Your Guide to Lending

Reduce Home Loans

This Borrowers Guide to Lending has been designed to assist you gain a better understanding of how the lending process works. The mortgage process can be confusing and overwhelming at times, but when you understand the basic process, you will be much more prepared.

Talk to your Mortgage Broker!

Your Mortgage Broker is here to assist you navigate this complicated process so it is important to engage them early in the process.

Your Mortgage Broker will:

Discuss your existing situation, your lending needs, requirements and obtain all necessary information pertaining to your lending application.

Explain the types of loans available to you from a range of banks and specialist lending institutions.

Based on the information provided by you and utilising specialist lending software, match your lending requirements to a selection of loan products offered by a diverse range of lenders.

Provide an overview of the relevant costs associated with your loan application.

Provide an in-depth overview of the loan product or products you select.

Act as an intermediary between you and the lender by completing and packaging your loan application.

Liaise with your solicitor, real estate agent, accountant and any other related party to ensure a smooth and timely settlement.

Assist you in lodging your progress payment claims with the lender.

Assist with any future lending requirements, whether you wish to check, change or top-up your loan.

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Before you start looking for a home or investment property, there are several key details to consider such as:

Your income

This includes your fixed remuneration and any bonuses or allowances you receive. It is important when discussing your income with your Mortgage Broker that you disclose the types of income as some lenders may assess different types of income at different rates. As an example, your overtime might only be assessed at 80% of your income, but if you were in essential services it may be assessed at 100%.

Your Financial Liabilities

This includes things such as credit cards, personal or car loan and HECS debt. It also includes After Pay and Zip Pay and any interest free loans you may have. Credit cards with no debt owing but still active also need to be disclosed.

Your Living Expenses

Mortgage Brokers and lenders have an obligation to ensure they are not putting you into a loan that would cause you undue hardship. A key factor in assessing this is reviewing your living expenses. This is normally done by assessing your last 3-6 months transaction and credit card statements to assess how and where you spend your money. One of the key benefits of working with your Mortgage Broker before you are ready to buy a property is that they can help you identify any changes in your spending habits that you could make to provide a more favourable view to the lender.

There are many options available in relation to how much you will need to come up with as a deposit.
Depending on your situation it could vary from 5%-20%. Sitting down with your trusted Mortgage Broker will ensure you know which options are available to you.

Most lenders will want to see evidence of consistent savings over a period of 3-6 months. This is to not only show that you have the funds to complete the transaction, but that you also have the discipline and commitment to pay your ongoing mortgage repayments once you settle your loan.

The amount of the deposit can be varied, some lenders will allow you to borrow up to 95% of the value of the property requiring you to only have 5% of the value of the property saved. This will require you to pay Lenders Mortgage Insurance (LMI). LMI is a cost which you, the borrower, pay at the settlement of your loan that protects the bank in case you default on the loan and they must sell the property at a loss. It is important to understand that LMI does not protect you if you get sick or lose your job. To avoid paying LMI you generally need to borrow less than 80% of the value of the property.

The cost involved in purchasing a property is more than just the purchase price and can include such things as:

Bank Fees

This includes any application or valuation charges and can vary between lenders.

Stamp duty

This is a government cost that is usually the biggest expense outside the purchase
price of the property. Stamp duty varies between the states and territory. Your Mortgage Broker can assist you in calculating this amount.

Lenders Mortgage insurance

Insurance
This is a cost to you, the borrower, that is generally charged by the bank if you have less than a 20% deposit on the property. It can vary between lenders and your Mortgage Broker can assist you in calculating this amount.

Government fees

These include things such as mortgage registration, transfer fees and title searches.
Legal Costs Either a conveyancer or solicitor will review your Contract of Sale and ensure appropriate checks are conducted on the property with local government agencies.

Property Checks

It is always recommended that prior to purchasing a property, you hire professionals to inspect the property for structural defects, concerns, pest infestations, anything that could potentially cause damage to your property.

Removalist Costs

Will you do this yourself or hire a company?

Utilities

Set up of utilities which may include a connection fee and up to 2 months of charges as they may charge in advance.

The amount you can borrow will depend on several factors and is another reason why it
is important to engage your Mortgage Broker in the process BEFORE you are wanting to buy a house. Your borrowing capacity will depend on several factors including:

Fixed Rate Home Loan

A fixed rate simply means that the interest
rate is guaranteed for a certain amount of time
– commonly between 1 year to 5 years.
The benefits of a fixed rate loan are that you
know what your repayments will be over a specific
time frame and you can budget accordingly. The
interest rate is not going to go up (or down)
over that period.
The disadvantage however is that fixed rates loans
are not very flexible. There will be a limit to the
amount extra you can pay off over the fixed term
and fixed rate loans rarely allow you to redraw
any surplus funds or have an offset account. The
other thing to be aware of is that if you have to
sell the property during the fixed rate period, you
may incur break costs which could run into the
1000’s of dollars

Interest Only Home Loan

An interest only loan is where the borrower only
has to pay the interest accrued each month on
the loan, rather than paying down the principle
balance. Usually it is associated with investment
properties in line with a strategy from the
accountant or financial planner.
The benefits are that the repayment is reduced,
thus freeing up cash for other purposes however,
the principle will still need to be repaid and once
the interest only period is over you will be paying
off the principle at higher repayments than you
would if you started paying the principle off from
the beginning.

Variable Rate Home Loan

A variable rate means that the interest rate will rise
and fall with the market over the period of your
home loan. This can be in line with movements
in the official cash rate by the Reserve Bank or it
may be a decision by your financial institution to
vary their rates.
The main advantage of a variable rate loan is
flexibility. While you must meet your minimum
monthly repayment, you can usually pay more if
you want to. There is also no cost penalty if you
decide to sell your property and move. You also
generally can have access to an offset account,
redraw or both.
The main disadvantage of a variable rate loan is
that your minimum repayment amount may rise
or fall at any time in line with either the Reserve
Bank or a business decision by your financial
institution. This can make it hard to plan especially
for those on a tight budget.

Split Home Loan

A split loan offers the best of both, offering
the certainty of a fixed rate and the flexibility
of a variable rate.

To ensure you have the best experience possible, we have provided a few handy checklists:

Required Documents Checklist

This will allow you to prepare for your first meeting with your Mortgage Broker and ensure you have the right documents ready, to avoid delay.

Budget

It is important to understand what you spend and what you can afford. Your Mortgage Broker will review this with you, but this document will help get you started.