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Good debt bad debt

May 28, 2010 By peter

 

Is there a difference between good and bad debt? Debt is debt isn’t it? Some might say that any debt is bad debt, especially our grandparents and great grandparents who preferred to save up for what they wanted rather than borrow. Their thinking being if you can’t afford it, don’t buy it. 

How times have changed. We are a nation that lives with and on debt. We especially like our credit cards and store cards because it means we don’t have to save for what we want. We can buy it now and worry about paying for it later. The credit card companies love that and so do the retailers who sell more products. 

OK, perhaps I’m being a bit hard here. After all, credit cards do offer convenience and an element of safety (for example, there’s no need to carry around wads of cash) but with the average Australian carrying over $3,000 of credit card debt at interest rates of 15% to 20%+, it raises the need for more of us to be smart with our money. 

So let’s explore what being smart means. Let’s look at the difference between good debt and bad debt. 

Good debt is debt that produces wealth and cash flow. For example, a home loan is good debt because over time your home should generate a good tax free capital gain. Plus, we’ve got to live somewhere and it is often more cost effective to buy rather than rent over the long term. 

Really good debt would include borrowing to buy assets like an investment property or shares – not only could you generate a capital gain on sale, but you’ll also get an income stream (rent or dividends) and a tax deduction for interest payments. 

Another example of good debt would be debt consolidation, say into your home loan where you could save a significant amount on interest costs, especially if you consolidated higher cost unsecured debt. But remember, if you continue to borrow after consolidation you may end up considerably worse off with higher debt and less equity in your home. 

Bad debt typically involves borrowing to pay for your lifestyle. It often involves buying things you don’t really need that will decrease in value as soon as you walk out of the shop, using expensive store cards or credit cards. 

This is the easiest way to over extend yourself as you can quickly lose track of your purchases. It can include items like an expensive holiday, clothes, and electronics. It’s OK to treat ourselves once in a while but when this becomes the norm, and when bad debt is not paid off in full, financial problems may start to surface. 

More often that not, it is bad debt that gets people into financial trouble. Defaults on your credit cards and other forms of unsecured borrowing are recorded by credit reference agencies like Veda Advantage and Dun and Bradstreet. Once your credit rating is affected in a negative way it can hurt your chances of qualifying for cheaper finance or finance at all. 

To work out if your debt is good or bad you need to ask yourself whether the asset you’re going to buy will increase in value or provide cash flow advantages. If the answer is no, then you should think very carefully about borrowing to buy. If you do borrow, then look to pay the debt off in full very quickly, if not immediately on receipt of your statement. 

Saving before you buy might not be the way things are done these days but it may be the best way to avoid consequences of bad debt.

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, New South Wales, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Victoria, Western Australia, home-loans, property Tagged With: bad debt, budgeting, financial planning, first time buyer, good debt, our home sweet home, Peter Boehm

How to choose an investment property loan

May 21, 2010 By peter

I’ve often been asked whether taking out a loan for an investment property is the same as taking out a loan for a house to live in. The answer is no, it is not.

Buying an investment property is about identifying a residential property asset that provides you with the right mix of rental return, capital growth and profit. If you choose the wrong property your investment strategy could go up in smoke. The same applies to choosing the right investment property loan. You want a loan that helps, not hinders your investment objectives.

This means that a loan that might be suitable for your home and lifestyle needs may be totally unsuitable for your investment property needs.

You need to ask yourself a number of key questions which include:

  • How long do you want to hold on to the property before selling it? For example, if you intend to hold it for three years, it’s no good taking a five year fixed rate mortgage. You’ll be up for some hefty early settlement penalties which will eat into any capital profits you may make
  • How much of your own funds will you contribute to the purchase price? There may be limitations on the amount your lender is willing to lend against meaning you’ll either contribute more of your own funds or look for other forms of security – like your existing home.
  • What loan type do you need to maximise your tax strategy? For example, would you be better off with an interest only or amortising loan?
  • Do you want to be positively or negatively geared? You may need to sacrifice flexibility for a low interest rate/low cost loan product.
  • Do you want to pay the loan down quickly? In which case you should look at loans that allow lump sum and extra payments without penalty.
  • What will your investment/ownership structure be? Will you own the property in your name or through a company or trust? You’ll need to make sure your lender is prepared to lend via these types of vehicles and whether they may require director or other types of guarantee.

So there’s a lot to think about before taking out an investment property loan.

My tip

The key is to make sure the loan supports your investment structure, goals and objectives. Be clear about what you are trying to achieve and when you want to achieve it.

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, Investment properties, New South Wales, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Western Australia, home-loans, property Tagged With: home-loans, investment property loans, our home sweet home, Peter Boehm, property-investment

How to save thousands off your home loan

May 14, 2010 By peter

Last week we looked at how a typical variable rate amortising or principal and interest mortgage worked and in particular how the amount borrowed, the interest rate and loan term combined to determine the minimum monthly repayment, the total interest paid and the speed at which the loan balance was paid off. 

Today we’ll explore how you can pay off your home loan faster and save thousands on your interest costs. 

Start early

The most amount of interest is charged and paid during the early years of your loan. It follows that the earlier you can reduce your loan balance, the better off you’ll be. This may be a bit of a challenge, particularly during the first five years, but you’ll be surprised at what you can achieve and what a difference can be made to your financial position. 

Lump sum payments*

You may find yourself in the fortunate position to be in receipt of a lump sum of cash. Perhaps you received a bonus from work, a gift or an inheritance from a long lost relative. What should you do with it? You have a choice of spending it, investing it or paying off debt. 

To decide the best way forward, you should compare the benefits (financial and non-financial) of your options. Here we are looking at the financial benefits in relation to your debt. Normally, it’s probably a good idea to pay down high cost debt, like credit cards or personal loans. 

But what about your home loan – is it worth paying off a lump sum and if so, when?  Let’s look at a situation where you receive an after tax $5,000 lump sum and are wondering whether to use it to reduce your home loan. Let’s look at some different loan balances and some different time frames in which the lump sum is paid. 

Interest saving made on paying a $5,000 lump sum off a 25 year mortgage at 6 percent: 

Loan\when 1st year 5th year 10th year 15th year 20th year
$200,000 $15,265 $11,081 $7,017 $3,962 $1,674
$250,000 $15,420 $11,180 $7,072 $3,993 $1,691
$300,000 $15,527 $11,247 $7,110 $4,014 $1,703
$350,000 $15,603 $11,295 $7,137 $4,028 $1,711

Time saving made on paying a $5,000 lump sum off a 25 year mortgage at 6 percent: 

Loan\when 1st year 5th year 10th year 15th year 20th year
$200,000 1 year 4 mths 1 year 9 months 7 months 5 months
$250,000 1 year 1 month 10 months 7 months 6 months 4 months
$300,000 11 months 8 months 6 months 5 months 3 months
$350,000 9 months 7 months 5 months 4 months 3 months

 As you can see, the earlier you pay a lump sum off your loan, the more it saves you in time and money and the quicker you pay off your debt. If you can regularly pay lump sums off your mortgage, you’ll pay your loan off even sooner and save yourself a lot more in interest cost. 

Extra payments*

Say you have some extra cash and can make additional payments on top of your minimum monthly loan repayments. Is it worth doing and how much will you save? 

Let’s look at an example of making extra repayments on a $250,000 25 year loan at a variable rate 6 percent. The minimum monthly repayment would be $1,610.75. What would happen if you could, from the very beginning, repay more than the minimum? 

Saving on your loan by paying more than the monthly minimum: 

Savings\extra payment $10 extra per month $20 extra per month $50 extra per month $100 extra per month $200 extra per month $500 extra per month
Interest saved $3,874 $7,607 $18,041 $33,262 $57,646 $103,614
Time saved 4 months 8 months 1 year 7 mths 3 years 5 years 4 mths 10 years

The first five years of paying off your home loan are usually the toughest. So let’s look at what would happen if you started making the same extra repayments five years into your loan. 

Saving on your loan by paying more than the monthly minimum after five years: 

Savings\extra payment $10 extra per month $20 extra per month $50 extra per month $100 extra per month $200 extra per month $500 extra per month
Money saved $2,199 $4,355 $10,389 $19,447 $34,511 $64,719
Time saved 2 months 5 months 1 year 1 month 2 years 1 month 3 years 9 month 7 years 3 months

You can see making extra repayments, no matter how small, can save you thousands and reduce the amount of time it takes to repay your loan. 

Tips 

Here are some easy to follow tips to help you save time and money on your mortgage: 

1)      Check and make sure its OK to make extra repayments without penalty. If there is a penalty, weigh this up against any savings;

2)      Try to make extra or lump sum payments as early on in your loan term as possible – that way you’ll save more interest and be able to pay off your loan more quickly;

3)      Even small extra repayments can make a big difference – look for little savings and use these to increase your monthly repayments;

4)      If your lender reduces your interest rate and your monthly repayments, think about maintaining your current repayments which will help pay your loan off sooner

5)      Use online tools and mortgage calculators to help manage your home loan and work out the savings in time and money you can make through making extra or lump sum payments. 

* Note: Always check to make sure whether there are any costs or penalties in making lump sum or extra repayments.

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, New South Wales, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Victoria, Western Australia, home-loans Tagged With: budgeting, first time buyer, home loan, our home sweet home, Peter Boehm, planning

How to manage your home loan

May 7, 2010 By peter

The best way to manage your home loan is to understand how it works. To do this you need to understand the linkages between the interest rate, the term, how much you borrow and how much you repay each month. Once you’ve mastered this, you’re on your way to being better able to assess your loan and being able to apply money saving techniques. 

The basics 

The most common type of home loan is an amortising or capital and interest loan, where a proportion of your monthly repayment pays off some principal (the amount you borrowed) and the remainder pays off the interest charged by your lender. The interest rate can be variable, fixed, or a combination of both. 

To explore this further, let’s use an example of a home loan for $250,000 at a variable interest rate of 6 percent for 25 years. What would you be committing to under this loan? 

Amount borrowed Monthly repayment Total interest Total repayments

$250,000

$1,610.75*

$233,226

$483,226

 * This assumes interest rates stay the same over the term of the loan

As the table shows, over the term of the loan you would be paying back your lender $483,226 at $1,610.75 per month, where the interest component is a whopping 93 percent of the amount borrowed. You might be surprised at how much interest you’re paying, but if you really want a shock, if the interest rate was 8%, total interest paid would be $328,862 or 132 percent of the amount borrowed! 

Why is the interest figure so high? Apart from the amount you borrow, there are two key factors. Firstly cost – the interest rate charged. Secondly term – the period over which the loan is borrowed. 

The length of your loan 

Most people understand the concept that the more you borrow, or the higher the interest cost, the more you’ll pay. What many don’t realise is that the longer the term, the more you’ll pay (and conversely, the shorter the term, the less you’ll pay).

Let’s compare our example loan above over different terms: 

Term of loan

Monthly repayments

Total interest

Total repayments

15 years

$2,109.64

$129,735

$379,735

20 years

$1,791.08

$179,858

$429,858

25 years

$1,610.75

$233,226

$483,226

30 years

$1,498.88

$289,595

$539,595

As you can see, the length of time you choose to repay your loan effects greatly how much interest you’ll have to repay. It’s really about balancing affordability and cost. On the one hand, a longer term reduces your monthly repayments, but you pay a lot more in interest. On the other hand, a shorter term means you pay less interest, but your monthly repayments can be significantly higher. 

Paying off your loan 

The way in which your monthly repayment is applied to reducing the amount borrowed may come as a bit of a shock. In the early years of an amortising loan, most of the repayment goes to paying interest, and only a small proportion goes to repaying capital. This is because the interest component is much higher in the early years and decreases significantly further down the track once the amount borrowed starts to reduce. 

Let’s look at how the principal outstanding changes for our example loan: 

Period

Cumulative repayments

Cumulative interest

Principal outstanding

Interest for period

 

Principal reduction

% principal remaining
1 year

$19,329

$14,879

$245,550

$14,879

$4,450

98%
2-5 years

$96,645

$71,475

$224,830

$56,596

$20,720

90%
6-10 years

$193,290

$134,170

$190,880

$62,695

$33,950

76%
11-15 years

$289,935

$185,022

$145,086

$50,852

$45,794

58%
16-20 years

$386,580

$219,898

$83,317

$34,876

$61,769

33%
21-25 years $483,226

$233,226

$0

$13,328

$83,317

0%

 Some would think that after five years of a twenty five year loan, being 20 percent of the way through the term, 20 percent of the loan balance would have been repaid. Wrong! In this case, only 10 percent of the principal is repaid. Why? The reason for this is interest cost. 

Let’s look at how much of your monthly repayment goes towards interest: 

Period

Total repayments

Total interest

Interest as a % or repayments
1- 5 years

$96,645

$71,475

74%
6 – 10 years

$96,645

$62,695

65%
11 – 15 years

$96,645

$50,852

53%
16 – 20 years

$96,645

$34,876

36%
21 – 25 years

$96,645

$13,328

14%

 The above table gives a good illustration of where your repayments go – particularly during the first ten years. After that, more of your repayments go to paying off the loan balance. The early years are always the toughest and your repayments pretty much go towards paying the lender’s interest. 

Tips 

Armed with this knowledge, here are some easy to follow tips to help you manage your mortgage: 

1)      Interest rate is important – the lower the rate the better. Make sure you check for any additional fees and charges a lender may try to impose to counteract a low rate;

2)      Think carefully about how much you borrow. The more you borrow the more interest you’ll pay. Do a budget and make sure you can afford to meet the minimum monthly repayments;

3)      By very mindful of being offered longer term loans. While it may be tempting to take a longer term loan in order to reduce your monthly repayments, remember the longer the term, the more interest you’ll pay and the longer it will take you to build equity in your home;

4)      Really focus on your home loan during the first ten years because most of your repayments are going towards interest. Make sure you meet all your repayments on time;

5)      The speed at which you build equity in your home through reducing your loan balance depends on things like loan term, amount borrowed, interest rate and monthly repayment. You can use online tools and calculators to run scenarios on how your financial position or equity in your home would change if any of these key factors varied;

Next week we’ll look at some simple techniques you can use to pay off your home loan more quickly and save thousands off your interest bill.

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, Investment properties, New South Wales, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Victoria, Western Australia, home-loans, property Tagged With: budgeting, first time buyer, home loan, our home sweet home, Peter Boehm

Making yourself attractive to your lender

April 30, 2010 By peter

While you’re out looking for the best mortgage, your mortgage company is out looking for the best borrowers. 

When you both meet for the first time, impressions count. Home lending requirements are becoming tighter, and mortgages are by no means guaranteed. But the better impression you can make, the more likely your chosen mortgage company will be to grant you a home loan. 

So how can you present yourself in the best light? Here are my top ten tips: 

1. Approach the mortgage company directly 

There are a variety of ways to contact a home lender – through a branch (if the lender happens to be a bank), a mobile lending manager, or even via a mortgage broker. Whichever path you think is the most suitable is fine. 

However, while the big banks and major lenders support all types of approaches, the introduction they typically prefer is the direct one – an enquiry that goes straight to their business. 

This is because they prefer to be involved from the outset. For borrowers, one advantage is that you’ll deal directly with someone who can approve the loan. 

2. Be honest 

Honesty is the best policy. If you keep information from your home lender or tell them something that’s not true, you’re very likely to be discovered. 

When you are, your loan application will probably fail. The best practice is to be open and honest – your lender will be happier to write a loan if they believe you’re trustworthy. 

3. Never ‘play the field’ 

Mortgage companies get wary when they see multiple loan applications on your credit file. A long list of applications often leads them to presume that you’re desperate or that something is wrong. 

For this reason, don’t play the field by applying to lots of lenders at once. Be selective and approach as few lenders as possible. (Read more about credit files and Australia’s new credit reporting system). 

4. Save a big deposit 

Mortgage companies get excited by equity. Your ability to meet your mortgage repayments is always their primary consideration, but the bigger your deposit (and the bigger your unencumbered equity) the higher your chances of receiving a loan. 

Try to have a 10 per cent deposit as a minimum. If you can save 20 per cent or more, you can avoid stricter underwriting guidelines and the added expense of Lenders Mortgage Insurance. 

5. Be an existing customer 

Home lenders like to know you before they give you a loan, but often the first time they meet you is when you’re requesting a loan. 

If you have a pre-existing relationship with a home lender through other products such as credit cards or savings accounts, they can be more familiar with and comfortable about you and the way you conduct your finances. 

If you know the lender you’d like to deal with and you have some time up your sleeve, consider becoming their customer for six months or so before requesting a home loan. 

6. Demonstrate a stable work history 

Home lenders prefer borrowers who’ve been employed on a continuous basis. Switching jobs is fine, especially in the same field, but if there are sizable gaps in your employment history home lenders may ask why. 

If you’re self-employed, you may not be as attractive to a home lender as someone who earns a salary. You will need to provide a good deal of documentation that shows your ability to pay back the loan. Tax returns for at least the last two years will be required. 

7. Show a good savings history 

Mortgage companies are interested in your ability to manage your financial commitments. One way to prove you can is to demonstrate a record of savings that shows sound financial control. If possible, try to demonstrate a six-month savings history and explain to your mortgage company how you achieved your aims. 

8. Pay your bills 

Mortgage companies like to know that you’re on top of your day to day finances.

Let them know that you can meet your financial commitments, including your regular utility, phone and other charges, on time. 

9. Manage your credit card 

Showing that you can manage a credit card will help to persuade a home lender that you can manage debt. 

Show that you pay your credit card off (in full) each month, and that you’re not funding your living expenses on credit. At the very least, home lenders will want to see that you’re making above the minimum repayments on your debts. 

10. Detail your past relationships 

History often repeats and your lender will probably want to know how your previous loans have worked out. 

They’ll ask your past lending partners first hand, requesting credit checks through organisations like Dun & Bradstreet. 

For this reason, it’s important to have a clean credit history – even small imperfections such as missed power bills can affect your application. Be certain to pay your bills on time and ensure that any disputes you have are resolved quickly. 

Summing up 

Getting a home loan requires preparation, planning and a good first impression. 

To understand what your lender or mortgage company is looking for, the above list is a good start. See how you measure up. If there are any gaps start working to improve them now. Remember that the stronger your loan request, the more opportunity there will be to negotiate for lower interest rates and better features on your mortgage. 

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, Investment properties, New South Wales, News, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Victoria, Western Australia, home-loans, property Tagged With: first time buyer, home loan, loan application, mortgage application, our home sweet home, Peter Boehm, real estate

How much can you really afford?

April 23, 2010 By peter

Home ownership is a big part of the Australian psyche and many Australians are prepared to take on massive mortgages to buy a place to call their own.

Part of the trouble with the home buying process is that it’s an emotional roller-coaster  and when emotions are high we don’t always make the best decisions.

The pressure is to buy big and it’s the task of real estate agents to sell their properties: encouraging us to spend as much as we can afford.

Of course, the trouble with buying the best house on the street is that you need the biggest and best mortgage on the street to pay for it.

How much debt can you afford?

It’s imperative to understand that there’s a big difference between how much money a mortgage company will offer you and the amount of debt you might actually be comfortable taking on.

How much can you actually afford?

There’s only one person capable of answering that question: you. You’ll find a heap of advice from various parties on the amount of money you can borrow, but you have to do the maths yourself  don’t rely on somebody else to tell you.

For a ballpark idea of what sized mortgage you can comfortably afford, start by using some online tools. There are a wide variety of mortgage calculators that will provide you with some idea of how much money you can but not necessarily how much money you should borrow.

But be aware that these calculators are only a quick guide. They don’t always allow for the fact that interest rates are likely to vary over the loan term, and they can sometimes offer larger sums that you will actually be able to afford.�

Lenders use much more details tools when deciding what sized mortgage they think you can afford � usually taking into account your credit card or other debts, as well as any dependents.

Always be very aware that these calculations determine only how much you might borrow. They don’t necessarily make provision for the costs of an enjoyable lifestyle, such as a meal on the town, a movie, a football game or a holiday. If you don’t want to become a virtual slave to your mortgage, these expenses need to be part of the equation.

Doing the sums

There are some basic rules of thumb you can apply when deciding what percentage of your income you can spend on mortgage repayments.

In the US and Canada, the recommended percentage usually falls between 28 and 36 per cent.

In Australia, it’s generally felt that anything over 35 per cent is dangerous and likely to end in mortgage stress. Some people do pay more than this because they think they can afford to.

But, at the end of the day, it’s only you who can decide what ratio you’re comfortable with. It will probably depend on your earnings, but in an ideal world the ratio should be under 30 per cent.

Be certain to use your after tax income when you do your sums and not your gross figure  you can only make your mortgage repayments after you’ve paid your tax.

When you start deciding what sized mortgage is best:

  • Create an in-depth budget based on your current spending habits while searching for any expenses you can slash.
  • Factor in a 1 to 2 per cent interest rate buffer.
  • Make room in the budget for the arrival of children, for taking holidays and for unexpected costs.

Life is much more than four walls

When doing your calculations, keep the following in mind:

  • As much as you want a place to live, you’ll also want some enjoyment in your life. If you over-extend, you’ll be in danger of becoming a slave to your loan.
  • You can always lower the size of your mortgage by saving a bigger deposit (see our article Saving for a home deposit).
  • Work with your net after-tax income, not your gross pre-tax salary.

Above all, once you’re out looking at properties, don’t let yourself be up-sold. You’ve already decided the type and size of home you can afford, so don’t let anyone convince you to buy a bigger house that will require a bigger loan.

Remember: it’s going to be you who has to meet each of those mortgage repayments. While a lender will offer you an amount, it’s up to you to say how much you can actually afford.

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, Investment properties, New South Wales, News, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Victoria, Western Australia, home-loans, property Tagged With: budgeting, first home buyer, our home sweet home, Peter Boehm, planning

How to resolve bank disputes

April 17, 2010 By peter

Disputes between banks and their customers are on the up – leaping an incredible 33 per cent in the first half of 2009, according to the Financial Ombudsman Service.The huge growth in complaints (from 14,359 to 19,107) is partly a result of the global financial crisis and increased anxiety amongst consumers, says the Ombudsman, who expects the trend to continue.

What are we disputing?

More and more, it’s our credit products (6,731 disputes, up 36 per cent), our insurance policies (6,406 up 34 per cent), our investments (1,540 up 68 per cent) and our payment systems (1,474 up 8 per cent).

We’re complaining about banking errors (both by computers and humans), contract and calculation errors, insufficient or misleading disclosure statements, and conduct that contravene legal codes. Interestingly, the Ombudsman also highlighted a large increase in disputes with lenders about the costs of breaking fixed rate loans.

In my Yahoo7 column Going direct to a home lender I examined how service levels at the big banks can vary considerably, and with the popularity of complaints forums such as Not Good Enough, some of us might say it’s no surprise that disputes are up.

So, if you find yourself in a dispute with your bank or financial provider, what can you do to have it resolved in your favour?

How to fight the bank

Here are some tips to follow:

1. Be clear about what you’re disputing

When you’re in a dispute with your bank, it’s important to be clear and concise. Be specific by listing the questions you want answered and what actions you’d like to the bank to take.

Be sure to keep records of any conversations you have, as well as copies of all documentation. Keep the details of the people you speak to and, if you can, carry out your discussions in writing – that way you’ll avoid misunderstandings about what has been said or requested.

Most importantly, stay calm now matter how angry or upset you might become. High emotions don’t do anybody any good. Focus on the facts while looking for a mutually acceptable solution to the problem.

2. Follow the bank’s dispute procedures

Each of Australia’s major banks and most of our financial institutions are members of the Financial Ombudsman Service. This membership requires them to have internal dispute resolution procedures and you should familiarise yourself with these before you start (information is usually to be found online or in your local branch).

While the big banks have large departments which deal exclusively with complaints, the best initial point of contact for your dispute is usually your branch. Start there, and try to ensure that the branch undertakes any proposed actions within the agreed upon time frame. Be sure to keep a record either way.

3. If you’re still unhappy, escalate

If you’re dissatisfied with the response you receive at branch level, ask how you can escalate the matter. Usually, this will result in the dispute being sent to head office or the internal dispute department.

Rather than dealing with a call centre, ask for a specific case worker to be assigned – a consistent point of contact that understands you and your problem and can take ownership of the issue.

At the same time, be prepared to compromise. You might not always be able to get exactly what you want, but if you can get most of it, that’s often the best outcome.

4. Stick to your obligations

When you’re in a dispute, it can be tempting to send a message by stopping payments or failing to meet your obligations while your dispute is unresolved. This is always a bad idea.

Failing to fulfil your obligations won’t help your cause, and might result in further financial penalties. Always stick to your obligations unless you have an agreement, in writing, that they will be suspended while the dispute is ongoing.

5. Seek outside help

If all else fails, ask your bank how you can take things further and refer the matter to the Financial Ombudsman Service.

The Ombudsman will investigate banking, insurance and investment disputes and is a free service. If the Ombudsman can’t help, they will likely give you a further pointer to someone who can.

Staying calm:

Remember, your aim should always be to get your dispute resolved as quickly and as amicably as possible. At all times, state clearly what you want, keep your cool, retain good records, and follow the bank’s resolution procedures.

If that fails, escalate your problem and go to the Ombudsman, but always be prepared to compromise if it means receiving most of what you want.

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, Investment properties, New South Wales, News, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Victoria, Western Australia, home-loans Tagged With: bank disputes, first time buyer, home-loans, our home sweet home, Peter Boehm

Top negotiating tips when buying a property

April 10, 2010 By peter

 

Buying a home is an experience that’s both emotional (exciting, frightening, rewarding) and financial (probably the biggest monetary commitment you’ll ever make).

As property buyers, we naturally want the best price possible. Paying a lower price not only saves us money up front, but also in the long term. For example, every $5000 saved on the purchase price saves around $4,700 in interest over the life of the loan (that’s $9,700 saved in total – assuming a 25 year loan at 6 per cent).

So, when buying a home, how can you go about knocking the purchase price down? The answer is through the art of negotiation. Here are some tips on how to strengthen your negotiating position:

1. Know your limit

When negotiating, do your sums and know your limit, but never let on to the seller what your top price is. Stay calm during the process and never make an offer above what you can afford.

If price negotiations go higher than you can stand, walk away. It’s always better to find another property than to place yourself under financial and emotional stress.

2. Know your seller

During your negotiations, try to gather as much information on the seller as possible. Start by chatting to the estate agent, asking how long the property has been on the market, what price the seller is looking for, and whether or not there are circumstances that might necessitate a quick sale.

You might not get all the information you want, but you will get a feel for how the seller is placed and the potential scope for negotiation.

3. Keep your cards close to your chest

Keep your own position from the seller. This means not giving away anything that indicates how much you might be willing to spend, how much you can borrow, or even how much you like the property.

4. Start low

When negotiating, it never hurts to put in a low offer to see what happens. Even if the property is up for auction, the auction can always be withdrawn, and your offer might even be accepted.

When making a low offer, it’s a good idea to provide a credible reason – perhaps the roof needs repairing, the property needs modernising, or there is something about the property that reduces its appeal.

5. Set deadlines

By placing a time limit on your offer, you may be able to force the seller into making a decision. Make sure the reason for the deadline is reasonable, however. Perhaps there are other properties you’re interested in, or your loan approval has a set timeframe.

6. Don’t be pressured

The seller may put pressure on you to act quickly, hoping you’ll make a rash decision. Gathering information about the seller’s situation – especially in regard to how quickly the property must be sold – will help you to determine how much of this pressure is bluff. Taking your time also introduces further uncertainty for the seller – something which can be to your advantage.

7. Offer something in return

To get a lower price, you may need to offer the seller some kind of compensation in return. One of the best ways to become an attractive buyer is to offer a quick sale. For maximum advantage, make sure your finances are in place before the negotiations start so that you’re ready to move as quickly as possible.

The art of negotiation

The most successful negotiations are those in which all parties walk away feeling that they’ve made a good deal. When it comes to property, parties can achieve this by knowing what the other wants.

Of course, in Australia’s current market – where demand for properties is high and there’s a lack of supply – sellers often have the upper hand. To counter this, buyers need to strengthen their position as much as possible. When negotiating using the steps above, try to keep a clear mind and cool heart. For each offer and counter-offer, remember how much you might be saving – or spending – in the long run.

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, Investment properties, New South Wales, News, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Victoria, Western Australia, home-loans, property Tagged With: first time buyer, our home sweet home, Peter Boehm, property, real estate

The top ten questions you should ask your lender

April 3, 2010 By peter

From the state of your personal finances to the size of your deposit, your home lender will have a long list of questions when you apply for a loan.

Their aim is to assess your creditworthiness – to decide whether or not, in their opinion, they should lend to you.

But when it comes to home loans, the questions should go both ways. Let’s turn the tables. Here are the top ten questions you can ask your lender (or broker) to help decide, in your opinion, whether or not they’re right for you.

1. How much can I borrow?

Your lender’s answer to this question will depend on their maximum ‘loan to value’ ratio (what percentage of a property’s value they will lend against), what size deposit you have, and your general financial standing (your income, commitments and credit rating).

Online tools can provide an estimate, but getting a lender’s confirmation regarding how much they’ll lend you is an important first step. Be sure that your lender includes an interest rate buffer in case rates go up.

2. What fees and charges will I pay?

From application fees to valuation fees and set-up charges, the upfront costs of establishing a home loan can be $1000 or more.

Ask your lender to explain what theirs are. Question them as to the government fees, such as stamp duty, that will apply to the mortgage or property, and don’t forget to check your eligibility for grants and concessions.

Be sure to ask about break fees and other costs that might apply if you settle your loan early – particularly if you’re considering a fixed rate loan.

3. What size deposit do I need?

One of the most important questions is how much you’ll be expected to pay up-front. Some lenders demand a 10 per cent deposit, while others require only 5 per cent.

Be certain to ask about any lender fees or government charges, as well as Lenders’ Mortgage Insurance (compulsory if you’re borrowing more than 80 per cent of a property’s value).

4. What will be the total cost of the loan?

Be sure to ask how much you’ll pay in both interest and charges during the lifetime of the loan. Have the lender explain its ‘Comparison rate’ – that is, the ‘interest rate’ which combines the loan’s interest costs with each of its fees and charges. (See my column Comparing home loans using ‘comparison rates’).

5. What documents do I need to provide?

From proof of income to statements of assets and liabilities, lenders require a raft of documentation before they accept you. The more prepared you can be, the smoother the process. Beforehand, ask your lender what’s needed and have copies on hand to supply.

6. Which loan is right for me?

When your lender (or broker) recommends a particular loan, ask them to outline why they’ve done so, and why it best suits your needs. If possible, get their explanation in writing.

The goal is to ensure that your lender has taken your personal circumstances into account and isn’t just selling you the loan that delivers the biggest profit. You should also ask how the loan will suit your future needs as your circumstances change.

7. How can I reduce my interest costs?

Paying more interest than necessary will cost thousands of dollars over the life of your loan. Ask your lender how to reduce your interest costs. They should be able to suggest products and features that will help you, such as offset accounts and the ability to make lump sum payments. Ask how flexible the loan will be in terms of payment frequency. You might be able to save by making payments weekly or fortnightly.

8. How long will it take to approve my loan?

Having answered your lender’s questions and provided everything they require you should expect a speedy response to your application. Ask your lender to commit to a timeframe and find out what could delay your loan’s approval. If there are delays, make sure that you aren’t the cause.

9. Do you offer loan packages?

Most lenders now package their home loans with other products, including credit card and transaction accounts – often with discounted rates and lower fees. Be sure to ask what they have on offer.

10. Why should I borrow from you?

It’s important to have your lender explain why they deserve your business. Ask your lender about their customer service standards, awards they may have won, and what makes them better than their competitors.

Remember that you’re entering a long-term relationship – probably between 20 and 30 years. You need to be sure the lender is someone you’ll be comfortable dealing with for a long time.

Summing up

In all likelihood, your home loan will be the biggest financial commitment you make.

For this reason alone, don’t be too afraid or too shy to ask questions – they’re a vital part of understanding your loan, and they could help you to uncover helpful features, or perhaps fees you weren’t expecting.

Above all, by being inquisitive and by educating yourself, you might also be able to negotiate for a better deal.

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, Investment properties, New South Wales, News, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Victoria, Western Australia, home-loans, property Tagged With: first home buyer, first time buyer, home loan, mortgage-broker, our home sweet home, Peter Boehm, property-investment, real estate

How to choose a mortgage broker

March 26, 2010 By peter

In the Australian mortgage market, brokers play a role in around 40 per cent of mortgages – a big part of the industry. Many first home buyers ask me what the benefits of using a mortgage broker are, as opposed to going straight to one of the big banks. I’d like to detail some of the benefits of finding a mortgage through a mortgage broker, and outline a few issues you should think about. 

Mortgage brokers 

Mortgage brokers are essentially intermediaries. Brokers match the needs of home borrowers to the home loans offered by lenders. Their job is to look after borrowers, but they get paid by lenders, which means precisely who they work for can be a grey area. 

So, what are the benefits of using a good mortgage broker? 

  1. They have access to a big range of mortgage companies (called their ‘lending panel’) and a detailed knowledge of the loans they broker.
  2. They take the time to understand your objectives and needs – matching them against their loans to suggest one with the right features and the lowest cost.
  3. They undertake the legwork, wading through the hundreds of loans available on the market, including those from lenders who are less well known.
  4. They assist you to fill out your paper work correctly, and keep you up to date on the progress of your mortgage application.
  5. They are handy advisers and mentors, especially for first home purchasers or for those who don’t meet mainstream lending criterion.
  6. They stay with you for the life of your loan and they can also help you to negotiate further mortgage refinancing as your needs develop over time. 

Before turning to a broker, however, there some things you should understand: 

  1. Brokers make a living by broking mortgages. They earn upfront as well as trail commissions (over the life of a mortgage) by selling a home lender’s products. These commissions will vary from lender to lender, and could influence a mortgage broker’s recommendation to you. Bear in mind that the more you borrow, the more the broker earns, so be careful not to overstretch.
  2. Brokers may be independently owned, but they are unlikely to be truly independent. To be so would mean recommending loans without receiving commissions. As they are in the business of making money, this is not going to happen.
  3. Home lenders impose volume targets on their mortgage brokers. To keep their accreditation, brokers must sell a certain number or value of home loans each year. At times, this may affect their recommendations.
  4. Mortgage brokers are not financial advisers. There is no rule that says they are obliged to find you the very best mortgage.
  5. Some home lenders do not allow brokers to sell their very best mortgages, so sticking with a broker means you could miss out. To prevent this, go online to check the competitiveness of the mortgage your broker suggests.
  6. Brokers vary in size, from one man operations to massive businesses. Brokers have different levels of skills and expertise. Their service quality and the size of their lending panels can differ greatly. 

So, how can you make sure you’re dealing with a good broker, not a bad one? Here are some questions you might ask your broker: 

  1. Do I need to pay? The services of most brokers are free. Be careful about brokers who want to levy upfront fees without any guarantees of service.
  2. Are you accredited? Be certain that your broker is a member of an industry organisation like the Mortgage and Finance Association of Australia (MFAA). Membership subjects them to rules about conduct and signs them up to dispute resolution and ombudsman schemes.
  3. What are your professional qualifications? Be sure your mortgage broker has some type of academic, industry or professional qualifications. Ask how many years they’ve been in business.
  4. Which home lenders are on your panel? Find out which home lenders your mortgage broker can select from. Ask which lender(s) the broker writes the most loans with and why.
  5. How are you paid? Get the broker to explain how their commissions work, including any other benefits.
  6. How will you choose the best mortgage for me? No two personal situations are the same, so your broker must take your circumstances into account. Always get any recommendation they present in writing.
  7. Are you a home lender? Check that your broker is not suggesting their own products. If they do, ask why. Compare the cost and features of the mortgage and judge whether their suggestion makes sense.
  8. Do you have Professional Indemnity Insurance? Be certain that your broker is insured – it’s okay to request to see their certificate.
  9. Can you provide references? Ask to speak with a few of the broker’s recent customers. This can be a solid measure of the quality of their service.

10.  How will you handle my personal information? Be sure that your potential broker complies with the Privacy Act. Ask for a copy of their privacy policy. 

While they’re never 100 per cent independent, the overwhelming majority of mortgage brokers are experts and their services offer many benefits, particularly for first home buyers. 

Deciding whether to use a broker is an individual choice. If you believe you would benefit from what a mortgage broker can deliver, be sure to choose carefully. Don’t be too shy to ask questions and make sure you’re satisfied that the loan suggested is the loan that’s right for you. 

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you’ll find home loans, mortgage calculators, guides and more. If you’re looking to buy your first home sign up to Our Home Sweet Home’s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.

Filed Under: ACT, Featured, Investment properties, New South Wales, Northern Territory, Peter Boehm, Queensland, South Australia, Tasmania, Victoria, Western Australia, home-loans, property Tagged With: first time buyer, first-home-buyers, home loan, mortgage-broker, our home sweet home, Peter Boehm, property
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