Buying Property For Dummies Page 20

  Stand-alone mortgage

  You can look at a mortgage just as a big loan that you make monthly (or fortnightly) payments into. If this method is your preference, you can set up a regular payment from your existing deposit or transaction account, and apart from that you don’t need to have much to do with it. In this case, you probably don’t care too much who your mortgage is with, as long as it has a low interest rate, low-cost establishment and ongoing fees, and the loan features (refer to the section ‘Standard variable vanilla’ earlier in this chapter) you need, such as the ability to carry it with you if you move to another property.

  A couple of financial research companies provide comparative information on home loan lenders. InfoChoice (www.infochoice.com.au) has a Home Loan Selector that offers a list of available home loans according to a set of criteria you choose. RateCity (www.ratecity.com.au) has information on home loans that includes interest rates, establishment and ongoing fees. CANSTAR CANNEX, a supplier of research and analysis on financial services, provides the information. RateCity also has a star-rating system that lists home loan products according to whether they represent ‘superior’, ‘exceptional’ or ‘strong’ value.

  The mortgage as the core of your finances

  For many people, the mortgage represents the centre of their financial affairs. Many mortgages allow you to redraw on additional payments you’ve made, making them a kind of savings account in reverse. Your mortgage loan can also be connected to transaction accounts, credit cards, high-interest accounts and even other investment products such as margin loans (which allow you to borrow to invest in the sharemarket using shares or managed funds as security for the loan) and share-broking facilities (which allow you to buy and sell shares). This interrelationship between accounts results in a mortgage that is the core product in a web of accounts.

  To banks and other financial institutions, connectedness between accounts is the ultimate scenario. After you spend the time to set everything up with one financial institution, moving the whole show over to another lender can be too time-consuming to contemplate. That linkage then makes you something of a captive customer. Therefore, you need to make sure that you get the best deal possible before you tie yourself into this kind of arrangement.

  Getting pre-approval

  Before you go out home hunting, organising a pre-approval of a loan amount from your chosen lender is important. Not only can you be confident that you qualify to get a loan, you can also have a clear picture of exactly how much you can borrow and therefore spend on a new home. When you arrange this amount, remember to take into account the other costs associated with buying a home, such as stamp duty and legal fees.

  Don’t make a contract binding until you receive written confirmation of final loan approval. Pre-approval doesn’t guarantee that the lender is going to lend you money on a particular home. Lenders lend you only as much as they believe the home is worth on the open market. If they believe you have offered too much for a home, they may refuse the loan or offer you a smaller loan based on their own valuation.

  If your approach to your financial affairs is to use your mortgage as the core product, you should choose a lender that offers not only the cheapest rate. As well, the lender needs to be one that you’re happy to have a long-term financial relationship with. When you use your mortgage this way — that is, as the basis for your day-to-day banking — your banking life is a lot easier if your lender’s other financial services and customer service are of a high standard.

  You may be paying your salary into a mortgage with a redraw facility from which you can transfer funds into a savings account or credit card account, as well as pay bills online. In that arrangement of accounts, you need the benefit of a well laid out and functional internet banking facility. Also, if you have a linked credit card, it should offer low annual fees, a reasonable interest rate (although you probably want to pay off the balance each month) and a good rewards program to boot.

  If you already have a savings account or credit card with a financial institution you’re happy with, approach it with your plan to take out a home loan and ask the lender what kind of package the financial institution can set you up with. Make sure you shop around, and be prepared to move your savings account if that is required. Even though other considerations may be important, you should always haggle for the best deal. In most cases, lenders desperately want your custom, and you may be surprised how flexible they can be when they’re looking at the possibility of losing a long-term customer.

  The core-product approach for your mortgage lends itself well to the ‘professional packages’ offered by many lenders today. For more information on this loan type, refer to the section ‘Going professional’ earlier in this chapter.

  Who’s who of mortgage lenders

  Australians can choose to borrow money for a new home from a number of different organisations at different levels of banking. The major lenders are

  The ‘big four’ banks: ANZ, Commonwealth, NAB and Westpac still lend most of the mortgages in Australia, with around 80 per cent of all owner-occupied loans approved between them. They source their funds from customers’ savings and deposit accounts as well as international sources. They can provide integrated banking packages that include transaction offset accounts, credit cards and insurance.

  ‘Second-tier’ banks: These banks include BankWest, Bendigo, Adelaide Bank and other regional banks that also offer integrated banking packages, and sometimes more personalised service and more flexible arrangements and features.

  Credit unions: These offer low rates and often don’t charge ongoing fees. Many credit unions offer fully-featured banking packages.

  Building societies: These were the original home lenders. Many still offer the best deals in home loans.

  Mortgage managers or originators: Mortgage managers or originators act as intermediaries between non-bank lenders and borrowers. They source their funds from investors and mortgage trusts rather than from customers’ deposits. A mortgage originator may appoint a mortgage manager to manage and administer the loan throughout its life.

  Mortgage brokers: Mortgage brokers offer home loans from the lenders they’re accredited with (called a panel of lenders). Mortgage brokers manage or administer the loan process up to settlement on behalf of the borrower. (See the following section for more on mortgage brokers.)

  While a mortgage involves a lot of money, the lender’s money is at risk rather than your own. This arrangement means that if by some chance the lending company collapses, your equity isn’t at risk. Unfortunately, you don’t get out of paying your home loan off either. Instead, a lender’s loan book, which is a very valuable asset, is likely to be taken over by some other loan company and you have a different company name on your monthly repayment notice.

  Choosing the right mortgage broker for you

  A mortgage broker can give you access to a variety of home loan products. Around 4,000 mortgage brokers are in business in Australia. These businesses can range from one-person outfits, to medium-sized local firms, to giant national companies such as Mortgage Choice.

  Because anyone can set up a business as a mortgage broker, training standards and personal qualifications can vary widely. Brokers may receive bad press from time to time, and not all of them may act as professionally, impartially or comprehensively as they like to make out. The broker who acts in a businesslike way, though, can be a lifesaver for people who don’t have the time or the inclination to comb through the dozens of possible home loan options.

  Because mortgage brokers may have an inside understanding of how lenders assess home loan applications, they can be invaluable if you have any doubts over whether you’re likely to qualify for a loan. If you apply straight to one lender and you’re knocked back, applying to other lenders can be more difficult. A mortgage broker can point out problems with your application from the outset and advise you on ways you can improve on your chance of getting a loan.

  How a mortgage broker
works

  Mortgage brokers give you access to a range of home loan products from a range of lenders. They need to be ‘accredited’ by the lenders on their list, which requires that they prove to the lenders their ability to properly advise on that product.

  When the mortgage broker successfully places you with a lender, the lender pays the mortgage broker an upfront commission, and also often pays an ongoing commission to the broker.

  If a mortgage broker asks you to pay an upfront fee to arrange your loan, steer clear. Charging you an upfront fee is against the law in some states.

  Commissions can add up to several thousand dollars over the life of your mortgage, so the broker is well compensated for his effort. Indirectly, the mortgage broker’s costs are added onto your loan as well. Make sure your broker works for his money.

  Questions to ask a mortgage broker

  Don’t be afraid to ask the mortgage broker questions to get the information you need. Begin with this list:

  How many lenders do you provide access to?

  How do you research and rate the lenders and their loans?

  What are your qualifications and experience?

  Are you a member of the Mortgage & Finance Association of Australia (MFAA)? The MFAA is the representative organisation for all mortgage and business finance lenders in Australia — banks and other mortgage lenders as well as mortgage brokers. Membership is voluntary, but using a broker who is a member gives you the assurance that she has promised to adhere to the association’s professional and ethical standards, that she has professional indemnity insurance and that you have recourse to an independent dispute resolution service (the Credit Ombudsman Service Limited — see the sidebar ‘Resolving a dispute with your lender or mortgage broker’) if something goes wrong. Brokers who are members of the MFAA are only too happy to advertise the fact.

  What types of commissions do you receive? By law, mortgage brokers must disclose all commissions in dollars.

  Do you rebate some of the commission? (This rebate saves you money.)

  Do you charge a fee? Some mortgage brokers charge by fee for service, claiming this procedure makes them more independent. Mortgage brokers shouldn’t charge fees as well as receive a commission.

  Can you provide a formal comparison of the loans you recommend, including the dollar cost of upfront and ongoing fees, and the average annual percentage rate (AAPR) that applies to the amount borrowed? The AAPR gives a more accurate account of the cost of the loan because it adds the loans fees, costs and charges to the loan rate

  What service do you offer after the loan is settled?

  Do you belong to an independent complaints scheme?

  What are you going to do in the event of a dispute between myself and the lender?

  Critics argue that mortgage brokers don’t provide access to some of the cheapest lenders — such as credit unions and building societies — partly because these financial institutions don’t pay them commissions. If after you do your research you find a credit union with a better rate than the lender your broker has recommended, ask why you should go with that lender rather than the credit union.

  Deciding to change your mortgage lender

  Theoretically, you can change your lender if you’re not happy with the service, or you feel you can get a better deal elsewhere. This is known as refinancing, and what it means is that the new lender ‘buys’ your loan from your former lender. (Remember that lenders make a lot of money from the privilege of lending you money.) However, you do need to be aware that lenders often charge exit fees if you leave, especially if you leave within the first few years of your home loan.

  Resolving a dispute with your lender or mortgage broker

  If you have a dispute you can’t resolve with your lender or mortgage broker directly, you can contact the independent Credit Ombudsman Service Limited. This service is free and allows consumers an alternative to pursuing legal avenues for resolving a dispute. You can find this service and file an online complaint at www.creditombudsman.com.au or phone the consumer line 1800 138 422.

  Exit fees are also known as switching fees, early termination fees, early discharge fees or deferred start up fees and were originally developed as a way of cutting down the initial costs to borrowers of establishing a home loan. Exit fees generally only apply if you change your loan within three or four years of establishment. However, complaints about high exit fees led to the federal government amending its National Credit Code legislation in 2010. The law now limits these fees to the recovery of a lender’s loss caused by the early termination. Lenders can’t use exit fees to discourage borrowers from switching their loan or to punish them for doing so.

  For mortgages established after 1 July 2010, if you think you have been charged an exit fee that is ‘unconscionable or unfair’, you can complain to your lender. If needed, you can then take the dispute to the lender’s External Dispute Resolution Scheme, complain to ASIC, and/or challenge the fee in court proceedings.

  At the time of writing, the federal government has announced they intend to ban exit fees altogether. However, some warn that this may result in costs being recovered in higher interest rates or through fees charged to everyone rather than just those who decide to change their lender in the first three or four years of the loan.

  Check the loan contract before you sign it to see what exit fees will be charged and at what point of your home loan they are phased out. Remember to also check how the loan compares on other factors, such as interest rates and other fees, as well.

  When You’re Not the Standard Mould

  Lenders prefer to minimise the financial risk to themselves by lending to people who fit a narrow set of criteria — people who are employed by a company or institution on a regular salary basis, have been in their jobs for a year at least and who earn more than the average wage.

  Potential borrowers who make lenders nervous because they don’t meet the standard criteria include people who

  Are older than 40 years who may not be able to service a 25-year loan once retired

  Are self-employed

  Earn more than half of their income through commissions

  Have a history of changing jobs regularly

  Have a history of not paying loan repayments or bills on time, or who have defaulted on a loan or bill

  Have an employment history with the one company for less than a year

  Have recently immigrated to Australia

  Haven’t been able to save 10 per cent of the projected purchase price of their new home

  If you fit any one or more of the preceding descriptions, you’re going to find getting yourself a home loan more difficult. Since the global financial crisis (GFC), Australian lenders have tightened up considerably on their lending to people who fall outside the regular criteria. That’s even though Australia’s system is quite different to the American system that led to the mass defaults on home loans there.

  This tightening up of credit doesn’t mean you won’t be able to get a loan at all. You just have to work harder to convince lenders that you’re not a credit risk — for example, by being able to demonstrate a longer savings history. Unless you want to pay interest rates up to 5 per cent above regular rates, you may also need to bring a higher deposit to your purchase.

  Accessing no-doc and low-doc loans

  If you’re self-employed, lenders usually want to see several years of tax returns as well as any financial reports, financial statements and pay slips if you have them. Gathering all this documentation can be difficult, especially if you’ve been in business for just a year or so.

  One way of getting around this dilemma is to apply for either a low-doc (low-document) or a no-doc (no-document) loan. With these kinds of loans you’re not required to supply financial documents to prove your income. Instead, you fill out an income declaration form stating your income and assets in a process called self-verification. Most low-doc lenders also require you to have had an Australian Business Number (ABN)
for at least 12 months.

  Low- and no-doc loans are available through several lenders — including some of the bigger names such as ANZ, Westpac, AMP and St.George Bank. You can choose from fixed or variable rates and can often get features like redraw and portability (taking the loan with you when you move home) as well as the ability to make extra repayments.

  The downside, apart from higher establishment fees and interest rates that are generally about 1 per cent higher than mainstream home loans, is that if you borrow more than 60 per cent of the value of the property you may be required to take out mortgage insurance as well. This can add several thousand dollars to the cost of buying your home. (Borrowers of mainstream home loans don’t have to take out mortgage insurance for loans under 80 per cent of the valuation of the property.)