Frequently Asked Questions
- What is a finance broker?
- Why do lenders use finance brokers?
- Are you accredited with any industry regulated bodies?
- Does Loans Australia charge me a fee for service?
- How does Loans Australia get paid for their service and how much?
- Does Loans Australia ensure my confidentiality?
- What can I borrow money for?
- What is my maximum borrowing capacity?
- What is mortgage insurance? When do I have to pay?
- Where can I get mortgage insurance?
- What can I purchase?
- What is meant by the term "genuine savings"?
- How much deposit do I need?
- Can I pay out my home loan early?
- How is interest calculated?
- What is a comparison rate?
- Can I switch between variable and fixed interest rates?
- What happens at the end of a fixed rate term?
- Why would I take out an interest only loan?
- How much is the First Homeowners Grant?
- What is a redraw facility?
- What is a 100% Offset loan?
- Can I get a home loan if I have a bad credit history?
- Is there a home loan lender, which can lend me the full cost of the property plus the associated legal fees?
- What is a credit reference file?
- What is generally on your credit file?
What is a Finance Broker?
Finance Brokers help consumers find the right finance product for their needs. A good finance broker should not be restricted by a limited lender offering. The broker should have access to at least 35 different institutions as not one lender can provide the best solution in every circumstance. The finance broker will help educate and inform you so that you are able to make an educated decision about what to do. Finance Brokers will be able to explain the loan options to you in plain english often avoiding the industry jargon many banks and solicitors use. An experienced broker will also be able to guide you away from many of the potential traps when borrowing money. Loans Australia refers to its finance brokers as Finance Advisors.
Why do Lenders use Finance Advisors?
Finance advisors are a cost efficient and effective means for lenders obtaining new clients. Many lenders are not represented throughout Australia, so finance advisors become the major way for these lenders to expand without spending major dollars on new infrastructure. Finance advisors also save lenders a lot of time and resources in the processing of each loan as they perform serviceability tests, ensure clients meet the lending criteria and collect necessary paperwork. Some lenders now allow finance advisors to input the client's information straight into the loan assessment database from their office thus saving the bank considerable amounts of time and money.
Are you accredited with any industry regulated bodies?
Loans Australia is accredited with the Finance Brokers Association of Australia, Australian Institute of Mortgage Brokers and the Credit Ombudsman Service Limited.
Does Loans Australia charge me a fee for service?
No service fee is charged for arranging home and investment loans. For business loans, commercial loans, car & equipment financing, deposit bonds and personal loans a fee may be charged. The fee is agreed upon upfront and a Finance Broking Agreement is signed.
How does Loans Australia get paid for their service and how much?
Loans Australia is paid a commission fee by the lenders on our panel for every loan settlement. Commission fee structures vary amongst these lenders. Loans Australia abides by its Customer Charter to ensure that all Finance Advisors act in the best interests of the client at all times. If you believe that your advisor has not acted in your best interests please either phone or email the Director Stephen McClatchie on firstname.lastname@example.org so that Loans Australia can rectify the situation as quickly as possible.
Your Loans Australia Finance Advisor will be happy to explain all our commission structures to you during the loan interview process and they are provided in writing within the Finance Broking Contract. The lenders loan documents will also outline any commission's payable under the loan contract.
Does Loans Australia ensure my confidentiality?
What can I borrow money for?
If you are offering a residential property as security, you can borrow money for a large range of purposes. You can borrow to:
- buy a house to live in
- purchase an investment property
- purchase other investments e.g. shares
- refinance your existing mortgage
- consolidate your personal or investment debts
- purchase land
- construct your home or investment property
- some lenders will allow you to use the equity from your home for business purposes
What is my maximum borrowing capacity?
Your maximum borrowing capacity is based on your income and the deposit you have available. When calculating your income, lenders will consider your salary and any other income you receive as long as it can be verified. For investment properties between 60-100% of the rental amount can be used depending on the lender chosen. Some lenders will even take into account the tax deductibility of investment loans when working out your borrowing capacity. Your borrowing capacity based on your income may be $800,000 but if you don't have a deposit then in reality you might only be able to purchase a property for $450,000 (based on the deposit you have).
What is Lenders Mortgage Insurance? When do I have to pay?
Lenders mortgage insurance covers the lender in the event that the borrower defaults on the mortgage and the amount recovered upon the sale of the property is less than what is owed by the borrower. This insurance does not cover the borrower.
For most lenders the client pays this once only cost if they borrow more than 80% of the value of the property, or they are borrowing more than $500,000. Lenders can differ as to when they require the client to pay for the premium, so it is worth finding out what the lenders guidelines are. For the majority of lenders, mortgage insurance is paid at settlement. For professionals, there is the possibility of having lenders mortgage insurance waived up to 93% of the value of the property, saving the borrower thousands of dollars in insurance premiums.
Where can I get mortgage insurance?
The lender you choose will arrange the mortgage insurance. There are two main insurers in the market, Genworth and PMI who dominate the marketplace. The two insurers charge different rates to different lenders and hence it is worthwhile using finance brokers who understand the differences and pass on the savings benefits to borrowers. Some major lenders also have in-house mortgage insurance arrangements which can have slightly different guidelines.
What can I purchase?
Home loans are secured against a first mortgage on residential property. This can be your home or an investment property. Lenders will not lend on all types of property e.g. financing for small units under 50m2 is limited and the mortgage insurers will not generally lend against small units (therefore you could only borrow up to 80% of the value of the unit). Converted warehouses, serviced apartments, high rise apartments and apartments in the CBD of the major capital cities also face restrictions in lending policy from many lenders. Factors that affect the security property include the location, condition of the property, zoning and the style of the property. It is advisable to get a pre-approval before purchasing any property.
What is meant by the term "genuine savings"?
If the amount you want to borrow is greater than 90% of the value of the property then you will be required to prove that you have genuine savings. Genuine savings is money saved in a bank or term deposit over a certain time period (generally 6 months) or shares held for at least 6 months. Most lenders will want to see at least 5% genuine savings (of the purchase price). If you have less than 5% then the mortgage insurance premium you will pay will substantially increase. There are now a limited number of lenders who have 97% or 100% home loans, which may still require at least 3% genuine savings. New lenders are emerging where there is the potential to lend up to 106% of the purchase price where no genuine savings are required.
How much deposit do I need?
To avoid having to pay mortgage insurance you will require a 20% deposit plus the purchase costs (about another 5% of the property purchase price). Some lenders will let you borrow 95% against the property purchase price plus borrow the mortgage insurance premium on top of the 95% loan amount. This feature is called capitalising your mortgage insurance. There are lenders available who will lend 100% of the purchase price, where you will only require funds to cover the costs e.g. stamp duty's, legal fees, lender fees, mortgage insurance and other government fees. New lenders are emerging where there is the potential to lend up to 106% of the purchase price where no deposit is required.
Can I pay out my home loan early?
Yes. Most loan terms are now 30 years. If the loan is paid out in the first 3 years some lenders charge a 'deferred establishment fee' to recover some of their costs. After three years most lenders don't charge an early payout penalty fee but all lenders generally have a discharge legal fee of about $350 when you decide to close your loan (regardless of when it happens).
How is interest calculated?
Interest is calculated on the daily outstanding balance of your loan and charged to your loan account monthly. Since the number of days in a month varies so will the interest charged to you each month.
What is a comparison rate?
From July 1 2003, all credit providers are required by law to use the 'comparison rate' when quoting interest rates for consumer credit loans such as home loans and personal loans. The comparison rate is a tool to help consumers compare different loans from different lenders based on cost.
Comparison rates combine the fees associated with a loan into the interest rate to give you an indication of the 'true' cost of the loan. Establishment, valuation and legal fees plus any ongoing fees are combined with the interest rate to calculate a figure you can use to compare loans. This may be higher or the same as the initial interest rate depending on the fee structure of the loan. Keep in mind that focusing on the comparison rate alone can be misleading as repayment flexibility and other features are not included, such as 100% offset account, line of credit potential benefits, redraw costs and switching costs. In other words, comparison rates take into account base costs but ignore features and flexibility. This is why you should have already selected the type of loan and features you want before you begin shopping with comparison rates.
Comparison rate schedules must be provided by law from your lender or Finance Advisor. Please note that comparison rate schedules can give you an overview of the comparison rate but do not take your specific needs into account. For example, Lenders Mortgage Insurance is not included in a comparison schedule, as not all clients need to pay for it.
Some lenders are misleading consumers by advertising a very low comparison rate then up selling the client into a more expensive product when they respond to the advertising.
Can I switch between variable and fixed interest rates?
Yes, in most cases you can switch to a fixed rate loan at anytime. Some lenders will charge a switch fee of approximately $350 to do this. If you have taken a discounted variable rate loan, the lender may charge an early exit penalty to switch to a fixed loan within the first couple of years.
What happens at the end of a fixed rate term?
Generally the loan will automatically revert to the standard variable interest rate for no fee. You can normally elect to fix for another period of time, some lenders will charge you a fee of approximately $300 to do this (others will be free).
Why would I take out an interest only loan?
Investors mainly use the interest only option to minimise their repayments and maximise their potential tax deductions. You can claim tax benefits against the interest payments made on an investment loan but not on any principal payments made on the loan. Interest only loans leave more cash in the borrowers pocket for other purposes. Some lenders also allow interest only repayments on home loans which could help first homebuyers with cashflow or people who plan on selling their home in the short term. For construction loans, interest only is normally paid during the construction period only (the loan then reverts to principal and interest once the property is completed).
How much is the First Home Owners Grant?
The Government is giving first homebuyers a grant of $7,000 towards the purchase of their first home. There are restrictions in qualifying for the grant, please refer to the governments website www.firsthome.gov.au. Most of the state governments offer first homebuyers other concessions, so please consider these before purchasing your home e.g. in Victoria the Government has the first home bonus of $5,000 payable up until July 2005.
What is a redraw facility?
If you have been making extra loan repayments above the minimum requested by the lender, then the lender could allow you to redraw (take out) that extra money at any future date. Some lenders will charge a fee for this service. It also must be noted that with a lot of lenders the redraw is at the lenders discretion and they could disallow it.
What is a 100% offset loan?
A 100% offset account allows you to link a savings account to your home loan. Whatever savings you have in your savings account is deducted from your home loan account balance before your loan interest is calculated. For example, if $100,000 is currently owing on your home loan and there is $5,000 in your 100% offset savings account, the monthly interest would be based on $95,000. The offset account earns no interest itself and therefore no tax is paid on the interest in the offset account. The longer you leave the money in the savings account the less interest you pay to the lender on the home loan. Some lenders charge higher interest rates and fees for this facility but if taken as part of a lenders professional package a low interest rate can be achieved.
Can I get a home loan if I have a bad credit history?
Yes, in most circumstances you can. There are now non-conforming lenders who specialise in helping people who have lending scenarios outside the normal approval guidelines of the major banks. Non-conforming lenders will allow you to borrow money even if you have had arrears, defaults, judgements, past bankruptcies, have an unusual income source, are self-employed and don't declare much income on paper. It is always worth just asking the question.
Is there a home loan lender, which can lend me the full cost of the property plus the associated legal fees?
Yes, we have a lender who will lend up to 106% of the value of the established property, which will cover the purchase price, stamp duty, other government charges and legal fees. This loan does not require any genuine savings but has strict guidelines for approval. This loan can be used for both owner occupied and investment purposes. Even though the fees and interest rate is higher than a normal home loan, it can be an excellent way to get into the property market for the first time, a good way to re-establish yourself after a separation/divorce and potentially excellent way to maximise your tax deductions if you are a property investor.
What is a credit reference file?
A credit reference file is a report that records information about your identity, your address and employer history, your credit history and any other relevant information. The file contains details about any request for credit you have made over the last 5 years regardless of whether you were approved for the loan or decided not to proceed with the loan. The file does indicate the amount of credit applied for, the type or purpose of the credit sought and the institution e.g. home loan, credit card, banks, credit cards, interest free loans and mobile phone companies.
What is generally on your credit reference file?
Information about you and your credit history, which can include:
- Personal details such as name, address, date of birth, drivers license number
- Credit applications and enquiries made in the last 5 years
- Records of some current credit accounts
- Overdue accounts (Defaults), which may have been listed against your name
- Bankruptcy information
- Public record information such as Directorships and Proprietorships