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What is 'LVR'?
When you are working out what amount you can borrow to purchase a property, the size of deposit you need to save and whether you are eligible for a particular mortgage product, the loan-to-valuation ratio (LVR) is one of the most important considerations.
In the simplest terms, the LVR is the percentage of the property’s value, as assessed by the lender, that your loan equates to. So, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is 80 per cent of the property value, making your LVR 80 per cent.
What documents do you need to apply for a loan?
Applying for a loan is a very big step, and it’s not always straightforward. To help make it simple, here is a handy list of the documents you are likely to need when you meet with your finance broker.
You are ready to buy a home, you just need a mortgage. Before you go rushing off to meet with your local finance broker, be sure that you have a few documents on hand to prove your identity, income, assets and liabilities.
You will need two of the following three:
- driver’s licence; and
- photo identification, such as a university identification card or proof of age card.
If you don’t have two of these, you can also provide one, plus a birth certificate, Medicare card, citizenship certificate or similar documentation.
If you are employed on a full-time basis, this is a fairly easy part. You will need to prove your income by providing your most recent PAYG payslip, including YTD income of at least three months. If your payslips don’t list your YTD income, you will need to provide previous payslips, your employment contract, an ATO tax assessment, a PAYG summary or a professionally prepared tax return.
If you are self-employed, you’ll need to provide your individual tax return and ATO assessment notices for a year, as well as your business’s financial documents: one year’s tax return, profit and loss statement, and balance sheet. You may need BAS statements or other documents from your accountant, too.
Whether you are self-employed or not, any other income you receive will also need to be documented. For example, if you own an investment property, provide a current lease, tax return listing the rental income or a letter from the leasing agent; if you own shares, bring a statement, investment record or tax return; and if you receive any government benefits, bring a statement from Centrelink.
You will need to prove your savings with bank statements, as well as be able to provide details and values of any other assets, such as cars, stock, term deposits and property.
By the time you are applying, you should have paid down your debts and reduced the limits on credit cards to give you the best chance of approval and improve your borrowing capacity, as lenders assess your ability to make repayments on your credit limits, not just the amount you owe
You will need current statements for your credit cards, store cards and loans.
Are you refinancing?
If you are refinancing a loan, you will need the past three months’ loan statements and the current payout figure including any exit fees.
Of course, depending on your personal circumstances and the requirements of your individual lender, the documentation you need will differ.
What are 'Comparison rates'?
Comparing apples with oranges doesn’t make sense. To make finding the right loan easier, and to make advertised rates as transparent as possible, we have comparison rates.
You’re looking for the best mortgage deal and you see an ad. It shouts ‘3.8% INTEREST!’ and, underneath that seemingly too-good-to-be-true rate, ‘7.9% comparison rate’. What does this mean?
“Because a comparison rate includes all of the fees and charges that can be applied to a home loan, it helps to show customers what the true cost of a loan is. In some instances, lenders offering the lowest rate may not actually boast the cheapest loan, which is what a comparison rate shows,” explains Mortgage Choice Head of Corporate Affairs, Jessica Darnbrough.
“In 2003, an amendment was made to the Uniform Consumer Credit Code (UCCC) that required comparison rates to be included in advertising. This change was made so that customers were not easily misled when it came to home loan interest rates.” The UCCC has since been replaced by the National Credit Code and the comparison rate requirement remains.
This allows consumers to compare apples with apples, to an extent. It does make it much simpler to hold two loan products side by side and, regardless of whether one has a slightly higher interest rate and no fees while the other is a super-low interest rate with high fees, see at a glance which one is the better deal financially.
However, it isn’t always this simple. Fees and charges, the rate at which principle is paid down and the total interest paid over the loan term all change depending on the loan amount and on the term, so you need to delve a little further into how that comparison rate is calculated.
While the comparison rate itself must be as prominently displayed as the interest rate – not buried in tiny fine print – somewhere on the advertisement, there will be a statement along the lines of ‘Comparison rate calculated on a loan of $150,000 for a term of 25 years, with monthly repayments’. If your loan is going to be for $900,000, the comparison rate for your loan will be vastly different.
“In order to get an idea of the comparison rate that applies to a loan, it is a good idea for borrowers to look at the comparison rate for the amount and term closest to the amount and term of their loan,” Darnbrough suggests. “It is always a good idea to look at a comparison rate that is specific to their circumstances, otherwise they can be misled.”
How lenders work out whether you can afford a loan?
Different lenders use different formulas to work out how much you can borrow, but the biggest loan isn’t always the best idea.
Being able to secure your ideal loan amount can seem like a battle of balances. Once you’ve worked your budget and finances through a spreadsheet, there’s still the one issue left to deal with: assessment rates. This is also known as an ‘interest rate buffer’.
Getting in while the going’s good and securing your loan while interest rates are low doesn’t change the fact that lenders are compelled to ensure that you will be able to make repayments if interest rates fluctuate.
Matching the features of a loan to your financial position is important, and often requires a third-party expert to help guide you through.
“What is very important is that people understand the ramifications of exposing themselves to debt,” says the finance broker.
“When modelling costs, an adviser would be wise to be very conservative in the figures they are using.”
Assessment rates add a margin to the variable or fixed interest rate of your loan. The assessment rate provides added protection that you will be able to repay your loan when interest rates rise, because they are sure to rise and fall throughout the life of your loan.
“APRA is clamping down on lenders exposing people to too much debt and not preparing them for interest rates as well as they could have,” the broker says.
The assessment rate can be anything from 1.5-2% above the variable rate, depending on the lender, and many are currently using rates of approximately 7-8%. Mortgage assessment rates vary from lender to lender, which is why different lenders may offer people in the same financial situation different loan amounts.
In some cases, the difference in loan amounts offered by different lenders can go into tens of thousands of dollars, but the biggest loan isn’t always the most suitable. Ensuring that you can pay your loan, whether rates stay low or rise, requires a bit of know-how.
Stamp duty explained
Stamp duty is a charge which is applied by state governments in Australia on transactions relating to the transfer of land or property. It is paid upfront and needs to be budgeted for in addition to your loan deposit.
The amount of stamp duty you are required to pay differs in each state, however there are three factors, along with the value of the property, that determine how much stamp duty you will pay. Contributing factors include:
- whether or not the property is a primary residence or investment property;
- whether or not you are a first home buyer; and
- if you are purchasing an established home, a new home or vacant land.
Jump to our stamp duty calculators to take the guesswork out of budgeting for a property. Factoring in this additional cost cannot be overlooked when you are considering your capacity to repay a loan.
However, in a bid by state governments to stimulate home ownership and growth, there are a range of tax concessions available to reduce stamp duty.
Again exact amounts differ across each state, but those who benefit the most are first home buyers and those opting to buy a new home.
To find out how much stamp duty you need to pay, and whether or not you are eligible for any concessions, contact us
What is a Fixed-rate Home Loan?
With interest rates at an all-time low, taking the option of locking in an interest rate on your home loan to guard against possible future fluctuation may be attractive. However, it pays to know the ins and outs of fixed-rate loans before committing to one.
When purchasing a property, borrowers can decide between fixed-interest loans that maintain the same interest rate over a specific period of time, or variable-rate loans that charge interest according to market rate fluctuations.
Fixed-rate loans usually come with a few provisos: borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early.
However, locking in the interest rate on your home loan can offer stability.
“For those conscious of a budget and who want to take a medium-to-long term position on a fixed rate, they can protect themselves from the volatility of potential rate movement,” the finance broker says.
Fixed rates are locked in for an amount of time that is prearranged between you and your lender.
“There are some lenders that offer seven-year or 10-year fixed terms, but generally one to five years are the most popular terms,” the finance broker says. “The three- or five-year terms are generally the most popular for customers because a lot can change within that amount of time.”
Further to this, fixed-rate loans can also be pre-approved. This means that you can apply for the fixed-rate loan before you find the property you want to buy.
“When you apply for a fixed rate, at the point of application you can pay a fixed rate lock-in fee which will, depending on the lender, give you between 60 and 90 days from the time of application to settle the loan at that fixed rate,” the broker explains.
“You pay a fee to protect your interest rate. Alternatively, you can choose to lock the rate in at the time of actual approval.”
Pre-approval helps you to discern how much money you are likely to have approved on official application. Knowing that your potential lender will offer a fixed-term interest loan grants further peace of mind for those borrowers looking to budget precisely rather than be susceptible to rate fluctuations.
Bridging loan or deposit bond?
A bridging loan is a shortterm home loan designed to allow you to initiate the purchase of a property before you have sold your previous one.
Loan terms are often between six and 12 months and bridging loans generally have a higher interest rate than traditional home loans.
This can be a great option but carries some risk. It’s important to know that you will be able to make the repayments even in a worst case scenario where your old house doesn’t sell as quickly as you’d hoped or where property values may change unexpectedly.
It’s important to talk to a broker and ensure that you have the capacity to service the loan for the period of time required.
A deposit bond is a tool that, upon agreement with a vendor, can replace the requirement of a cash deposit when purchasing a property.
This can be a relatively cheap method of initiating the purchase of a property usually without the need to liquidate your other assets. The cost of a bond can vary depending on transaction complexity and the term being sought. In a simple transaction, it is likely to be approximately 1.3% of the amount of the deposit. For example, for a deposit guarantee to the value of 10% of a property price for an individual purchasing an established property in NSW and repaying that guarantee within 6 months on a $50k deposit for a property purchase of $500k, the fee will be about $650.*
A deposit bond is issued by an insurer to the vendor of the property for either the full or partial deposit required. At settlement, the purchaser must pay the full purchase price including the amount of deposit. At this point, the deposit bond becomes void.
If the purchaser fails to complete the purchase of the property, the vendor is able to give the deposit bond to the insurer who will provide them the entire value of the deposit bond.
The insurer will then seek reimbursement of the deposit bond from the purchaser.
Deposit bonds are generally a fair bit cheaper than a shortterm loan, but it’s important to talk to a mortgage broker to compare the two, taking into account your requirements and objectives and your financial situation.
How much will it cost to use a broker?
There’s no such thing as a free lunch, but that doesn’t mean you will receive lower levels of service or expertise from a finance broker who doesn’t charge you. It just means that someone else is paying for it. Each business will have its own reasons for its revenue model, and each structure offers different advantages.
Approximately 90 per cent of the more than 10,000 MFAA accredited finance brokers don’t charge a fee for their advice, relying on lender commissions for their income. Others rate their intellectual property as a service worth paying for upfront.
As part of the majority, Mortgage Choice has never once charged a client an engagement fee in 23 years of business. Jessica Darnbrough, Head of Corporate Affairs, says that, while she can understand why some people have introduced a fee-for-service structure to cover costs even when a client takes their business elsewhere, recent survey results reveal that it’s not something Mortgage Choice’s borrowers would agree to take on at this stage.
“It’s a tricky thing to introduce, and those who do tend to be independent players,” she says.
“But the truth is, buyers do shop around these days and brokers can end up doing a lot of work and not getting paid for it, especially since the introduction of the National Consumer Credit Protection Act 2009 – that prompted a lot of brokers to start charging. So, we might very well see an increased level of brokers charging in the future.”
Robinson Sewell Partners (RSP) has done just that. After several years in business, agribusiness finance specialist RSP recently introduced a fee-for-service model that allowed it to help clients even when it would not make business sense to do so if the only income would be commission. It also allowed RSP to assign a clear value to its services and the experience in its team.
“It’s been a learning curve, but we realised that trying to engage clients without charging any fee, and just relying on the back end of success, really undermined how we evaluate our propositions,” says Director, Ian Robinson.
Clients have been increasingly committed to the process because they wanted to guarantee a return on their investment and, contrary to the Mortgage Choice experience, the company saw little debate about the new fee structure.
“We value our intellectual property very highly. We’ve been in the trenches with the banks for years and we understand the internal mechanics – this is very powerful information to have when we’re operating on the client’s side.”
A clear advantage of seeing a fee-for-service broker is having someone onside who isn’t worried about the volume of your business. They are paid to do a job for you, and they do that whether your loan is $200,000 or $2 million.
The main and very obvious advantage of seeing a finance broker who does not charge a fee is that it lowers the cost of procuring finance and, despite public debate, the different commission structures offered by the various lenders do not impact the finance broker’s recommendations.
Not only are MFAA accredited finance brokers (of which Hassan Finance is accredited with) arebound by ethics agreements that demand they do not suggest loan products that are unsuitable for a client, an broker who prioritised commissions over their clients would see their business suffer as clients realised that they would get a better deal elsewhere.