The purpose of this Borrowers Guide to Lending is to provide you with a clearer comprehension of the lending procedure.
The mortgage application process can be perplexing and daunting, but once you grasp the fundamental steps involved, you will feel more equipped to handle it.
Make sure to communicate with your Mortgage Broker! It is crucial to involve them early on in the lending process as they are here to guide you through the intricacies of this process. Your Mortgage Broker will:
1. Discuss your current situation, lending needs, and gather all the necessary information required for your lending application.
2. Elucidate the various loan options available to you from multiple banks and specialist lending institutions.
3. Utilize specialized lending software to match your lending requirements with a range of loan products offered by different lenders based on the information provided by you.
4. Provide a comprehensive overview of the applicable costs associated with your loan application.
5. Furnish a detailed explanation of the loan product(s) that you choose.
6. Serve as an intermediary between you and the lender by completing and preparing your loan application.
7. Coordinate with your solicitor, real estate agent, accountant, and other relevant parties to ensure a seamless and timely settlement.
8. Assist you in filing your progress payment claims with the lender.
9. Aid you with any future guide to lending, whether you need to review, modify, or increase your loan.
Preparation. The Keys Before The Keys
Before embarking on your search for a residential or investment property, several critical factors require careful consideration, including:
1. What are the costs involved?
2. Can I afford it?
3. How much can I borrow?
4. How much deposit do I require?
How Much Can I Borrow?
Your borrowing capacity is subject to various factors, and it is essential to involve your Mortgage Broker in the process well in advance of your home purchase. Several factors determine the amount you can borrow, such as:
a) Your Income
When discussing your income with your Mortgage Broker, it’s important to disclose all types of income you receive, including fixed remuneration, bonuses, and allowances. Some lenders may assess different types of income at different rates. For instance, if you work in essential services, your overtime may be assessed at 100% of your income, whereas it may only be assessed at 80% for other borrowers.
b) Your Financial Liabilities
Your Financial Liabilities encompass various debts, including credit cards, personal or car loans, HECS debt, After Pay and Zip Pay, and any interest-free loans you may have. It’s essential to disclose all of them, including active credit cards with no debt owing.
c) Your Living Expenses
Lenders and Mortgage Brokers must ensure that they don’t put you into a loan that causes undue hardship. They do so by reviewing your Living Expenses, which include assessing your credit card and transaction statements from the last 3-6 months to see how and where you spend your money. Working with your Mortgage Broker before you’re ready to buy a property can help you identify changes in your spending habits to present a more favourable view to the lender.
How Much Deposit Do I Require?
The amount of the deposit required can vary from 5% to 20% depending on your situation. A Mortgage Broker can help you understand the different deposit options.
Lenders typically want to see evidence of consistent savings for 3-6 months to ensure you not only have funds to complete the transaction but also have the discipline and commitment to pay your ongoing mortgage repayments.
If you have saved less than 20% of the property’s value, some lenders may allow you to borrow up to 95% of the property’s value but require you to pay Lenders Mortgage Insurance (LMI). LMI is a cost that protects the lender in case you default on the loan, and they have to sell the property at a loss. However, LMI does not protect you if you get sick or lose your job. From our guide to lending, to avoid paying LMI, you generally need to borrow less than 80% of the property’s value.
What are the Costs Involved in Buying a Property?
When purchasing a property, it’s important to consider that the total cost goes beyond just the purchase price. Here are some additional expenses that you should keep in mind from our borrowers guide to lending:
a) Bank Fees: These are charges incurred during the mortgage application process, including valuation and application fees. The amount can vary between lenders.
b) Stamp Duty: This is a government tax that is often the largest expense apart from the property purchase price. Stamp duty rates differ among states and territories, and your Mortgage Broker can assist you in calculating the exact amount.
c) Lenders Mortgage Insurance: If you have less than a 20% deposit on the property, you may be charged Lenders Mortgage Insurance. This cost varies among lenders, and your Mortgage Broker can help calculate it.
d) Government Fees: These include fees for mortgage registration, transfer, and title searches.
e) Legal Costs: A conveyancer or solicitor can review your Contract of Sale and conduct necessary checks on the property with local government agencies.
f) Property Inspection: Before purchasing a property, it’s recommended to hire professionals to inspect it for structural defects, pest infestations, and other potential issues.
g) Removalist Costs: Consider whether you will do the move yourself or hire a company.
h) Utilities: Set up of utilities may require a connection fee and up to two months of charges in advance.
Can I Afford it?
Please note, whilst it is good to review your living expenses and reduce discretionary costs, it is also important that you balance that with your lifestyle. You want to ensure that this is a budget you can stick to long term and not feel like you are sacrificing too much for the sake of buying a house. It is important to therefore factor rate increases into your calculation.
The amount you can borrow depends on several factors, which is why it’s essential to engage with your Mortgage Broker before you start looking for a property. Your borrowing capacity will depend on various factors like types of loans.
Types of Home Loans
Your Mortgage Broker can help you select the most suitable home loan option from various types available to meet your specific requirements. This borrowers guide to lending is also a good start.
1. Fixed Rate Home Loan
To put it simply, a fixed-rate home loan ensures that the interest rate stays the same for a specific period, typically between 1 to 5 years. This allows you to plan your budget accordingly and know exactly how much you need to repay each month. However, fixed rate loans are less flexible, limiting the amount you can pay off during the fixed term and often not allowing you to redraw any surplus funds or have an offset account. Additionally, if you sell your property during the fixed rate period, you may face break costs.
2. Interest Only Home Loan
On the other hand, an interest-only home loan only requires you to pay the interest accrued each month, freeing up cash for other purposes. However, you still need to repay the principal balance in the future, which will result in higher repayments than if you started paying off the principal from the beginning. This type of loan is usually associated with investment properties and requires a strategy from an accountant or financial planner.
3. Variable Rate Home Loan
A variable rate home loan, as the name suggests, means that the interest rate will fluctuate with market movements. While this offers more flexibility, allowing you to pay more if you wish to, there is no guarantee that your minimum repayment amount won’t rise or fall at any time. The advantage of a variable rate loan is that you can often have access to an offset account, redraw, or both. Additionally, there is no cost penalty if you decide to sell your property and move.
4. Split Home Loan
Finally, a split home loan combines the advantages of both fixed and variable-rate loans. This allows you to have the certainty of a fixed rate while still having the flexibility of a variable rate.
Tools To Assist You
Here are some helpful checklists from our guide to lending to make sure you have a smooth experience:
1) Document Checklist
To avoid any delays, this checklist will help you gather the necessary documents for your initial meeting with your Mortgage Broker.
2) Budget Checklist
Understanding your spending habits and financial situation is crucial. Your Mortgage Broker will discuss this with you, but this checklist can help you get started.
3) Settlement Preparation Checklist
Buying a home involves a lot of details. This checklist will assist you in making sure everything is for a hassle-free settlement day.
