Loan to value ratios

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The mortgage industry is a wide, wondrous world with a language all of its own. One of the many acronyms bandied about is ‘LVR’, which stands for ‘Loan to Value Ratio’. Here’s what it means.

When you are working out what amount you can borrow to purchase a property, the size of deposit you need to save, and whether you are eligible for a particular mortgage product, the LVR is one of the most important considerations.

In the simplest terms, the LVR is the percentage of the property’s value, as assessed by the lender that your loan equates to.

So, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is 80% of the property value, making your LVR 80%.

LVR is important because different lenders and loan types have different maximum LVRs and some lenders will only lend up to a certain LVR for small properties or properties in certain areas.

Most lenders will finance 80% LVR, or higher with Lenders Mortgage Insurance (LMI), while low documentation loans may be limited to 60% LVR without LMI.

If you are looking to buy a property get in touch – one of our team can help you find the finance that will work best to help you achieve your goals!

Fixed rate versus variable loans

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Fixed rate loans

A fixed rate loan is one that maintain the same interest rate over a set period of time regardless of market fluctuations in interest rates.

A fixed rate home loan can offer stability for those conscious of a budget and who want to take a medium-to-long term position on a fixed rate. It can also protect borrowers from the volatility of potential rate movements.

Fixed rates are locked in for an amount of time that is prearranged between you and your lender – this could be a term of one to ten years depending on the lender. Three and five-year terms are generally the most popular for borrowers because a lot can change in that time.

However, fixed rate loans usually come with a few provisos. Borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early, selling the property or switching to variable interest during the fixed rate period. Also, you may not be able to leverage an offset account against a fixed rate loan.

Borrowers should consider, and be aware, that at the end of the fixed-rate term the loan will usually ‘revert’ to a variable rate.

Borrowers should talk to their mortgage broker when the end of fixed rate term is approaching as lender offers may not apply the lowest interest rate they offer when a loan reverts to a variable rate.

Variable rate loans

The interest rate on a variable rate loan can change throughout the term of the loan in reaction to market fluctuations in interest rates. The interest rate on a variable rate loan can go up or down.

A variable rate loan may come with features such as an offset account (which can reduce the amount of interest you pay), a redraw facility and the ability to make additional repayments either regularly or in a lump sum.

A variable rate loan can offer flexibility, however, borrowers should consider the capacity to service the loan if the interest rate increased.

A split loan – the best of both worlds

A loan can also be split  – this option allows you to have some of your loan at a fixed rate and some at a variable rate. You can split your loan 50/50 or at a ratio that meets your needs.

If you would like to have a conversation about the loan that is going to best to help you reach your goals then get in touch today! We can help!

The ins-and-outs of Construction Loans

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If you’re thinking of building your own home, you’ll need to be familiar with the ins-and-outs of construction loans.

Construction loans are not as straightforward as standard home loans. There are additional decisions to be made about the structure of the loan, additional documentation is required, and the funding is released in an entirely different way.

Documentation

In addition to documentation about your finances, income and identity, your application for a construction loan needs to include contracts or tenders for the construction, as well as the plans so that a valuation can be performed.

Further documentation will also be required before the first payment is made from the lender to the builder, including a schedule of the payments to be made (called drawdowns), the builders’ insurance details, and the final plans that have been approved by the local council.

Structure

To avoid having to contribute your full deposit and being charged interest on the entire loan amount from the moment the land purchase settles, you can split your mortgage into a land loan and a construction loan.

At settlement of the land purchase you start being charged interest and making repayments on the balance of the land loan – you may also be required to pay lenders mortgage insurance (LMI) depending on your deposit size.

The interest and repayments on the construction portion then kick in only as each drawdown is processed.

Funding

The drawdown schedule is very important; as you don’t start paying interest on each portion of the loan until it is paid to the builder, you, the lender, and the builder, need to be satisfied with the schedule.

For the lender to make each payment to the builder, you will need to fill out a drawdown request form from your lender, and submit it to your builder. The builder can then send the lender your form with an invoice for that part of the payment and, after the lender is satisfied that the work has been completed and is up to the standard expected in the valuation, the drawdown can be completed with a payment to the builder.

Any changes to the contract and plans can trigger a reassessment of the loan, so be as sure as you can that the plans and contracts the lender sees are final. It’s also worth trying to pay for any small amendments from your own pocket, rather than changing the loan and risking a reassessment.

Problems can also arise when other work on the site that isn’t completed by the builder needs to be paid for, as some lenders only make the remaining funds of the mortgage available after the completion of construction.

While some builders will include subcontractors as part of the main contract, meaning that they can be paid by the builder as stages of work are complete throughout the drawdown schedule, others will not do this. Again, this may make it necessary to pay from your own pocket.

We have assisted many clients secure construction loans for their building projects, get in touch today if you are looking for advice!

How do lenders assess applications?

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While loan officers work solely for a lending institution and can only offer that institution’s products, brokers can help connect you to the lender best fit to serve your mortgage needs by shopping around on your behalf.

Finance brokers on the other hand are paid commissions by lenders to match borrowers to the right products and can negotiate the lowest rate on your behalf, which is why more than half of borrowers today turn to finance brokers when it comes to finding a home loan.

In order to decide whether or not to provide you with a loan, lenders will generally assess you against five qualities.

  1. Your ability to repay the loan

    To establish your capacity the lender will look at your employment history and salary to evaluate whether you have enough cash coming in to reliably pay the loan over time.

  1. How much cash you have up front

    Assessing your ability to put down a percentage of the value of the property being purchase up front is standard. The percentages vary, and specialist lenders may approve a 5% deposit.

  1. The property appraisal price

    Since the property is used as collateral if you are unable to repay the loan, the lender will value the property. Based on the report, the lender will decide whether the property is worth the loan being approved.

  1. Your financial history

    Your credit rating, expenses and debts will help the lender assess your character as a borrower and whether you are worth the risk.

  1. Market conditions

    Economic circumstances in the market can influence what interest rate you have access to and whether you need to provide extra security. They can also influence the repayment schedule.

Genworth launches It’s My Home magazine – edition 7

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We are excited to share the seventh edition of Genworth’s It’s My Home Magazine.

Genworth’s seventh edition features super straightforward and informative articles covering property inspections, different home loan products and features, and the roles that mortgage brokers, solicitors and conveyancers play when purchasing a property.

Buying a property is a very important decision and we know that it can be both challenging and stressful! It’s My Home is a great resource created by Genworth to help you navigate through the home buying process.

Read the magazine here! 

 

How redraw and offset accounts can save you money

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Offset accounts and redraw facilities work in similar ways. They both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.

Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.

In the meantime, the extra money paid will lower the amount of interest charged, while still giving you access to your money.

However, there may be restrictions on how much money can be withdrawn and when.

“For redraw, it depends on whether the facility applies to a fixed-rate or variable loan,” the finance broker says, “Most institutions only allow redraw from a variable-rate loan, or fixed-rate loan, but with limited access.”

It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.

Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.

Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals.

“Let’s say that you are paying five per cent interest on your home loan and earning two per cent interest on your offset account,” explains the finance broker, “In a offset setup, the difference would be 3%, but would mean that the 2% interest that you earn is coming off the interest you are paying on your home loan.”

With 100 per cent offset accounts, you earn interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are earning home loan account interest rates on the money held within the offset account.

“Let’s say you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on $90,000,” the finance broker says, “That’s probably the best type to have, if you are looking at offset accounts.”

Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities.

“There are less restrictions attached to 100 per cent offset accounts- they’re very flexible, but really, it does just depends on each lender,” the broker says.

Finding a loan that matches your needs is a lot easier with an expert on your side. Get in touch today and we can help you to find a loan that matches your current needs and future plans.

Investing in a holiday house? Location is everything

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Before you take the leap into a holiday-home investment, it is essential that you consider all angles. This means taking your heart out of the equation and giving thought to rental returns – which means location really is king.

When deciding whether or not to buy a holiday house or unit as an investment, you would be best served to consider location first. In fact, location has a great deal to do with the success of your investment property if you will be renting it as a holiday destination.

“Sometimes people are torn between where they would prefer to holiday as opposed to looking at the logistics of what will rent better, and what niche markets they can target to provide better rental returns,” says Accom Holidays Director, Brent Pilkington.

You need to make sure that your property location matches up with market demand. Things to consider are travel time and expense, rent rates, local attractions and activities.

“The best rental return properties on the coast are in busier suburbs, but often holiday rental buyers are looking at some of the peripheral suburbs that are quieter,” explains Pilkington, “That’s when it’s ruled by their heart rather than their head, and they can end up with a property that may be popular through peak periods, but that delivers much more seasonal rent return.”

Pilkington suggests taking occasional markets into consideration too.

“I think the key thing is to choose areas that are not just holiday locations. Somewhere that has other things going on besides holidays. This means that when it’s not the holiday season, there are still other reasons for people to visit your area,” says Pilkington.

Deciding whether the investment holiday property you want will be as lucrative as you think often requires the advice of an expert, particularly for investors who aren’t as familiar with the area as residents may be, so investors would be well served to seek advice instead of taking a gamble.

Before you start looking for that perfect holiday home, get in touch to see how we can help with the finance

Tiny houses

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It’s easy to understand why we look for the largest, most prestigious properties we can afford – we are constantly urged to define our success by our possessions- bigger, better, newer, faster, shinier. A relatively recent counter-movement, however, urges lower impact, fewer goods and less consumption, and at its core nestles the tiny house.

With the price of property ownership creeping skyward across most parts of Australia and leaping into the stratosphere in others, a big home isn’t always affordable to buy. Add the cost of energy and living, and big isn’t always affordable to maintain, either.

With the boom of environmentally friendly housing and a return-to-basics design mentality, a trend for micro housing has cropped up, producing some positively diminutive living arrangements.

Whether it’s a one-room cabin with a loft for a bed space, a Japanese tree house or a converted shipping container, the trend in minimalist shelter has well and truly skyrocketed.

Despite how innovative those ideas are, there is no denying that they aren’t suited to everyone. What could apply broadly, however, are their lessons in downsizing. Not only can people save money, but they can save time and energy, too. It’s a good idea to consider the following benefits of smaller housing before buying the biggest home you can afford.

  • Less expensive. Small homes tend to have smaller price tags. This can be the difference between living comfortably while saving for your future or an investment property, or worrying about what will happen if the market turns. Less debt also, generally, equals lower risk
  • Energy efficient. Having fewer rooms to heat and cool saves on energy costs and lowers your ecological footprint, too
  • Less maintenance. Big houses generally mean more maintenance. This applies to the week-to-week cleaning as well as the big responsibilities, such as clearing gutters, mending fences or painting walls, which can’t be shirked if you intend to protect your investment
  • More time. All of the above leads to time saved for everything else. The more money and maintenance required for the upkeep of a home, the less time you have. For many, this is a lifestyle choice, but an important one nonetheless
  • Easier to sell. Smaller, more affordable homes are less likely to end up stranded in the property market. The more people who can afford to buy your home, the easier it will be to sell in future.

While some lenders will only finance properties over a minimum square footage, a Mortgage and Finance Association of Australia (MFAA) accredited finance broker has access to a broad range of lenders and loan products to make sure they can find the perfect one for a tiny home. Get in touch today to see if we can help you on your journey?

Is a family guarantee right for you?

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Entering the property market is no easy feat for a first homebuyer, but even parents who aren’t prepared to hand over cash for a deposit may help by being a guarantor on a loan. Before taking the plunge however, it’s crucial to be aware of the implications involved. Here are three questions to ask yourself to see if a family guarantee is right for you.

  1. Am I financially fit to be a guarantor?

The very first thing you should be certain of is whether or not you are in a financially capable position to pay off the loan if the borrower finds that they can no longer do so. There can be many disruptions to an income, such as loss of employment or a serious accident, and some types of guarantor loans hold the guarantor legally accountable to ensure the mortgage is paid off.

“You need to be in a strong financial position and have enough equity in your property to be a guarantor,” says a finance broker, “Some banks even want to make sure that the guarantor can service the full debt as well, so it’s always advisable to get independent legal or financial advice if you’re considering it.”

  1. Do the benefits outweigh the risks?

It’s no secret that it can take a long time to save for a deposit and by becoming a guarantor, you offer the borrower the chance to enter the property market sooner.

“Lenders may treat the loan like an 80 per cent lend, so you avoid the costly lender’s mortgage insurance,” the broker advises, “You also don’t have to save up for a full deposit for the purchase, or sometimes any deposit at all.”

However, any time you borrow money or a bank places a mortgage over your property, there are definitely things that need to be taken into account, the broker explains. “While in some instances I would recommend it, it’s definitely not a first option as there are certain factors that can put you or your property at risk. Your ability to borrow will also be reduced after using a guarantor.”

  1. Are there other ways I can help without being a guarantor?

If contributing to a deposit is an option, it allows you a little help without needing to put yourself or your property at risk, but there are some extra hoops to jump through if a deposit includes gifted funds.

“With gifted funds, if [the deposit is] less than 20 per cent of the property’s purchase price, then the banks will most likely want to see five per cent of genuine savings,” the broker explains, “Having said that, there are a few lenders that will allow you to use rent as genuine savings. So, if you’ve been renting for a while, it shows that you have the propensity to make repayments and then the reduced (less than 20 per cent) deposit may be used in that regard.”

Mortgage and Finance Association of Australia (MFAA) accredited finance brokers can provide access to tailored loan products and expert knowledge, and meet the highest educational and ethical standards. Get in touch today to see how we can help!

How to keep your loan application on track

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For the best possible chance of getting the loan that suits your circumstances, you need to tick all the boxes. If an application is not completed correctly, you risk delays in approval, or even being declined by potential lenders.

Other than the obvious documentation that needs to accompany an application, satisfactory identification and evidence of income by way of pay slips; many lenders will expect to see a reference from your employer, group certificates or tax returns, and records of any investments or shares that you might have.

If you are self-employed, you will need to organise alternative documentation to prove income, such as financial statements relating to the profit and loss of your business going back two years.

Lenders will also want to see bank statements going back a few months in order to track your spending and savings history. Most importantly, you will need to provide the details of your debts.

“I commonly see the same type of document sent back from the lenders, often due to non-disclosure,” explains Anthony Wickremasinghe, Business Development Manager at lender Liberty Financial.

You must include documents that outline HECS debt, personal loans, credit card liability and any expenses relating to dependants. If you don’t disclose this information, your loan will very likely be declined.

In order for a lender to assess your capacity to service loan repayments, every financial detail must be taken into account.

Lenders want to see proof that you are capable of managing the responsibility of the loan, through steady employment, a good credit history and a debt-free approach to your financials.

“We like to help customers that are in trouble. But if they have bad habits, we can’t really help them before we know that they can commit to us in the future,” Wickremasinghe says.

By having all of your documents organised and a saving and repayment plan documented, as well as evidence that you can commit to the plan, you will increase your chances of receiving the loan you are after, even if your credit history is not perfect.

“We do look at customers who have had hardship issues,” explains Wickremasinghe.

“If we can see that they are trying to help themselves, and going forward we are putting them into a better situation or a better product, then we will proceed with that.”

In many cases, home loan applications require professional guidance and help, we have the expertise to match a loan to a borrower and help you to ensure that your documentation is in order.