If you are planning to apply for a home loan then consider these tips for getting your finances "match fit" and ready for the application. This will help you get access to a wider choice of lenders and be in a better position to borrow what you need at the lowest possible rate.
Cutting down on discretionary expenses
Lenders are looking closely at your actual expenses, to the point where credit card and bank account statements are being scrutinised. Consider cutting back on services that are nice-to-haves - such as streaming subscriptions, game subscriptions and food delivery. Every little bit helps by reducing your "expense" declaration and allowing you to potentially borrow more.
Getting your deposit in order
Lenders like seeing clearly where your deposit sits and how long it has been in the "saving" mode. What they question is when a deposit is made up of a whole lot of big transactions from external accounts at the last minute. This is especially the case for high loan-to-value ratio loans.
Having your deposit split over multiple accounts and in different places can cause a bit of a headache.
So if you know you when you roughly expect to purchase a property then get your deposit sorted at least 4 months prior. Get it all into one savings account and show that you have topped up your deposit over several months through extra savings.
Reducing credit card limits
A common misconception is that the lenders care only about the balance of your credit cards. People often say "I pay off my card in full each month" and expect the lender to assume $0 debt.
Unfortunately, lenders these days assume the worst and calculate the debt assuming you max your cards out the limit. They assume you will pay 3% of the limit value of your cards each month, regardless of the current balance. This can have an impact on your ability to borrow.
Reduce the limit of your cards to a usable limit before you apply for a home loan. Consider closing down any cards that you don't use.
Stop applying for credit
If you have a habit of shopping around for credit card "new customer offers" then now is the time to park it. Regularly changing credit card providers will put extra entries on your credit file and reduce your credit score. If you know you have a home loan application coming up then cease applying for other forms of credit so that you can boost your credit score and reduce questions from lenders on your credit history activity.
Keep your employment stable
Lenders like to see continuity of employment. Many are not willing to lend to those that have just started a new job and are still in a probation period.
So if you are looking to get a home loan then don't throw in your job with your current employer. Avoid contract roles where possible and stick with full time, PAYG employment if you can.
If you earn commissions, then the lenders will be looking to see at least 6 months of commission earnings before they will consider including your commission component.
Save as much deposit as possible
Having a bigger deposit will potentially saving you from higher lenders mortgage insurance (LMI) premiums where your loan-to-value ratio is over 80%. Having a bigger deposit could also give you access to better interest rates and may get you a loan where you otherwise may be unable. Lenders will often offer discounted rates for loans that are under 70% loan-to-value ratios.
Not all home loans are made equal. Some have no ongoing fees, some have big upfront fees and others have ongoing monthly fees. This has quite an effect on the actual amount of interest you will pay over the life of the loan. How do you go about making an apples for apples comparison when looking for a new home loan?
Enter Comparison Rates. The government mandates that whenever an interest rate is advertised then it needs to be accompanies by a comparison rate. The comparison rate is the effective rate you receive on the loan by taking the fees and charges into account. The comparison rate is typically based on a loan size of $150,000 and a loan term of 25 years. This provides you with a way to compare home loan offers.
While comparison rates are a good start to helping you compare rates, they have some flaws:
So how are you expected to make an accurate comparison? It is tough. You either need a fairly good background in mathematics or you need the help of a mortgage broker. The good news is that our systems calculate a true rate for you when comparing loans - it will take into account the rates, fees, term and actual amount borrowed.
Contact us if you need help with comparing rates and navigating the home loan minefield.
You are looking to buy your first home or apartment in Sydney or NSW. What is the absolute minimum deposit required?
In order to have the minimum deposit we need to borrow up to 95% of the value of the property. This requires the payment of a lenders mortgage insurance (LMI) premium. This premium gets worked into the loan and is paid off over the life of the loan.
A minimum deposit will then vary on the purchase price. Here are some examples of what different deposits in NSW can get you:
Note that these figures are for owner-occupier lending and it is assumed that the buyer qualifies for the NSW government stamp duty concessions for first home buyers.
Investment lending is a little more complicated since lenders have varying policies on how much they will lend. Most will only lend to 80% loan-to-value ratios.
Do you have a deposit saved? Contact us to get started with a pre-approval.
APRA recently announced its intention to have lenders remove the 7.25% floor they use for servicing calculations. In a letter to the lenders, APRA state that they plan to remove the servicing floor and allowing lenders to assess on actual repayments plus a buffer, which will allow many people to borrow more. This will loosen the the tightening credit situation in Australia.
What does it really mean?
If you have recently been knocked back on a loan because you were unable to service the loan amount then there is a chance that you will be able to qualify for a loan once this comes into effect. Loans are currently assessed at around 7.25%, meaning that the lender will assess your ability to repay the loan should rates go up to 7.25%. This will be moving to the actual rate +2.5%, so if your home loan rate is around 3.6% then the new assessment rate will be approximately 6.1%. The new assessment rates will have a big impact on borrowing capacity.
Update Aug-2019: This is now in place with lenders.
One thing to note is that it won't help you with your deposit. If you were unable to get a loan because of a lack of deposit then, unfortunately, you need to keep saving.
Contact us and let's see what might be possible under the new system.
Most Australian lenders offer both variable and fixed rate home loans. Depending on the current economic climate, fixed rates can seem very attractive. Before you rush in to fixed rates, beware the downsides of such loan types.
A fixed rate loan is one that is offered at a fixed rate for a fixed term. For example, you can usually get terms of 1, 2, 3, 5 and 7 years. During this period, you pay the agreed rate, regardless of what happens to variable rates.
People will consider a fixed rate when there is a high likelihood of a rate rise in the future or where they expect they may be challenged to repay if rates should increase. For example, couples that are thinking of starting a family in the future may want to lock in some fixed rates so they have certainty around repayments and can plan accordingly.
However, there are several downsides of a fixed rate loan:
You can alleviate most of these by having split loans where you have a portion as a fixed rate and a portion as a variable rate loan.
At the end of the day, be sure to talk to your mortgage broker about the advantages and disadvantages of fixed rate loans and the mechanisms that can be used to get you the best of both worlds.
Contact Us if you have any questions on whether a fixed rate is right for you.
Australian lenders vary considerably in their rates, the loan products they offer, their turnaround times and many other factors. Let’s take a moment to explore the different lenders out there.
The Big Four
Commonwealth Bank, Westpac, ANZ and NAB. They form the four pillars of the Australian banking industry. The are the safest of all the lenders. They also own some tier 2 banks such as Bankwest, St George, Bank of Melbourne. They have massive bricks and mortar presence – which comes at a high operating cost. The high operating cost generally means that the home loan rates they offer tend to be higher than the other banks. They will usually have the broadest selection of loan products. They can also be the strictest on who they will lend to and are often the slowest to approve loans.
Tier 2 banks
They are the smaller banks and credit unions such as Suncorp, me bank, ING, Bank of Sydney, Bank Australia. Like the big four, they are classified as Authorised Deposit-taking Institutions (ADI’s) so they have degree of protection from the Australian government and must comply with the lending restrictions from APRA. They have fewer bank branches than the big four, meaning lower costs, and can often provide better lending rates for home loans. They are sometimes fast at approving loans (although several are rather slow).
Non-bank lenders are those that are not classified as an ADI. They don’t call themselves a “Bank”. Examples are Resimac, ASCF. They often get their funding through private equity – where institutions will invest funds in them and expect a return from these funds. They usually don’t have any bank branches and rely heavily on the mortgage broker community to source their borrowers. Consequently, they can usually offer extremely low and competitive rates. They are usually quite fast at approving loans. This is the fastest growing lender group in Australia.
Specialist lenders are those that target clients they are unable to get loans from the banks. They specifically have loan packages for those that may have some black marks against their credit file, may have had a bankruptcy some years back or those that have recently started their own business. Their rates will be higher since they are taking on more risk.
Who do we recommend? It entirely depends on your situation. Some customers may be buying with a cooling off period so a fast turnaround is critical, others will be looking for product features such as offset accounts, some may want to stick with a certain group of lenders, some may need special treatment of their income since they may earn commissions or be self-employed, while others just want the lowest possible rate.
It is also why having a mortgage broker is such a valuable aide to your financing needs. We have access to over 35 Australian lenders. Contact us to get started.
Most sales professionals earn commission income. However, when applying for a home loan the commission income component does not get treated the same way as the base income and lenders vary in the way they will assess commission income.
Most lenders will “shade” commission income – usually taking only 80% of the value of it when assessing your ability to repay a loan. As an example, if you earn a base salary of $100,000 and commission income of $100,000 then the lender will use 100% of your base salary but only 80% of your commission income. In this case, despite you earning $200,000 in a year, the lender will only use $180,000 of it to assess your income.
The next challenge is how lenders will calculate your annual commission income. Some will take the lesser of the past two years as shown on your PAYG summaries while some will take the average of the two years. Others may only look at your current year earnings. If your commission income varies significantly from year to year then lenders may apply their own ad-hoc rules to your income.
The upshot of this is that it is a real minefield out there for those of you who are earning commission income, especially if you are trying to borrow close to your servicing limit.
Your mortgage broker will know the policies of the lenders and can help you find the right loan for your situation. For tricky cases, we can even ask lenders to pre-assess the commission income before making a formal loan application. This will give you assurance that your sales commission income won’t be a reason for your application being declined.
Several Australian lenders offer the ability for immediate family members to use the equity in their own home to help other family members get in to the property market without needing a deposit.
It comes with conditions and some potential traps for the unwary.
How does it work? Let’s say your parents or your partner’s parents have a home that they own outright. For this example, we will assume that he home has a value of $500,000. They can offer to be a guarantor on the purchase of your first property. They can offer up to 80% of the value of their property, in this case 80% is $400,000, in lieu of you needing savings for a deposit. They can also cover the stamp duty costs. This allows you to borrow 100% of the purchase price plus anything needed for stamp duty.
It is a nice way to give adult children a leg up into the property market. However, it does come with a few conditions and things to be wary of:
Talk to us if you would like help with a loan featuring a family guarantee.
Not all deposits are equal in the eyes of Australian lenders.
If you are borrowing over 90% of the value of the property then the lender will be looking for evidence of 5% "genuine savings" in your deposit. This is required to satisfy the mortgage insurers.
Genuine savings is commonly evidenced by providing the last 3 months of your savings account statements showing that you have held at least 5% of the purchase price as savings. The lender will be looking to see that the savings have grown over this time and no big external deposits have been used to prop the savings up. Alternatively, you can use a term deposit or shares that have been held for more than 3 months or a combination of all of these.
If you don't have genuine savings then some lenders may look at the rent you have paid over the past three months and use that in lieu of genuine savings.
In any case - the key to genuine savings is planning in advance. If you know you need to satisfy the genuine savings requirement and you plan to apply for a loan in 3-4 months then get your savings in order as soon as possible. Show that you have held the minimum 5% over this time and try to keep it all in one savings account to make it easier for the lender to assess.
Contact us to get help with understanding where you sit with genuine savings.
The federal government recently announced a new scheme to help first home owners save a deposit to purchase their first property.
EFFECTIVE 1 JULY 2017 - Subject to legislation passing
Individuals will be able to make voluntary superannuation contributions in excess of super guarantee of up to $15,000 per year up to a total of $30,000 to purchase their first home. These voluntary contributions, which will be taxed at 15%, along with deemed earnings, can be withdrawn for a deposit on a person’s first home. Withdrawals will be taxed at marginal tax rates less a 30% tax offset and will be allowed from 1 July 2018.
First home savers will be able to salary sacrifice an amount from their pre-tax income directly into super. Individuals who are self-employed or whose employers do not offer salary sacrifice will be able to claim a tax deduction on personal contributions. However, any pre-tax contributions made under these rules must be within the concessional cap.
First home savers will also be able to make non-concessional (post-tax) contributions under this scheme. However, these contributions will not be taxed when they are withdrawn.
The amount of deemed earnings that can be released under these rules will be calculated based on the 90 day Bank Bill rate plus 3% - currently equivalent to a deemed rate of return of 4.77%. This is the actual amount of additional earnings that you will be able to release - so if you invest in a growth portfolio and make 10% earnings then you will be only permitted to release 4.77% of the earnings.
The Government has confirmed that the ATO will have the primary responsibility for administering the scheme, including:
The Government has also confirmed that while the concessional part of a release amount will be included in a person's taxable income, it will not flow through to other income tests used for other purposes, such as for calculation of HECS/HELP repayments, family tax benefit or child care benefit.
Contact us if you would like help with understanding if this strategy is right for you or if you need help with understanding how much deposit you need to purchase your first property.