Australian Mortgage and Loan Information

It is official, banks are making it tougher to get a home mortgage.

Despite the bail out from the Federal Government to free up lending, it seems some of our major banks have not got the message. A client reported to me today that she had been knocked back for a home loan by her bank (One of the Big Four), despite only looking to borrow a maximum LVR of 77%.

LVR is the abbreviation for the lending term Loan to Valuation Ratio. Like other ratios LVR is expressed as a percentage and is calculated by dividing the amount you need to borrow by the lenders valuation of the property used as security.

Eg if want to borrow $400,000 and your property is valued at $500,000. LVR would be (400,000/$500,000)x100 = 80% Generally an LVR of less than 80% is attractive to most mortgage lenders. The higher the LVR the riskier the proposition for the mortgage lender.

Now there are many reasons why a mortgage lender declines an application, but after reviewing the details I am at a loss to understand their decision and have referred my client to my mortgage broker. I will report further on this matter.

So is this an indication of how the major lenders are going to react to the current crisis? I hope not. The bail out and deposit guarantee was provided so they would lend money and help the economy grow. Could it be they are now a bit gun shy? A smaller bank I could understand, but the big four must do their bit. They have been taking for a long time, it is now time to give a little back.

Please don’t be discouraged if you ever get a knock back from a home loan mortgage lender. Get yourself a competent mortgage broker. They will go the extra mile for you, leave no stone unturned, in their efforts to help you get the home finance you need.

Low Doc Home Loan/Mortgage for Debt Consolidation?

The credit turmoil has lead to some radical changes in the way home loan lenders assess home loan applications. Lo doc loans have come under greater scutiny, but what are they and what are they good for?

Low Doc (short for Low Document) home loans are targeted at contractors and the self-employed, who often lack current tax returns and financial records. Traditionally it has been more difficult for the self employed to obtain loans because banks had a preference for borrowers on guaranteed (ie PAYE) incomes and yes they are still available.

A Low Doc Home Loan will help borrowers with irregular cash flow or who may not have current tax returns and financial statements, providing they have sufficient equity in an existing property or other assets. In some case’s wage earners can also access low doc home loans.

My big tip for any one considering a low doc home loan for debt consolidation, is to make sure you have kept all their credit cards, store accounts and current home loan in order for atleast the last six months. It will be difficult for your mortgage broker to obtain finance for you if you have been erratic with your payments or flippant with your credit rating.

Low Doc loans can be variable or fixed rate loans, or lines of credit, and may include an offset facility.

Low Document loans can attract a higher rate of interest than other types of loans because lenders perceive the risk involved to be greater.

Because the employment situation in Australia is changing, bank and non-bank lenders have had to become more flexible in their approach to lending and so Low Doc loans are becoming more common.

Features of Low Doc Loans
The Low Doc loan is usually just a standard fixed or variable rate loan, but with different credit criteria i.e. low documentation.

Since full documentation is not required the risk to the lender is higher and this is reflected in the interest rate and maximum loan-to-valuation ratio (LVR) of 65 – 80%. Interest rates are often 0.5% to 1% higher than standard loans depending on risk but competition is bringing rates down and the rate is often reduced once you have established a good track record of repayments. Still, Lenders Mortgage Insurance is not normally required on loans under 80% LVR.

Other useful features can include offset accounts, redraw facility, direct salary crediting, portability and repayment options depending on the lender and type of loan.

Benefits of Low Doc Loans
Specifically designed for self-employed and contactors with good credit records.
Low documentation requirement (This does not mean no documentation!)
Feature rich depending on type of loan selected

Tips and strategies
Shop around because interest rates and LVR can vary significantly between lenders
Avoid loans with monthly account fees
Making weekly or fortnightly repayments pays your loan off faster than monthly payments because you are making 1 or 2 extra repayments per year
When interest rates drop retain current repayment levels
Have your personal income paid into your loan account to reduce interest and use the interest free period on a credit card for purchases before paying the credit card bill from the loan account
Put lump sum payments like tax refunds into your loan account. If required later, use the redraw facility.

Example Rates and Fees
Variable Rate Home Loan (June 2008):
Monthly fee $10
Annual fee NIL
Redraw fee $50
Extra Payment fee NIL
Fixing fee NIL
Low Rate 7.97% std. variable
CCR 8.08%*
*Based on $250,000 Loan over 25 years.

See your finance or mortgage broker for more details.

Free money from the government.

Australians aged 18 and over at last have some help to save for their first home. The First Home Buyers Deposit Saver Scheme became a reality today as the first accounts were made available by a couple of the major banks.

The scheme essentially provides the opportunity for free money from the government. The more you can save for a deposit on your first home the less likely you will be slugged mortgage lenders insurance by your home loan lender. If you can keep your lvr below 80%, that is have a deposit of at least 20%, you can save thousands.

You could use the money not wasted on lenders mortgage insurance to furnish your new home.

Here are the facts:

The following is an extract from the official fact sheet presented by the Government of Australia Treasury 2008.

First Home Saver Accounts – Fact Sheet -

Account Holders Overview:

First Home Saver Accounts (FHSAs) are the first of their kind in Australia and will provide a simple, tax effective way for Australians to save for their first home through a combination of Government contributions and low taxes.

Eligibility
An individual can open an account if they: are aged 18 or over and under 65;
have not previously purchased or built a first home in which to live; do not have, or have not previously had, a First Home Saver Account; and provide their tax file number to the provider.
Penalties will apply if a person opens an account where they are not eligible to do so.

Contribution arrangements
Contributions may be made by the account holder or another party, such as an employer, on behalf of the account holder. Contributions will be made from after-tax income. The Government will make additional contributions which will be paid directly into the account, after the individual has lodged their tax return and the provider has submitted the relevant information to the ATO. The Government will contribute 17 per cent on the first $5,000 (indexed) of individual contributions made each year. This means an individual contributing $5,000 will receive a Government contribution of $850. No minimum annual deposit is needed to keep the account open. The account can remain open for as long as necessary or until the account holder turns 65, at which time it must be closed.

Level of tax on accounts
Contributions will not be subject to tax when contributed to an account. Investment earnings (or interest) will be taxed at a rate of 15 per cent. Withdrawals will be tax free. FHSA balances will be exempt from the income and assets test.

Account balance limit
There will be a limit of $75,000 (indexed) on the overall account balance. If an individual reaches the account balance cap, no further individual contributions will be able to be made. Earnings and any outstanding Government contributions will still be able to be credited to the account after this time.
Contributions that exceed the limit will be returned to the account holder.

Four-year savings horizon
To withdraw their funds, minimum contributions of $1,000 need to be made over the course of at least four separate financial years. If an account holder is purchasing a property with another individual(s) who also holds an account, only one account holder needs to meet the four-year requirement. If one person meets this, then the other individual(s) can also withdraw their funds.

Withdrawals for a first home purchase
Individuals will be able to withdraw their account balance tax free to buy or build a first home in which to live. The full amount will need to be withdrawn and the account closed. The individual will need to live in the home for at least 6 months within the first 12 months of purchase or completion of construction. Individuals can close their account and contribute the full amount to superannuation at any time. Penalties will apply to individuals where they fail to meet the withdrawal or occupancy criteria.

Other circumstances
Where an individual’s circumstances change during the life of the account so that they no longer wish to purchase a first home, they will not be able to access the account but can transfer the balance into superannuation and close the account. Penalties will apply if funds are withdrawn and not used to purchase a first home in which to live. If an individual moves overseas, they can continue to make contributions into the account, but will not receive any Government contributions. Individuals will be able to access their funds tax free once they reach age 60, consistent with superannuation.

Early release provisions
By transferring the account balance into superannuation, individuals may apply to access the superannuation early release provisions of severe financial hardship, compassionate grounds or terminal illness.

Account providers
Public-offer superannuation providers, life insurers, friendly societies, banks, building societies and credit unions will be able to offer the accounts. Banks, building societies and credit unions will be able to offer deposit accounts and superannuation providers, life insurers and friendly societies will be able to offer investment-linked accounts.

Anyone who is eligible should pursue this opportunity. Parents should encourage children, grand parents should encourage grand children. Speak to your mortgage broker, visit your bank or credit union. Get it happening, its free money.

The global credit meltdown has bought all forms of mortgage and mortgage guarantee insurance firmly into the lime light. However the mortgage insurance they are talking about in the US is significantly different to the Australian version.

Under the Australian Consumer Credit Code if you are borrowing 80% lvr or more of the value of a property a lender can require you to take out this insurance. Mortgage insurance does not protect you the borrower or your interest in your property. Rather, It protects the mortgage lender in the event that you default on the loan and they have to resort to a mortgagee sale of your property. The lender will recover the difference or shortfall from the insurer if the amount you still owe after the sale is greater than the home loan to be repaid.

Mortgage insurance or mortgage guarantee insurance is usually a one-off premium paid at the time of settlement. If mortgage insurance pays out, for you this will not be the end of the matter, as the
insurance company will pursue you to recover their money.

I think paying this type of insurance to borrow money for a home is old hat. Save your deposit or ask for your inheritance from your parents in advance. A competent mortgage broker will have some alternatives for you to consider ahead of paying mortgage insurance. Finally, please don’t be in a rush to buy your property. Take your time. Property is a great long term investment.

Useful resources for preparing to take out a home loan or purchase a property are listed below.

Educating yourself in the different aspects of purchasing a property is the only way to guarantee that you get the best possible deal. Nearly all the other players involved in your property related transaction have their own interests at heart and you are fooling yourself if you think otherwise.

With the large amount of money involved it is a case of “Buyer Beware”. No amount of government or industry regulation is going to protect you from making errors or mistakes.

Use the following resources to increase your knowledge and help you in making decisions. Buy a couple of good books from our recommended list – they contain a wealth of information that would take a lifetime to accumulate, and the cost is insignificant compared to the money lost if you get things wrong. Find out what LVR is? It is an important term.

The resources listed below are all resources that I have used myself and have personal experience with, including the books which I own, have read, and regularly refer to as I buy and sell property. Internalising this mortgage, home loan and property information will also help you decide which professionals you make part of your property wealth creating team.

Home Loan Resources
Home Loan Rates
Information on current home loan interest rates in Australia.
Borrowers Check List
What you need to have ready before you approach a lender or mortgage broker.
Credit Comparison Rates
All loans are not equal so how do you compare loans?
Mortgage Calculators
Check out different mortgage repayment scenarios. See also the PC based software and loan calculators below.
Property Related Web-sites
Australian web-sites with useful resources.
Loan/Mortgage Brokers
Helpful Brokers who will find the best loan for your personal circumstances.
Recommended Books
A book list and reviews of Property related books by Australian Authors.
Mortgage Calculator – PC based software
The banks do not want you to use this software because of the refunds they have had to make to users. If you have an existing mortgage then it will pay you to buy this particular mortgage calculator instead of using the free bank calculators. Not only can you do “what if” scenario’s but you can check whether the bank has been ripping you off with your mortgage.

Loan Calculators | Australia

Glossary of Home Loan, Mortgage and Finance terms.
A
account balance – The amount of money you have in your account.
annual fee – The amount charged by the lender each year to cover the administration costs of the loan.
ANZ - A major Australian Banking Group.
application – A standardised form used to apply for a loan and to record relevant information about the prospective borrower and the proposed property.
appraisal – A written analysis of the estimated value of a property.
appreciation – An increase in the value of property due to changes in the market conditions, ie – inflation.
asset – Anything of monetary value owned by an individual.

B
bad debt – A debt that is not collectible and is therefore worthless to the creditor.
Bankwest – Major Australian Banking Group.
bankrupt – The condition of being unable to pay debts, with liabilities greater than assets.
business loan – A loan granted for the use of a business.
budget – A detailed plan of income and expenses estimated over a specific period of time, helping to manage costs and profits.

C
cash advance – An instant loan obtained from a lending institute.
CBA- Commonwealth Bank, a major Australian banking Group.
collateral – Property pledged as security for a debt.
commercial loan – A loan used to finance a company or its working capital needs.
construction loan – A loan used for financing the cost of construction.
contract – An oral or written binding agreement between two or more parties.
conveyancing – A legal process to transfer ownership of property from the seller to the buyer.
credit – An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.
credit card – A card that allows you to buy goods, services and obtain cash advances on credit.
credit report – A report of a person’s credit history from a credit bureau used by a lender to determine a loan applicant’s worthiness.

D
debit – When money is taken out of your account for something you’ve bought or to repay money you owe.
debt – An obligation to pay an amount owed for funds borrowed.
debt consolidation – The replacement of multiple loans with a single loan, often at a lower periodic payment.
default – Failure to make a required debt payment when it is due.
deposit – Money paid in good faith to assure the performance of a contract.
depreciation – A decline in the value of real or personal property.
direct debit – An amount of money paid regularly and of various amounts, to an individual or a company from your account with your consent.

E
EFTPOS – (Electronic Funds Transfer at Point of Sale) A way of buying goods and services using a fast cash savings, cheque or credit card.
equity – The difference between the market value of your home and your outstanding mortgage balance.
EFM – Equity Finance Mortgage a home loan mortgage where the lender has a stake in the security property, and shares in any profit or loss. Allows buyers to borrow more.

F
finance – The commercial activity of providing funds and capital.
first home owner grant scheme – (FHOG) One off $7000 payment to eligible first home buyers.
fixed interest rate – An interest rate which is fixed for the term of the loan.

G
grace period – The period of time in which you are not required to make payments on a debt.
gross income – Your income before any tax or other deductions have been made.

H
home loan – A residential mortgage loan secured by a primary residence.
home loan statement checker – pc based software good for finding errors in your bank statements.

I
inflation – An increase in the amount of money or credit available relative to the amount of goods or services available, causing a rise in the price level of goods and services.
instalment – A regularly scheduled periodic payment that a borrower agrees to make to a lender.
insurance – A form of risk management that provides compensation for specific losses in exchange for a periodic payment.
interest rate – The cost of borrowing money expressed as a percentage of the amount borrowed.
Investment – The money paid to purchase a capital asset or a fixed asset.
investment property – A property that is not occupied by the owner, usually purchased to generate profit.

J
jargon – The specialized language of a particular profession, used predominantly in contracts.

K
king hit – an unexpected and unseen punch to the head.

L
lender – A person or company that supply funds.
liability – The debts or financial obligations of a person or company.
liquidate – When a company ends from being unable to pay off its debts.
loan – Borrowed money that is usually repaid with interest.
loan checking software - pc based loan statement checking software.
loan term – A lender’s agreement to make a loan on particular terms, including interest rate, fees and charges.
low doc loan – A loan requiring a lower level of verification documents.

M
Major Lenders – ANZ, Bankwest,CBA,Members Equity,StGeorge, Westpac.
Members Equity – major union based home mortgage lender.
mortgage – A legal document that pledges a property to the lender as security for payment of a debit.
mortgage broker – Lending professional, with the ability to advise and place mortgage and home loans.
mortgage checker software – pc based software that helps you check for mistakes on your loan statements. Very useful, as lenders make a lot of mistakes.

N
NAB – National Australia Bank, major Australian banking Group.
no doc loan – A loan requiring no documentation of income.

O
occupancy rate – Percentage of currently rented units in a building, neighbourhood, complex, or city.
owner finance – A property purchase transaction where the seller provides the financing.

P
personal loan – Money borrowed to meet personal needs.
profit – The positive gain from an investment or business operation after expenses.
property – That which is legally owned by an individual or property.
purchase agreement – A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Q
quick cash – Liquid assets including cash on hand and assets readily convertible to cash.

R
rate – The annual rate of interest on a loan, expressed as a percentage of 100.
refinance – To repay one or more existing mortgage loans by getting a new loan.
renovation loan – A loan used to make improvements to an existing property.
rental property - house, unit, town house, flat or comercial property purchased for the sole purpose of renting out.
repayment plan – An agreement between a lender and a borrower, made to help the borrower repay installments.
risk – The probability of an event not goings as planned.

S
self employed – An individual who operates a business as a sole proprietor or in partnership.
second mortgage – A loan taken after the first mortgage and is secured against the same assets as the first.
security – Property or money that is pledged as collateral for a debt.
secured loan – A loan that is backed by property or other collateral.
settlement – The time when loan and mortgage documents are formally signed and the loan transaction is completed.
short term loan – A loan scheduled to be repaid in less than a year.
sole ownership – Ownership of property by a single person or entity.
St George Bank – major Australian Banking Group.

T
term – The period of time during which loan payments are made. At the end of the loan term, the loan must be paid.
title – A legal, written instrument detailing an individual’s lawful possession of a property.

U
underwriting – The process of verifying data and approving a loan.
unsecured loan – A loan that is obtained without security or collateral.

V
variable rate – An interest rate that changes with movement in the market.

W
warranty – A promise contained in a contract.
Westpac Bank – major Australian Banking Group.
write off – When a loan is uncollectible.

X

Y
yield – A measurement of the rate of earnings from an investment.

Z
zone – An area of property reserved for a specific or limited use, often subject to building restrictions or conditions.

A home loan mortgage finance application can be tricky, so it is important that you have all your personal and financial information ready before you meet with your mortgage broker.

Personal Information:

The first thing you need to do is prove who you are. Chances are your home loan lender is going to be advancing you many thousands for your property purchase, so they want to be sure you are who you say you are. You will need the obligatory 100 points of identification if you are going to secure a home loan or mortgage. You will need: Birth Certificate (certified if applying for first home owners grant) or Passport, drivers licence, Medicare card, credit card statements, maybe an account from a utilities provider with you current address, some other photo id and maybe a letter from your mum. You will also need to provide details of where you have lived for the last 5 years or so.

Financial Information:

If you are an employee, you will need at least your last three payslips that clearly identify you and the amount you earn. A letter from your employer may also be useful here if they are willing. They will need to state your employment start date, gross income and condition of employment as a minimum. You may also be asked to provide your PAYG Payment Summary for individual non-business. If you have more than one employer get a statement from them all. If you are self employed you will need your last two years tax returns and assessments for yourself and any other tax entity you trade under. Self employed applicants may also be able to use Low Doc or No Doc options to certify their incomes.

You will also need at least 6 months of saving account statements to show your savings history, lenders think a solid savings history indicates that you will be able to make the sacrifices necessary to keep up the payments on a home mortgage. In some cases 6 months of credit card statements, including the most recent, showing their balance and limit. Personal loan details and statements showing repayment outstanding balance figures and payment history. Store account statements and details.

You will also need paperwork explaining any bad credit history you may have. It is best to get this stuff up front to avoid any delays with your application. Contact a credit reference supplier and find out if you have anything to worry about if you are not sure.

If you are buying a property you will need to supply a Contract of Sale. The front page of a Contract of sale is generally enough for most of the major lenders. If you are refinancing, you will need 12 months mortgage statements on the loan to be refinanced and a recent council rate notice. If you are building it will be best to supply a complete copy of your building contract including the specifications and plans.

That’s just about it. You will also need your notepad or diary to take notes from your mortgage broker interview. I suggest you print this Blog and use it as a reminder. Oh and tell your mum you love her and that you appreciated all the times she cleaned up after you!

PS: Be prepared, get some mortgage checking software.

Do you know the shocking truth about borrowing from a bank……

Over half of monthly bank statements contain errors!

Whether you deal with a mortgage broker, or one of the major lenders, have a standard variable home loan mortgage, fixed rate home loan mortgage, construction loan, line of credit home loan, debt consolidation home loan mortgage, credit card linked home loan mortgage, offset account linked homeloan mortgage, split home loan facility, reverse mortgage, homestart home loan mortgage, one year discount variable home loan, low doc home loan, no doc home loan, investment property mortgage, first homebuyers mortgage, first home buyers home loan and so on, you need to be diligent and on alert for loan statement errors. Check the historical rates over the last 40 years, you will see there are many opportunities for major lenders to make mistakes.

It has happened to me. My bank overcharged me, so………….

Never accept the repayments specified by your lender as being correct.

In November 2005 the National Australia Bank (NAB) admitted it had been overcharging 50,000 customers for about 13 years and that it was going to hand back $21.6 million dollars. In this instance the overcharging mistake largely affected business customers with fixed interest rate loans.

If you have a home loan with any lender including the major one’s like NAB, Westpac, CBA, St George, ANZ and Members Equity there is at least a 50% probability you may have been overcharged. Lenders do what they can to limit mistakes, but errors still occur.

I use Mortgage Watchdog, mortgage statement checking software to check my statements. It has served me well.

The banks do not want you to use this software because of the refunds they have had to make to users. If you have an existing mortgage then it will pay you to buy this particular mortgage calculator instead of using the free bank calculators. Not only can you do “what if” scenario’s but you can check whether the bank has been ripping you off with your existing mortgage and get a refund. More on the super Mortgage Calculator and Checker here…

The software has been seen on…
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- 4 Corners
- Today Tonight
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The Home Deluxe Bundle consists of the following programs:
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3. The Mistake Compounder (calculates what a bank error at some time in the past is actually worth now)
4. The Home Loan Forecaster (allows you to determine what your repayments would be at different interest rates, payment modes and loan amounts)
5. The Offset Account Checker (calculates the interest on your savings account that should be offset against your mortgage account)
6. The Effective Rate Converter (shows the “true rate” that your lender is charging

They are also offering the following incentives to purchase: (Quoted from the Mortgage Watchdog website)

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RESERVE BANK LEAVES OFFICIAL RATES ALONE FOR NOW!

Thank you Reserve Bank Board, you have made one aussie mortgage battler’s month by not raising official interest rates. The spin from the media is there may even be a drop in rates in the near future if inflation drops a little. A lower oil price will have a domino effect on inflation, so a rate drop is a real possiblility. But, will the Banks and other lenders put rates on hold?

Most major mortgage lenders have increased the rate on their variable home loans by between .10% and .15%. on top of the RBA increases. They claim it is because of funding costs. I quote Ross McEwan, of the Commonwealth Bank, group executive retail banking services: “The sub-prime crisis – which was sparked when US lenders lost billions of dollars on bad loans – means the cost of sourcing money has gone up. Basically, banks need to pay more for the money they borrow to lend to consumers. The bank continues to balance the needs of its shareholders and customers by not passing on the full impact of the increased funding costs to borrowers and as a result has seen the margins on its home loan business decline significantly in the last year, The Commonwealth’s rate rise means payments on a $300,000 mortgage taken out over 30 years will rise by about $7 a week.”

However, my observation has been that deposit interest rates have maintained their correlation with official rates. If the banks are having trouble raising funds in the overseas credit markets, I would have thought they would try and raise their funds at home by offering more attactive deposit rates. It seems mortgage holders continue to bare the brunt of the worlds financial problems. I for one will be trying to eliminate my mortgage as soon as possible, so I do not have to worry about being treat badly by lenders. I suggest you do the same. A few sacrifices today, may well mean the difference between baked beans and steak in the future.

Owning a home outright, provides a fantastic feeling of achievement and an increased sense of self-worth. That feeling is worth every moment of mortgage stress endured.

P.S. Dont forget to check your mortgage statements. Lenders make mistakes, please keep them honest.