Home Loans
Home Loans
Suppose you're looking for a home loan. In that case, irrespective if you are a seasoned professional looking for your next investment property, or first home buyer, downsizing, upgrading, downsizing or merely wanting to refinance your current loan. You may want to use a home loan broker to help you through the different options from different lenders. Even though the bank pays the mortgage broker, you have to ensure that they are ultimately working for your best interest. A good broker will share industry information from the onset and help put you on the correct path.
All loan brokers in Australia fall under the control of ASIC and must hold a valid Australian Credit Licence and an ABN. You can check the registration currency of the loan broker with ASIC or with the Mortgage and Finance Association of Australia.
There is no difference if you deal with a mortgage broker or directly with the bank. However, it would be best to trust the broker you will be working with to secure your home loan.
Which is the best home loan currently on offer
There isn’t one size fits all home loan solutions. Every loan written is uniquely for the own individual circumstances. So the moment you feel the loan brokers are trying to push a specific product to you, you will know your interest is not in their mind.
A good loan broker will try to match the best-suited loan available for your current and future circumstances. However, you will need to be honest with your loan broker, and it is an offence to mislead the broker with incorrect information.
They will want to know information on your
- credit cards and their limits
- assets
- current income and expenses to assess your borrowing capacity
- deposit available
- if mortgage insurance is needed
- if fixed or variable rate home loan is suited for your current and future circumstances.
Interest rate
Banks and lenders will advertise their interest rates readily, but interest rates alone will not tell the whole story. There may be other fees that will make the low-interest loans not as low as they would be. A better gauge is the Comparison Interest Rate. All lenders must publish their comparison interest rate with the prevailing interest offered. The comparison interest rate has taken into account all other fees that may be payable in addition to the advertised interest rate. Therefore, the comparison interest rate is a better benchmark to compare different loan offers.
You will also choose between variable interest rates or fixed interest rates. Fixed interest rates are usually lower than variable interest rates, but fixed interest rate loans will tie you for a fixed duration between one to five years. Fixed interest rate loans are good if you foresee an inflation increase in the coming months or years.
Panel of lenders
Why is the panel of lenders essential? Are they to provide you with more choices? In reality, the number of lenders in the loan broker’s panel of lenders is not crucial. After all, you only want a loan. Therefore, it is better to speak to several mortgage brokers instead.
Depending on your current and future circumstances, the broker would advise the chances of loan approval from the bank and non-bank lenders, including building societies.
Information needed
The more information you provide to the bank or lender, the better the lender will evaluate the risk of the loan to you. Not all banks have the same risk appetites. Non-traditional lenders will accept higher risks.
All mortgage brokers, including banks, will have a standard checklist stating what documents are needed. Here are some standard requirements.
- 100 point identity verification as to proof of your identity.
- your income, expenses and assets you may have. The lender will need three months bank statements and salary slips.
- if you are self-employed, you can provide your tax return as proof of income.
- It will help your application if you can provide proof of other income, such as those from your share dividends.
Fees on loans
Good mortgage brokers will not use industry jargon to impress you that they are smart. Instead, ask all the mortgage brokers to explain the exact meaning of no fee or low fee home loans. No fee does not necessarily be no fee. All fees should also be explicit in the home loan details from the bank or lenders.
Several fees are associated with a mortgage, including ongoing monthly fees, rate lock fees, once-off package fees, yearly fees, early release fees, etc. You must be well aware of these fees.
Interest rate offer
Sometimes, lapse between your loan approval and signing the loan document in most loans. If your application is for a fixed interest rate loan, it is best to confirm with the lender how long they will hold the interest rate for you. It will typically be two months, but it is not unusual to get a longer duration in a dampened market.
Additional repayments
In most fixed interest rate home loans, you may only make limited additional repayment during the specified period. Some lenders may allow up to a maximum of $5,000 additional repayment per year. Others may be more or less.
In contrast to fixed interest rate loans, the advantage of variable interest rate loans is you may make as much additional repayment as you wish.
Making an additional repayment equivalent to a month’s amount every year will reduce the term of your loan by several years. This extra repayment will save you thousands of dollars in interest paid over the life of the loan. Especially if it is your principal home, it is best to make additional repayment whenever possible.
A loan redraw is an interesting feature you may want in your home loan. Most fixed interest rate home loans will not allow redraw, but there is no harm in asking the question. Redraw will give you the flexibility to make additional repayment to reduce your interest rate. Still, when you need the money for other purposes, the redraw amount is available to you without the need for another loan application.
One way to effectively use the redraw feature is to purchase your car. The overall interest will be lower than taking out a car loan application. Still, you need to be disciplined and pay off the amount equivalent to the principal and interest of the car no longer than you would if you have a car loan. People make the mistake of carrying the amount for the car loan for the duration of the home loan. It will defeat the reason of saving on interest. It will add on several thousand extra interest repayment amounts. The key to your financial success is understanding and capitalising on time and compounding interest.
Approval processes
It is best to start your discussion with mortgage brokers early in your home search. It would help if you educated yourself not to fall prey to ignorance that may cost you a lot of money down the road.
There is essentially three level of approvals in the industry.
Almost everyone without adverse financial records will be able to get a Pre-Approval. Pre-approval is a bit of nonsense within the industry. Pre-approval is non-binding, so what’s the point? No point, really!
Homebuyers should jump to the Conditional Approval stage. You would have submitted an application to the lender with all your supporting documents to get the conditional approval. The lender is also satisfied that you can service the loan for your applied amount. Once conditional approval is granted by the bank, it means that your loan will be conditionally approved, subject to you making an offer to purchase your home and going through with the loan. Conditional approval usually takes between two to 10 days; there are known instances that it may take longer depending on the documents you provide to the lender.
The purpose of conditional approval is to give you the comfort that the lender will loan you the amount stated in the conditional approval without the need for additional supporting documentation. Therefore, it is prudent for you not to make an offer to purchase a home that is more expensive than the amount approved.
Full Approval is when the bank is duly satisfied with the property you intend to purchase. Full Approval will typically require a valuation of the intended property. It is to protect the bank’s interest if you default on your loan. You will have to make sure you are across all the requirements and is comfortable with what you are getting into when you execute the loan. It would be best never to forget that your lender is not your friend.
Settlement
The settlement time frame is typically 60 days from your offer to purchase the property, but there is no fixed rule relating to the duration. It is a subject between a willing buyer and seller agreement. If the seller agrees, why not 365 days! The seller will want as short as possible settlement duration, and perhaps the buyer may need a long settlement, especially if the buyer’s purchase is subject to finance.
Will the full loan approval lapse
Even if you have signed the loan approval, it may still lapse, and the lender may withdraw the loan if you have not drawn down on loan within a reasonable time, say six months. Therefore, it would be best if you always remembered your lender is not your friend. Your banker is not your friend, but you want to make your mortgage broker your new best friend! A good mortgage broker will guide you through the entire process and help you resolve problems with the bank.
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