased in as each State Government will calculate your fee differently, the amount of your purchase and the purpose – so check out the stamp duty calculators on the website linked below http://stampduty.calculatorsaustralia.com.au

VARIABLE RATE LOANS

A flexible interest rate which adjusts with the Cash Rate set by the Reserve Bank of Australia, or adjusted independently by lenders depending on the economic climate.

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