There has been articles in the press lately about the possibility of mortgage brokers going out of their way to push clients into taking out bigger loans so that they get paid bigger commissions from lenders. I wanted to comment on this since, while is sounds like a good story, the practicalities of it are quite a bit more challenging and unlikely to occur.
Let me say up front - yes, mortgage brokers are paid by the lenders based on a % of the loan amount. This comes in the form of an upfront payment of around 0.6% and a trailing payment of around 0.15% per annum of the balance of the borrowings. This is a payment in return for the broker services which includes searching for the loan, talking to lenders, doing the loan application, talking to the assessors and working with conveyancers and sometimes accountants.
Now back to the theory that mortgage brokers go out of their way to jack up loan amounts.
Firstly - it is hard to do. Customers know what they want to buy, they know the buying costs, they know how much deposit they have saved. The math is pretty simple to work out how much they need to borrow. For a mortgage broker to say "Oh let's increase the borrowing amount by an extra $50,000" then they will get the customer response of "Why? I don't need any more". I don't know about you but I just can't see how you would be convinced to borrow more than you need.
Secondly - let's say the morgage broker was able to convince a client to get into debt by an extra $50,000 for no great reason, what would the broker stand to gain? They would get an extra 0.6% upfront, which in this case would be $300 and an extra $75/year in trailing commission.
Would any broker risk their credit representative status for the sake of an extra $375? I seriously doubt it and any that do don't deserve to be operating. Their licensee will be checking their loans regularly and a pattern will emerge fairly obviously if they consistently write loans where clients are borrowing more than they need.
A tip for dealing with a mortgage broker is to be on the lookout for any suggestion that you should be borrowing more than you really need. If you feel that they are overly pushy then it will pay to shop around for a new mortgage broker.
Getting the lowest rate home loan is something we all strive for when taking out a new loan. However, there are attributes of your loan requirements that determine what rates are available to you. Some things you can control and others you can't. At the end of the day, lenders will offer lower rates for lower risk loans. Let's explore some of the more common factors.
One of the biggest influences on what rate you can get is the loan-to-value ratio (LVR). Put simply, this is how much you are borrowing versus the value of the property that you are purchasing. LVRs of 60% can drive much better rates than LVR's of 95%. In essence, having more deposit (resulting in a lower LVR) means you usually get lower rates.
The purpose of the loan makes a big difference. Owner-occupier lending, where you intend to live in the property, will get much better rates than when you are borrowing as an investor.
Many lenders offer better rates for larger loan amounts. Typically loans over $750,000 will often open up improved rates. While lower loan amounts still command good rates, your ability to negotiate a lower rate improves with loan size.
Most lenders now charge more for interest-only loans so that they can limit the amount of investment lending as per APRA's requirements. Consequently, interest-only rates are typically 0.4% - 0.5% higher than principal+interest rates. Going with principal+interest will improve the rates on offer.
No-frills loans, those without features such as offset accounts, will often provide lower rates. Loans with monthly fees or larger application will also give you lower interest rares. Be careful here since the fees can add up quickly and make what looks like a great rate loan turn in to quite an expensive one.
Tier of Lender
The tier of lender can often impact rates. It is no secret that the big four tend to charge more, on average, for home loan rates since they have a lot more invested in bricks and mortar branches. Tier 2 lenders will usually offer lower rates. Being flexible on lenders can usually open up more attractive rate options.
Other factors that can improve the rates on offer include having the property located in a metropolitan area, being employed in a full time job with the same employer for more than 6 months and having genuine savings.
As you can see, it is quite complex and sometimes very confusing. A mortgage broker can help since they will compare the rates and fees of loans and will be able to assist you with finding the best product in the market based on your lending needs.
An offset account is like a regular savings account except that it is linked to your loan account and any balance in the offset account reduces your loan principal. This has the main benefit of reducing the interest you pay each month.
For example, take a home loan at a rate of 4.0% p.a. with a balance of $500,000 and you had an offset account linked to the home loan where you maintained a balance of $50,000. The $50,000 in the offset account would effectively reduce the balance by $50,000 on which the interest is calculated - saving a cool $2,000 a year in interest.
Another benefit of an offset is account is that you can withdraw funds from it at any time, giving you easy access to your savings.
The main downside to an offset account is that many lenders will charge a monthly or yearly fee to have the offset facility. However, if your savings on interest is high enough then it will pay for itself over the life of the loan.
If you have a home loan then consider putting all of your salary and savings into a linked offset account. It can save you plenty on interest and allow you to pay off your home loan much faster.
Talk to us if you would like to learn more on how to save on interest by refinancing to a home loan with an offset facility.
Buying a property can be quite an overwhelming experience, especially if you have never done it before.
Here are the steps in buying a house, unit or townhouse in QLD:
Buying a property can be quite an overwhelming experience, especially if you have never done it before.
Here are the steps in buying a house, unit or townhouse in NSW:
What we outline above is the process for buying via private treaty. It gets a little more interesting if you choose to go to auction.
An auction in NSW requires that you pay the 10% deposit on auction day and you have no cooling off period. Consequently, your checks such as building & pest and strata inspections, need to be done prior to auction day. You are also at the mercy of the lender granting full approval after you win the auction and pay the deposit - this is where it pays to have a good mortgage broker who can understand the lending practices and provide great guidance.
Be sure to share this with any friends and family that may be looking to buy in NSW.
The NSW government announced this week that they are abolishing stamp duty for first home owners for new and existing purchases up to $650,000 in value. Stamp duty has been reduced for first home purchase of values between $650,000 and $800,000.
In addition, the duty on mortgage insurance has also been abolished which could save in the order of $3,000 when borrowing up to 95% of the property value.
This is a great initiative and should help all those that are saving to get their first home in Sydney.
More details can be found on the office of state revenue web site.
There is a lot of excitement and satisfaction in constructing your own home. You get to design what you need and can create that perfect living environment.
However, if you are a first-timer at it then there can also be a bunch of hidden costs that you need to consider. Here is a list of some of the items you may not consider when budgeting for that new build.
Engineering and Planning
Choosing the right investment properties in the right locations can really make a difference to the success of your property portfolio. At the end of the day, you need to select properties that will both grow in value and attract tenants. Here are some things to look for when selecting your residential property.
The part of a property that appreciates in value is the land. The building itself depreciates over time. So try to choose a property that has a good land "value". This does not apply only to houses - it also includes townhouses and even units. Go for units with a maximum of 3 stories and you will usually get a much better land value than those units of 30 stories.
Your property will be more easily rented if you appeal to the majority of the rental market. Houses with 3 bedrooms and units with 2 bedrooms are the most sought-after properties for renters since they open themselves up to sharing. While single bedroom units will still do fine, you will usually do better with a two bedroom unit since it opens up the pool of available renters. Same applies to houses - a three bedroom house will be an attractive prospect to young families and friends sharing. Larger four or five bedroom homes tend to be more for larger families that are renting. Demographics are also changing where the average household is shrinking so smaller dwellings have a big future.
When buying a house, consider the garden maintenance. While that ornate English country garden may look nice, it will be painful and expensive to maintain. Renters don't want to spend their weekends maintaining your garden. Keep it simple - look for low maintenance gardens when purchasing a house.
Access to transport, education and employment
Access to transport, education and employment is a critical factor in choosing a great rental property. Look for properties near major transport routes - train lines, buses and motorways. Choose something that is within 15km of a CBD for easy access to employment. Look for closeness to schools and universities.
Access to shops
Similarly, access to shops, restaurants and cafes is also a popular requirement of renters. People like to be able to walk to a cafe and have a coffee, or a short drive to their local grocery shopping centre.
Population growth, infrastructure and employment
You can get a fast boost to property values if you choose a property in an area where there is a forecast of high population growth, investment in major infrastructure and a demand for housing. The states urban planning document is a very good indicator on where the government is investing in infrastructure.
Be sure to choose an area with sustainable employment though. For example, you can buy in a mining town where a new mining facility has just opened up, providing lots of employment and great rental yields, but be sure to understand the lifespan of that facility. If the town is built around that facility and the facility one day closes then you will be left out in the cold.
Important features to tenants
Tenants find the following features important, making your property much easier to let:
Bright and sunny
A recent construction
The building depreciation expense provides are great after-tax benefit, especially for high income earners. If you can find something constructed recently, less than 15 years old, then you can claim the building construction as a depreciation expense for some time and this will provide a great boost to your after-tax cash flow.
Avoid properties that are expensive to rent and will restrict your rental pool. That $3m unit on the harbour which rents for $1800/week is likely to be attractive to only high-income earning renters. There are not many of these around so you will increase your periods of rental vacancies and usually have to settle for a much lower yield.
Not the perfect property
Don't always look for the immaculate property. Seeking a property which may require some easy fixes and is priced accordingly can be a good strategy. For example, a house that is $30k below value because it has poor carpet, poor paint and dated kitchen appliances can be a good buy. Spending $8,000 to fix it up will give you an instant value and equity boost. Be cautious though, don't buy something too run-down unless you are handy with renovations.
A good rental yield
Look for something with a reasonable rental yield, around 4.3% to 5.5%. Rental yield is the yearly income you receive from the property divided by the property value. Low rental yield properties will mean you end up paying a lot more out of your pocket to cover interest expenses and, with the probability of future interest rate rises, make your ability to service the loans that much harder. Be wary of very high yielding residential properties as well (those with >9%) since they will be high yielding for a reason - there might be low prospects of capital growth or they may be in a mining town where employment may be temporary. Just be sure you go in with your eyes open.
Good prospects for capital growth
We all want our properties to grow in value. Some areas will grow faster than others. Study up on the cities or regions that you plan to buy in and be sure to look for where they are in their property cycle. Some will be at a peak where others may be at the bottom. Property investment magazines publish data on a monthly basis on property cycles. Pick one up and be sure the area you buy in has good prospects for capital growth.
Reasonable strata fees
While that new unit complex with a gym, pool and 24 hour concierge might seem impressive, it will certainly cost you in strata fees. Such fees can be upwards of $2000 per quarter. A great property is one where you get good rental yields with strata fees that are in the order of $650 per quarter. If you must go for the gym/pool/concierge, make sure that the rental returns include the premium required to cover it.
High rental demand area
Do some research on the rental demand of the area in which you are buying to ensure that the demand is there. Most property investment magazines will give you a "demand to supply ratio" score for each suburb in Australia. Also keep an eye on vacancy rates - ideally, you would be looking for low vacancy rates of less than 2% to give yourself the best chance of finding tenants quickly.