Purchasing property for the first time can all be very confusing! First home buyers usually have a lot of questions so let’s look at a few basic questions and answers regarding property, first home buyers, lenders, deposit and all that other tricky stuff!

Where do I start on my First Home purchase journey?

Check out my post on the First Home Buyer’s checklist!! Start researching the areas that interest you, the type of dwelling you’re looking for, the amount of money you’re looking to borrow. Just get stuck in and do a lot of research!! The internet is a great place to start!!

now this is my idea of a first home! friends over by the pool on a summers day!!

How much deposit do I need to purchase my first home?

It varies and is really up to you! Lenders will consider lending you 100% of the purchase price if you do not have a sufficient deposit and have adequate capacity (income) to service the debt! The larger your deposit the lower your repayments will be and the larger the equity in your home will be, and if you have 20% deposit you can avoid paying Lenders Mortgage Insurance!!

What is Lenders Mortgage Insurance (LMI)

If your ‘Loan to Value Ratio (LVR)’ is above 80% then it is mandatory to pay LMI. It is a fee to protect the Lender incase you default on your home loan. The higher the LVR, the larger the LMI fee will be!

What’s an easy way I can increase my borrowing capacity?

The best way besides earning more income (lol if only it were that easy!) is to reduce your personal debt such as a reduction in your credit card limit.

How many types of Home Loans are there and which one is best for me?

There are tons!! And it’s important to find the best one for you! If you can’t afford too many rate rises then it may pay to fix your loan. If you want to pay off your loan quickly and make extra payments then you may want a variable rate with additional features such as offset.

How much is the First Home Owner Grant?

$7000 and in NSW you are exempt from Stamp Duty for purchases up to $500,000 and a reduction in stamp Duty for purchase over $500,000. Check out my post on First Home Owners Grant (FHOG)

Are there any ways my parents can help me out?

Yes! Many lenders have products where your parents can assist by using equity in their home. Products such as Family Pledge (St George) and Fast Track (Rams) can help with First Home Buyers.

What is a Non-Bank Lender?

Non Bank Lenders such as Rams and Wizard provide alternatives to the main stream Banks such as Westpac and CBA etc.. and have been very important in increasing competition in the Mortgage Industry the last 10 years. Without Non-Bank lenders we would have much less choice and even much higher fees due to lack of competition in the marketplace. Non Bank lenders have really struggled the last 6 months due to the Global Credit Crisis as they need to borrow money to lend you money and the cost of this has dramatically increased, thus seeing the closure and/or re-structure of many of these lenders. For example, Rams is now funded by Westpac. Non Bank lenders offer the same products as the Big Banks and are very competitive with rates.

What is a non-conforming lender?

If you have bad credit or poor repayment history, or have just arrived in the country or have issues elsewhere etc. then a non-conforming lender will often look ‘outside the box’ and consider your application! Basically if your application won’t be approved anywhere else, then we may try a non-conforming lender often as a ‘last resort’.

What should I be aware of when taking out a Mortgage?

Purchasing property for most of us is a huge decision so find a broker you can trust and always watch out for loans that seem too good to be true!!

What should I ask you as my Mortgage Broker?

Ask if i’m member of the MFAA! Ask about loan types, rates, comparison rates, features, fees, any additional costs involved, the process…ask anything and i’ll do my best to support you from application to settlement!

Some of you have purchased real estate before and will be familiar with the mortgage process and the part the mortgage broker plays! While others are entering their first home purchase (FHOG) and the mortgage process will seem a little overwhelming!! The mortgage broker plays an important role as middle man between the client (you) and the lender. Each client could go directly to the lender, however the mortgage broker represents many lenders and is authorized to sell loan products on their behalf. This saves the client a whole lot of time and takes much of the work out of the process for the client, thus making the client’s goal whether it be a purchase or a refinance a whole lot easier!!

When you approach me to be your broker, this is the general process that will occur!!

The Initial Contact Stage

Thinking about a pre-approval?? Or maybe you’ve already found your property?? Great!! Let me know and we can focus on applying for a loan that best suits your needs, whether by phone, in person or via email. During the initial contact, i’ll gather some brief info and let you know what documents will be required for the application and we’ll then make an appointment for an interview either at your residence or somewhere convenient. Interviews can be a little intimadating, however i’m a fairly young laid back guy…so nothing to worry about there!!

with me as your Broker, your mortgage is in great hands!!

At the Interview

We’ll discuss more detailed information on your financial situation and determine your financial needs and goals! Basically trying to figure out what you’re looking to do and how much to borrow!! We’ll estimate the loan costs which we’ll also go over and any of your concerns can also be addressed. I’ll do a general serviceability worksheet to work out how much you can comfortably afford to borrow!

What comes next??

At this stage we can either get an application and Privacy Act completed in the initial interview, but depending on your situation I may need to take all the information away and look at a number of products that may be best suitable and then present these to you at a second meeting…depending on situation and urgency!! Matching your needs to the most suitable loan product can often take a little time!

So I will then present the best loan options to you (either at the initial meeting or at a second meeting) including comparison rates and we can go over any concerns you may have!

Verification of Information

I’ll also verify all the information required for the loan application. For example, copying of payslips, payment summaries, income tax assessments, Contract of Sale, rates notices and identification for 100 Point ID Check that were provided at the initial interview.

The Loan Application

We will complete a loan application together at either the initial or second meeting and then I submit this to the lender for approval! The lender also has stages in which the application will go through, they will contact me at each stage who in turn contact you as the application moves along. Stages that the lender has are pre-approval, conditional approval, and unconditioanl (full) approval, or more information required (where they can’t make a decision based on everything submitted). For eg, conditional approval is often subject to additonal info required by the lender and/or a valuation.

The lender then makes a decision and advises me:

If the loan application is declined, I will explain the reasons that the lender has told me and may try to re-submit the application with another lender!

If the loan application is approved, I will ensure that the lenders Loan Offer and other documents are received by you!

Progressing to Settlement

You will have been liaising with your solicitor throughout the process and will arrange meeting with them to discuss a full explanation of the documents etc. The solicitor will then arrange settlement with the lender’s settlement department.

Commissions

As previously stated, there is NO cost for you to use me as your Mortgage Broker. The lender pays me a commission once the loan settles!!

The First Home Owner market is huge and Banks are more than willing to accommodate all types of First Home Buyers! And guess what? You don’t even need a deposit these days to get into the real estate market! This post covers important basic mortgage terminology that you will learn about while purchasing your first home and the criteria that Banks look at when assessing an application for a First Home Buyer with limited deposit and/or limited employment history. Nowadays you don’t need to save for 5 or 10 years just for a deposit to gain entry into the property market!! Do your research, find out how much you can borrow, and take the first step into property ownership!!

take the first step towards owning your first property!!

Deposit

You really don’t need a deposit to purchase property as Banks will lend you 100% of the purchase price (if you meet the Lender’s criteria as discussed below) and the Govt offers you a First Home Owners Grant (FHOG) for the fees and legals. But having a deposit will save you money on both fees and repayments and the larger the deposit the greater the saving!! Your deposit can fall into one of two categories and this will affect the Lenders Mortgage Insurance Premium (LMI) which is further explained below:
1) Genuine savings: these are savings you have saved for at least a 6 month period and can be evidenced via bank account statements. Other forms of genuine savings include shares or investments but must be held in your name for at least 6 months and evidence provided.
2) Non-genuine savings: if you do not have savings it does not mean you cannot buy your first property. Banks can lend up to 100% LVR (Loan to Value Ratio). Or, you can use gifted funds from family members to lower your LVR and thus reduce your LMI premium. However the LMI premium on non-genuine savings is higher than that for having genuine savings. Gifted funds or funds from another source are known as non-genuine savings.

Loan to Value Ratio (LVR)

LVR is a term used by every institution and basically explains what percentage of your property is secured by the loan amount. The greater your deposit in either the form of genuine or non-genuine savings, the lower your LVR will be which is a good thing as this means you have more equity in your property! And the lower the LVR, the lower your Lenders Mortgage Insurance (LMI) fee will be!

To find out your LVR you divide your loan amount by the security value x 100
Let’s look at a simple example:
Purchase price: $200,000
Savings for deposit: $20,000
Therefore loan amount must be $180,000
LVR = loan/security x 100 = 90%

If you have savings of $40,000 your LVR will be 80% ($160k/$200k = 80%)

Now, there’s a big difference between having 80% and 90% LVR. Firstly, you have a lower loan balance and will therefore have lower repayments. Secondly, at 80% you do not get charged Lenders Mortgage Insurance!! (LMI)

Lenders Mortgage Insurance (LMI)

If your LVR is over 80% you’ll get slugged with LMI which is a fee charged by every institution as with the increase in LVR becomes a higher risk associated to the Bank for your loan if things were to go bad! LMI is a fee charged to protect the Bank, not the applicant! In most cases for First Home Buyers it can’t be avoided, I certainly had to pay it…it’s just one of those things! However, like many fees, it can be capitalized on top of your loan amount so you gradually pay it off along with your loan balance.
LMI is roughly 2% of your loan amount. It differs but allow for 2% is the general rule! LMI will also be more for those with no-genuine savings than for those with genuine savings.

Employment for First Home Buyers

Most Bank policies are similar when it comes to criteria for First Home Buyers or non-genuine savings applications with LVR over 95%. The policy is usually 12 months in your current job but there is flexibility when it comes to a stable job history over the last 2 years! Meaning, if you have changed jobs within the last 12 months, then your previous job history must be in the same industry going back at least 18 months. Evidence of this will need to be provided.
At 95% LVR or below, having 6 months in your current position is enough to satisfy Bank criteria and a payslip is enough to evidence this!

Serviceability

Banks use their own assessment rates to give them comfort with servicing criteria and to make sure if there are any rates increases that the applicant has adequate income to service the loan at a higher rate. Wow, it even sounds like they care right?? Well actually, afterall, if a loan goes into arrears and the applicant is forced to sell, the Bank doesn’t make anything on that loan! Ok so for servicing on a non-genuine savings product, the minimum servicability level is usually a little higher than that of a standard product.

Always remember…

Banks may very well approve you at 100% LVR but always always leave room for additional spending and worst case scenario if something were to happen to your income!! Don’t borrow so much that you have very little left over as rates can rise and the last thing you want to happen is to be a slave to your mortgage. Purchase property within your price range and use the First Home Owners checklist. Owning property should be an enjoyable first step to wealth creation!!

Are you purchasing or looking at refinancing and thinking about a fixed rate mortgage? Interest Rates are the highest they’ve been in years and we’ve had several rate rises in the last 8 months!! You can watch the news, read the papers, or see your financial advisor but the reality is that nobody really knows what is going to happen in the short term. Whatever you hear is just somebody else’s opinion!! So when will it end and is it the right time to consider fixing your loan??

always make sure you can make additional repayments with your loan product

It is nerve-wracking with continual rate increases!!

However, fixing your interest rate now could cost you more in the long term! Interest rates move in cycles and fixing at the wrong period in the cycle can see you paying more than if you had left it as variable. You see, fixing your loan for 2, 3, or 5 years is a long time and a lot can happen in that time! The common question you always hear is “Has the horse already bolted?” and when it comes to fixing your loan you would have to say YES it has!! Realistically fixing your loan a year or two ago would have been the answer but hindsight is a wonderful thing!! So fixing now at a high rate will cost you if and when rates begin to stabilize and even decrease again.

Banks love you fixing your loan do you want to know why??

In general, fixed rates already have several rate rises built into them. You are paying for stability or less risk!! You are already paying a higher interest rate and secondly there is no flexibility with making extra payments. Banks make their money by keeping you on the books as long as they can and would rather you pay the highest interest rate possible and you are doing this with a fixed rate with no flexibilty to further reduce your balance!! Not to mention the fees they will charge if you wish to change lender! Who wants to be locked into a rate at the peak without having the ability to make additional payments??

A combination of both fixed and variable is a good solution

In recent times of unstability, you may be 100% correct in fixing your whole loan or you may be 100% wrong if rates begin to fall. Why not have a combination of both and at least be 50% right?? A lot of products let you fix a portion of your loan amount while the rest can remain as variable. The advantage of this is you can make additional payments to the variable portion as you need to, while you also have the stability of your fixed portion!

Be smart and don’t panic!!

As I’ve stated in previous posts, I believe in reducing your mortgage as soon as you can, and you can still do this with a combination of both fixed and variable rates. With only a fixed rate, you cannot make additional payments and if rates do level off or fall you are stuck paying a higher rate!! Reducing your risk is the goal and in volatile times it may pay to spread the risk by splitting your loan into both fixed and variable rates!

In times of increasing Interest Rates and with no clear stability on the horizon, a lot of people are looking at ways they can tidy up their debts, and consolidating them into their home loan is a very popular way of doing this, but beware as this can lead to greater debt and if refinanced into the wrong loan product can often end up costing you more!

make good decisions when it comes to debt consolidation!

Look Closely at your Current Situation!

It’s a stressful time at the moment and nobody really knows for certain what will happen in the short term with regards to interest rates! It’s a time where we need to tighten the strings and prepare for worst case scenario! I’ve been looking over my finances and looking for ways to cut costs and everybody needs to keep abreast of how they can do the same and consolidation can be a good way to ease some of the pressure…but with caution!! The problem with consolidating debt into a home loan is that often that personal debt ie. credit cards, personal loans etc.. rear their ugly heads again once the consolidation is completed!!

Debt Consolidation Adds to your Home Loan Balance

Someone who wants an extra $20k to pay out their credit card, increases their home loan by $20k to do this, but the question is “does this person actually then cut up and cancel their credit card after settlement?” If not, then they have just increased their overall debt by $20k without saving themselves anything! My previous job as a Lending Manager I oversaw hundreds of applications for refinancing & debt consolidation, sure there are settlement conditions for these debts to be repaid but with debt consolidation it’s usually up to the individual applicants to do this. The Banks won’t actually control the funding and will just treat it as an equity release. It is essential that if you are considering eating into equity in your property that you don’t get a new credit card after settlement and fall into the same habits!

Debt Consolidation Reduces your Equity!

95% of the time I found that a refinance also had a debt consolidation associated with it, and if spending habits don’t change after refinancing and more personal debt incurred then the home loan can balloon out of control! In the above example, $20k has been added to the home loan, which has effectively reduced the equity in the property! And then what happens if the home value decreases?

Consider all the Options!

Debt consolidation can be an effective way to tidy up debts, but only if refinanced into a lower interest rate and spending habits become more disciplined! As I’ve stated before in previous posts, I believe it’s best to pay off your mortgage the fastest way possible, and by consolidating you are adding to your home loan…so there are both pros and cons when it comes to debt consolidation!!

Ever heard the saying, “if it sounds too good to be true it usually is” and “there’s no such thing as a free lunch”? Well that’s the point of this post, yes there are some good loan products out there that offer extra incentives but you must be cautious and do your research when it comes to these types of home loans, they sound like a fantastic offer that are hard to pass up…however let’s look a little more closely!

It’s a very Competitive Loan Market

Some lenders, mostly the lessor known smaller lenders sometimes try to entice customers by offering such incentives as free holidays, airpoints, or discounts on fuel. These offers sound great because who doesn’t want a free holiday by taking out a home loan?? However, most often these loan incentives come at the cost of higher interest or fees…or both! Caution must be exercised and all the fine print read!

all that glitters is not gold!

Let’s look at two examples

Ok let’s take for example a loan amount of $300k and take two different interest rates at 8.2% and 8.5% over a 30 year term. The 8.5% rate also offers enough airpoints for a free holiday to the Pacific Islands. OK so a trip to the Islands sounds great!! But let’s look at the at big picture here.

$300k at 8.5% over 30 years, P & I,this will cost you $530k total
$300k at 8.2% over 30 years, P & I, this will cost you $507k total

Now, how is that trip to the islands looking??? Do you think it’s really worth $23k??? This is an easy, obvious example, and yes it’s over the long term of 30 years but it illustrates one of the traps out there!!

When it comes to a Loan Product, let’s keep it simple!

I like to keep everything as simple as possible, whether it comes to health & fitness, or mortgages. Try to consider rate and features and forget about the freebies and extras that sound too good to be true! The comparison rate which Lenders now must disclose to the public is a great way to start. The comparison rate shows the total cost of the loan which includes ongoing fees, interest costs, and up-front charges over the life of a loan. What’s funny is that a cheaper interest rate product will often have a higher comparison rate which means it may not be so cheap after all!!

Start with interest rate, then look at the comparison rate, then loan features (I will talk about this further in another post). Consult your broker (me!!) if you have questions on a loan product before committing!!

There are a lot of fees involved in the Mortgage Process! Remember, the banks are out to make a profit and will milk you for money as much as they can over the life of a loan! How else do they make their billions of dollars ever year?!! Here is a short list of most of the fees you will encounter when establishing a mortgage.

Establishment

Establishment fees are charged by lenders to pay for the expenses of setting up a loan, such as valuations, legal fees etc. For most lenders the fee will be around $600 but this will vary between lenders and some may not charge one. Establishment fees can also be capitalized to the loan amount meaning they are not paid upfront by the applicant.

Administration Fees – monthly

Again depending on the lender and the loan type chosen, admin fees are usually around $8-$12 per month.

Stamp Duty

On land:

Whenever land is purchased in Australia, Stamp Duty is applicable and is a fee paid to the government. The amount varies between states and is based on the market value of the property or purchase price (whichever is greater). This usually gets paid by your solicitor/conveyancer on your behalf.

On mortgage documents:

Yes we also pay Stamp Duty on mortgage documents and is usually paid on your behalf by the lender. The amount varies from state to state and this fee can also be capitalized onto the loan amount.

Lenders Mortgage Insurance (LMI)

Insurance taken out by the lender to cover themselves in the event that the borrower defaults on their loan and the sale of the property in unable to cover the outstanding balance.
If you borrow greater than 80% of your security value (Lending Value Ratio 80%) then you will be liable to pay for LMI. Non-conforming institutions mortgage insurer every loan however is only payable over 80% LVR or depending on product chosen.
LMI protects the lender, not the borrower but is charged by every institution.

Legal (Conveyancing)

Always recommended and charges vary from state and in accordance to the conveyancer used. Your conveyancer will perform several checks including any building or strata title reports and a certificate of title check. Their fee will show a breakdown of all the individual items they have done in preparation for your mortgage.

Land Transfer

Land Transfer occurs every time property changes hands. A document known as a Land Transfer is lodged and registered with the Titles Office.
The cost varies from each state and your conveyancer will handle this fee on your behalf.

Registration of Mortgage Documents

A government charge to register the mortgage document. Usually paid on your behalf by the lender.

Ok so this post isn’t going to be too entertaining but it’s important to get the basics listed so they can be referenced at any time. Let’s start with a brief description of the generic Mortgage Products that all the institutions offer.

Standard Variable Rate

Probably the most popular type of home loan in Australia. Being variable, the interest varies up and down throughout the life of the loan.

Basic Variable Rate

A lot of lenders offer the Basic Variable with a lower interest rate compared to the standard variable but with fewer features. Again, the interest rate varies up and down throughout the life of the loan.

Fixed Rate

Interest rate and loan repayments are fixed for a set period, between one and 5 years. Most fixed loans automatically convert into a variable loan at the end of the fixed rate period. Additional repayments cannot be made with a Fixed Rate loan.

100% Offset

A little tricky to understand Offset loans have a savings account linked to the mortgage loan. The purpose of savings account is so that the balance of funds in the savings account is 100% offset against the interest being charged to the loan account. So, instead of interesting being charged on the balance of the home loan, it gets charged on the balance minus the funds in the savings account.

All-in-one

Works a lot like the 100% Offset but instead of having a savings account in conjunction with the loan account, any income and additional savings go straight into the loan account therefore interest is being charged daily on the lower balance. Funds required for everyday use can then be withdrawn from the loan account as needed.

Low Doc

For those that are self-employed and don’t have time to provide two years of financials (most banks require 2 years), applicants can provide a signed declaration of their income and servicing is based on this. There are usually LVR restrictions with these products
Line of Credit
Almost like a large credit card facility secured over your residential security. Applicants can then draw down to a set credit limit as required. Lines of Credit are popular with investors and are usually interest only. If you’re not a good money manager then a Line of Credit is not for you!

Other Loan Types & Terminology:

Non-conforming Mortgages

For those applicants that may have adverse credit issues eg. Defaults, judgments etc. or past repayment issues eg. Dishonours or reversals on their home loan, short-term employment, savings from an unusual source or other unique criteria, then there are lenders who specialize in this department and are called non-confirming lenders.

Combination home loans

Simply having a combination of both a variable and a fixed portion. Eg. Having 2 separate loans splits secured against your security