Kate Miller First home buyers are back and turning to brokers for their first home loan, according to Aussie, with the group reporting a surge in enquiries from first time …
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First home buyers return
First home buyers return
August 25, 2010 By Leave a Comment
Choosing a Home Loan
August 4, 2010 By
If you thought that finding the right property was difficult, you haven’t seen anything yet. Choosing the right home loan to suit your needs can be a minefield! There are so many options – how can you work out the right one for you?
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Choosing a Home Loan
Hooker muscles in on loans
July 28, 2010 By
AUSTRALIA’S second-biggest real estate agency, LJ Hooker, will enter the $860 million home loan market.
Alternatives sought to acquire home loan deposit
July 15, 2010 By
The use of gifts and family equity have become more popular ways of securing a deposit for a home loan since the global financial crisis, according to Loan Market.
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Alternatives sought to acquire home loan deposit
How to save thousands off your home loan
May 14, 2010 By
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.
How to manage your home loan
May 7, 2010 By
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.
Making yourself attractive to your lender
April 30, 2010 By
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.
Fixed rate demand takes another dip
April 10, 2010 By
Standard variable remains the home loan of choice
Fixed rate loan demand across Australia has experienced a reversal of last month’s upward trend and again headed south. According to new home loan approval data from Mortgage Choice, Australia’s largest independently-owned mortgage broker, fixed loans accounted for 1.7% of all March approvals.
The top ten questions you should ask your lender
April 3, 2010 By
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.
How to choose a mortgage broker
March 26, 2010 By
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?
- They have access to a big range of mortgage companies (called their ‘lending panel’) and a detailed knowledge of the loans they broker.
- 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.
- They undertake the legwork, wading through the hundreds of loans available on the market, including those from lenders who are less well known.
- They assist you to fill out your paper work correctly, and keep you up to date on the progress of your mortgage application.
- They are handy advisers and mentors, especially for first home purchasers or for those who don’t meet mainstream lending criterion.
- 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:
- 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.
- 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.
- 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.
- Mortgage brokers are not financial advisers. There is no rule that says they are obliged to find you the very best mortgage.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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.
- How are you paid? Get the broker to explain how their commissions work, including any other benefits.
- 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.
- 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.
- Do you have Professional Indemnity Insurance? Be certain that your broker is insured – it’s okay to request to see their certificate.
- 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.
