FAQ
LMI protects your lender in the event that you default on your home loan and there is a ‘shortfall’. A shortfall happens when the proceeds from the sale of your home are not enough to cover the outstanding amount you owe to your lender.
Your lender may be able to recover the shortfall from the LMI provider – but even if they do, it doesn’t mean you’re off the hook. The LMI provider may seek to recover the shortfall amount from you.
If LMI is required, you’ll have to pay the insurance premium. But it’s important to remember that LMI doesn’t provide you with any protection even though you pay for it – it’s there for your lender’s protection.
If you are finding it difficult to save up a 20% home loan deposit, you may still be able to borrow from a lender to buy a home. However, you may have to pay Lenders Mortgage Insurance (LMI).
Lenders typically ask for a minimum of 5% of the purchase price.
The reason why it is so strict with genuine savings is due to their Lenders Mortgage Insurance (LMI) providers.
Loans that are for over 80% of the property value are insured by an external company. This reduces the risk to the lender in the event that clients can’t repay the loan.
If a lender has to make a claim on a mortgage insurance policy as a result of a customer not paying their loan, then the mortgage insurer will audit the original approval.
If they see that the lender didn’t have evidence of exactly 5% or more in genuine savings when they approved clients’ loan, then they won’t pay the insurance claim.
Examples For Genuine Savings:
1. Funds held or accumulated in savings accounts for 3 months or more, or
2. Funds saved in First Home Saver Accounts, or
3. Equity in Residential Property, or
4. Proceeds from the sale of a property, or
5. Term deposits held for 3 months or more, or
6. Shares held for no less than the last 3 months, or
7. A rental history showing payments on time for 3 – 12 months, or
8. Lenders may allow a gift/inheritance from parents or a loved one as a deposit.
When a residential property investor borrows money from a lender in order to fund an investment property – which is the purchase of a property that will be used as a rental rather than the buyer’s primary residence – it becomes open to a financial strategy called ‘gearing’.
If the rental return or the rental income is not substantial enough to cover the total costs of managing the rental and re-paying the interest potion of the loan, the investment property will be ‘negatively geared’.
A negatively geared investment property can provide potential tax benefits, when the time comes for the client to lodge their yearly tax return.
An offset account is a separate deposit account. Employer can deposit salary into it and Clients can transfer money in from other accounts. They can use their offset account for everyday spending like groceries and bills by using a debit card.
A redraw facility is not a separate account but a feature attached to your loan. It allows to draw back additional payments (the amount above scheduled payments) they have made on the loan. A redraw facility may not be as flexible as an offset account. Don't have the option to redraw money from an ATM or transact using a debit card. Some lenders may set minimum redraw amounts.
The LVR or Loan Value Ratio is the amount clients are borrowing against the property value being used as security for the loan, represented as a percentage.
Lenders place a large emphasis on the LVR when assessing a loan application. The lower the LVR, the lower the risk is to the bank, hence they are likely to get better rates with a low LVR home loans.
Loan to Value Ratio is calculated by dividing the loan amount by the actual purchase price or valuation of the property, then multiplying it by 100
Fixed Interest Rate :
A fixed rate home loan means your loan repayments will be charged at the same interest rate for however long the fixed rate period is. This rate is commonly for a period between 1 – 5 years, but longer fixed rate terms do exist. After this period, the rate will revert to a variable rate, unless you enter into another fixed-term contract.
Locking in the interest rate on your home loan provides certainty in terms of your monthly repayment. This can make budgeting much easier, particularly in the first few years of home ownership. Your fixed rate will protect you in the short term against any increases in the official cash rate.
A potential disadvantage of fixed rate loans is that if interest rates fall, your ability to realize those savings will be delayed. Another disadvantage of a fixed rate home loan is inflexibility, if you need to break your contract it can be expensive.
Variable Interest Rate:
A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts, redraw, additional repayments.
A low-doc or no-doc mortgage is ideally suited for investors or self-employed borrowers looking to refinance, purchase or renovate.
Low Doc home loans are often perceived as higher risk by the lenders, because the income of the borrower cannot be substantiated by conventional means. As a result, a Low Doc loan would usually have a higher-than-average interest rate; plus more limitations in terms of the maximum Loan to Valuation Ratio (LVR), available loan features and package discounts.
A self-employed borrower would typically need to provide proof of income using a combination of the following:
• Proof of ABN and/or GST registration
• Business Activity Statements (BAS)
• Business Account transaction statements
• Accountant's letter
• Personal tax returns
Before applying for a Low Doc home loan, it's worth sitting down with an experienced mortgage broker to work out your net income and the amount of loan you can realistically afford to service on a regular basis. Doing this could help to avoid disappointments, plus you could also uncover more lenders or product choices which you were not previously aware of.
What are the merits and demerits of low doc loans?
Merits:
• Simple income declaration form
• Alternatives to tax returns as income evidence are available
• Fully serviceable loan options, redraws, line of credit, variable or fixed rates
• Principal & Interest or Interest-only loans
Demerit:
• Generally a higher interest rate and potentially fewer features
• Not every bank or lender offers low doc loans
When a residential property investor borrows money from a lender in order to fund an investment property – which is the purchase of a property that will be used as a rental rather than the buyer’s primary residence – it becomes open to a financial strategy called ‘gearing’.
If the rental return or the rental income is not substantial enough to cover the total costs of managing the rental and re-paying the interest potion of the loan, the investment property will be ‘negatively geared’.
A negatively geared investment property can provide potential tax benefits, when the time comes for the client to lodge their yearly tax return.
Principal and interest (P&I):It is a type of loan where the borrower repays the loan as well as the interest charged by the lender from the very start of the term. As you are progressively paying down the balance from the start of the loan term, you generally end up paying less in interest over the life of the loan, compared to an interest-only loan.
Interest-only (IO): It is a lending arrangement where you only repay the interest on the amount you have borrowed for a set period of time. You don’t have to repay the principal (the loan amount) during that period, like you would with a principal and interest (P&I) loan. During the interest-only period your repayments would be lower, but would go up once you start paying off the principal component of the loan.
Principal and interest (P&I):It is a type of loan where the borrower repays the loan as well as the interest charged by the lender from the very start of the term. As you are progressively paying down the balance from the start of the loan term, you generally end up paying less in interest over the life of the loan, compared to an interest-only loan.
Interest-only (IO): It is a lending arrangement where you only repay the interest on the amount you have borrowed for a set period of time. You don’t have to repay the principal (the loan amount) during that period, like you would with a principal and interest (P&I) loan. During the interest-only period your repayments would be lower, but would go up once you start paying off the principal component of the loan.
A Bridging Loan could help you buy a new home before you’ve sold your existing one. A Bridging Loan covers the time between buying a new property and settling on the sale of your existing one.
Benefits
A bridging loan gives you the flexibility to purchase a new property before you’ve sold your existing property. In a competitive market this could be the difference between purchasing the ideal property or missing out due to timing.
It can take the stress out of having to align your property settlement dates, to give you more control.
It allows you to borrow more money than you otherwise could under normal circumstances. This is because we understand that your total overall home loan debt will be reduced once you have sold your current property and paid off the agreed loan amount
Risks
Interest is calculated daily and charged monthly, which means the longer it takes you to sell your current property, the more interest you will pay.
You may end up selling your home for less than you expected, which may leave you with a higher home loan balance than planned.
If you can’t sell your current property within the 12 month timeframe from the day your bridging loan is funded, we may consider this a default and step in to assist with the sale of the property.
In the event of a default, you can lose your property and you may still owe us money
In most cases you will get the same rate if you had gone to that lender directly. In some cases you would actually get a better offer through brokers, because lenders view us as a wholesale channel. Brokers provide a more personalised service and for no additional cost they will do the leg work for you. Your own mortgage broker will manage your application all the way to settlement, keeping you informed every step of the way. We will handle as much paperwork as possible. With over 25 lenders to choose from, we provide real choice to find you the right deal. We will save you time and stress, getting things moving as quickly as possible.
Borrowing varies depending on how much you earn and what your living expenses are. A Mortgage broker can do some basic calculations to help you understand how much you can afford to borrow
The First Home Owners Grant (FHOG) scheme was introduced on 1 July 2000 to offset the effect of the GST on home ownership. It is a national scheme funded by the states and territories and administered under their own legislation.
Under the scheme, a one – off grant is payable to first home owners that satisfy all the eligibility criteria. The concession scheme is administered by the Revenue Office of each States.
Eligibility
• Purchasing a new home that has not been previously occupied or sold as a place of residence and includes a substantially renovated home.
• The market value of the property is $575,000 or less
• At least one applicant is an Australian citizen or permanent resident. New Zealand citizens permanently residing in Australia who hold Special Category Visas may also apply.
• Each applicant is 18 years of age or older
• You or your spouse/domestic partner have not held a relevant interest in an Australian residential property prior to 1 July 2000.
• You or your spouse/domestic partner have not occupied an Australian residential property in which you had a relevant interest on or after 1 July 2000 for 6 months or longer.
• You and your spouse/domestic partner have not previously received a first home owner grant in any state or territory of Australia. If a grant was received but later paid back together with any penalty (if applicable) you may be entitled to reapply for the grant.
• All applicants must reside in the home as their principal place of residence for a continuous period of at least 6 months commencing within 12 months of date of settlement for contracts to purchase, or the date construction is completed for owner builders or contracts to build.
Companies and trusts are not eligible for the first home owner grant.
There are several factors to consider, including your current financial situation, your goals and how long you intend to keep your home. Finance Mutual Australia can work with you to help evaluate your choices and find a solution that meets your needs both now and in the future.