I need a home loan – what does a lender want?
How to get yourself lender ready!
As a mortgage broker I’m often asked whether lenders are currently making it more difficult for applicants to obtain a loan. The answer is banks still want to lend. However, with all lenders having greater focus on meeting the Responsible Lending requirements some borrowers are finding it difficult to obtain an approval. Also, after a major change to what’s reported, credit reports are now providing surprises for some applicants.
My biggest tip is to “get yourself lender ready” by making sure your finances and financial records are well organised well before you apply for finance. Here are three ways you can achieve this:
1. Affordability is based on lender policy not actual numbers:
2. Living expenses is the hot topic
3. Check the details on your credit report annually.
In conclusion, getting yourself lender ready will give you a better chance of a successful outcome , reduces the time to yes and may identify expense savings. Don’t despair if your current bank cannot assist as there may be a lender that will provide a solution for your current situation. The Reserve Bank recently reported almost six out of ten applicants are using mortgage brokers to assist them with their search for finance. One major reason is brokers have access to multiple lenders and can assess your likely options quickly.
The information provided in this article is general advice only based on recent trends within the finance industry and client experience. A quick discussion with provision of financial details can assess your personal situation in greater detail.
The truth about your interest rate
At a time of almost constant changes in the finance world – and an absolute overload of information online – it’s easy to see why some consumers are becoming ‘switched off’.
A recent study* about financial literacy found 36% of respondents didn’t realise if they reduced the length of their loan they would also have reduced the amount of interest they paid! It also found 35% had done nothing to educate themselves on banking products and services.
What does that tell us? Well…
It tells us there are potentially a LOT of people who could be enjoying savings on their home loan AND other loan products – if only they knew how.
So how important is financial literacy? Let’s face it, many of us find the ever-changing world of finance and banking complex. And yes…pretty dull. But a lack of interest in educating ourselves about our home loan – usually the BIGGEST financial commitment we have – is often costing us money!
It’s interesting that the same survey found 74% of us don’t know what a comparison rate is…
Do you? And what SHOULD you know?
Lenders are legally required to display a comparison rate when advertising most loans.
This is a tool to help identify the true cost of a loan by combining all components into a single percentage rate*. It also takes into account loans with a lower introductory rate that reverts to a different interest rate after a set period of time.
For example at the time of writing this article, one lender was advertising an interest rate of 4.44%, but the comparison rate was 5.49%. Now that’s a difference of $1,050 interest each year for every $100,000 of borrowing you have. That is a little over $4,100 per annum on the average Australian loan.
The mandatory comparison rate was initially introduced to stop lenders advertising very low interest rates that lured borrowers into loans that actually ended up costing more than they expected. A low rate may look attractive at first glance but it doesn’t always mean it is the cheapest rate.
While the comparison rate can be used as a guide it is also important to consider the features of the loan and how these may benefit your particular circumstances and future goals. The rate alone should NOT be your sole consideration when obtaining finance.
Remember, whether you are looking to buy your first home, upgrade, downsize, refinance, invest in property or even buying a new car, as your finance specialist it is our job to do the research for you to determine the loan product most suitable for your circumstances.
We are your finance concierge, educator, confidant and specialist working for YOUR best finance options without the trickery of advertising low interest rates a lure for your business.
If you are thinking of reviewing your current loan – DON’T do it alone!!!
Our role as your finance specialist is to help you make the best financial decision for your personal situation. We consider factors such as:
AND we look at more than one lender for your solution!!!
Want to know more? Call us TODAY! We’re here to answer any financial queries you may have!
* mebank.com.au online survey June 2017
* An average Australian loan of $398,500 Finder.com.au April 2018
* abc news April 2018
* Different amounts and terms will result in different comparison rates
*Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.
Ease your investment property cashflow burden
Get the NOW – your investment property tax returns on pay day
Whether you are a first time property investor or a property portfolio owner, cash flow is critical. There are many ongoing, and sometimes surprising, costs associated with holding investment properties.
Numerous unending costs include insurance, body corporate/strata fees, council and water rates, property management fees, land tax, maintenance and repairs.
Plus there are considerations at the time of buying and selling such as entry and exit costs and property valuation fees.
Can you afford a cash flow shortfall?
Managing your income (rent from your tenant) versus your expenses is important in managing your overall surplus or shortfall.
As reported by CoreLogic in their ’25 years of housing trends report’ as of March 2018, property investors were 42.8% of the mortgage demand – more than double the proportion of 25 years ago. Now that’s a lot of investors having to manage their cash flow.
If you have negatively geared properties in your property portfolio (where the income from your investment is less than the expenses) then you would be contributing your own money to hold the property.
Most investors then boost their tax return at the end of the financial year through tax-deductible rental property expenses. This may seem straight forward for single investment property owners, but for those with a portfolio, the ongoing costs could put a strain on their own funds and cash flow.
Case study: Juhyan and Jennifer consider an investment property
Juhyan and Jennifer are considering buying an investment property. They spot a unit that ticks all of their boxes: it’s close to a train station and is a 10 minute walk to restaurants and shops.
The property price is $550,000 with buying costs of $23,000. They have a deposit of $150,000 so they will need to borrow $423,000 to complete the purchase. Their monthly income and expenses are expected to be:
Rental income: $2,250
Less loan repayment: -$2,725
Less allowances for expenses: -$225
Less strata fees: -$216
Less allowances for maintenance -$500
Juhyan and Jennifer can cover the monthly shortfall with Jennifer’s monthly salary, which they currently save. They also have an emergency fund they can draw on if they were suddenly without tenants for a while.
If Juhyan and Jennifer were to purchase say another three similar negatively geared properties, then they would be in for quite a shortfall.
Did you know you can use the tax system to your advantage?
Instead of waiting for your end of financial year tax return, you may be better off paying less tax throughout the year to subsidise the continuing outgoing expenses of your properties.
By completing the ATO PAYG withholding variation application, you can vary or reduce the amount of pay as you go (PAYG) tax that is withheld from your salary each pay period. This may be preferable if your normal rate of taxation leads to a large refund at the end of the year because it does not take into account your investment deductions. See the ATO website for more details.
Your regular cash flow is increased (less tax paid each pay – so more in your pocket) allowing you to: accelerate your debt reduction; put more into your offset account to reduce the interest accumulating; build up a deposit along with out current property equity for your next purchase and of course to help you with any shortfall for covering your property costs each month.
Beware – conditions apply!
The Australian Tax office clearly states that “We will process your application only if you:
The application is valid for one financial year only. So that better be on your-to-do list each financial year if you intend to continue using this strategy.
Importantly, don’t dive into investment property ownership without assessing your overall asset strategy, cash flow and budget management – you don’t want to be caught short each month!
You might consider giving PDH Accounting a call to make an appointment and discuss your intended strategy. We can work in conjunction with you and your accountant to make your dreams become a reality.
10 Steps to successful property investment
Property has been considered a popular path to wealth creation for Australians for many years.
It has the potential to generate capital growth (an increase in the value of your asset) as well as rental income. There are also tax advantages associated with negative gearing. However, when buying an investment property it is wise to remember that you are making a business decision and it’s worth taking the time to plan.
You are not buying from the heart, but from the head, so it is important to assess your current financial position. What are your cash reserves and what equity do you have in your present home? Look at your long term objectives and factor in potential changes to your current situation (eg the birth of a child of the loss of one income).
Positively geared properties – rental income is higher than your loan repayments and outgoings. Tax is likely to be payable on the net income. Negatively geared properties – rental income is less than your loan repayments and outgoings. The loss can (in some cases) be offset against other income earned, reducing your assessable income and therefore your tax payable.
You’ll property need a property investment loan. The deposit can come from your savings or alternatively from equity in the home you live in. It can also be possible to invest in property via a self managed superannuation fund.
There are generally two types of loans: ‘principal and interest’ and ‘interest only’. Interest only loans defer the obligation to repay the principal. The best loan type will be dependent upon your individual circumstances so it is best to talk to us.
This is an essential step to be realistic on your expectations and focus your property hunting time on properties you can afford.
Remember to factor in stamp duty, loan application fees and legal costs into your plans. A building and pest inspection is also a must to avoid expensive headaches down the track.
All properties incur ongoing expenses (eg rates, insurance etc). You’ll use your rental income to cover most or all of these but you might need to have some spare cash set aside until you start receiving rent (most agents pay the owner at the end of each month so you won’t receive rental income straight away).
This is obviously the area in which you will spend the most time. It doesn’t have to be a home you would live in. Think about which features are universally appealing and of course remember the old adage – location, location, location!
It could be a good idea to look for personal recommendations from tenants and landlords you may know.
Some insurance companies now combine building cover with specialist landlord insurance. You should also consider life, TPD and income protection insurance to ensure your family doesn’t suffer financial hardship repaying loans if the main income earner is unable to work.
Your financial situation..
Turn your financial stress around NOW.
A recent Household Financial Comfort Report* stated that 30% of households felt their financial situation worsened in the past year. And that’s a worry considering we are, and have been for two years now, in the lowest interest rate period in history.
You are in financial stress when you:
– have little or no savings
– avoid opening bills or bank statements
– have mounting expenses that your earnings don’t seem to cover
– are in arrears with your loan payments
– are adding to your credit card to pay for everyday expenses (or indulgences)
– need to keep borrowing money to survive the day to day living
– can’t afford an unexpected bill
Of course there are varying degrees of financial stress.
Regardless, facing your financial fears and making adjustments to your everyday spending and expenses ARE the only ways to turn your situation around.
Please don’t leave it until it’s too late.
These FIVE STEPS can help you turn your financial hardship into relief:
It sounds annoying and laborious but your mindset CAN shift when you track and log your expenses. Most of us do not realise how much we actually spend week to week.
You can use online expense tracking apps or a simple notes app on your phone. Many of the lenders now have expense tracking tools as a part of their online banking. Check your last bank statements.
Not only does tracking make you stop and review your spending, it makes you accountable and helps to put the brakes on your spending.
For those of us who aren’t great at detailed budgets, a simple strategy like allocating a percentage of our salary into different bank accounts and emergency funds, can help manage your money. Create savings from household expenses.
Do you have bank accounts with high fees? We can look at the costs vs benefits of shifting you to a low or no fees online or transaction account.
Electricity, pay TV – do you have multiple providers like Stan, Netflix and Foxtel? Compare your home and contents insurance.
Have you reviewed your private health insurance recently? Go to www.privatehealth.gov.au, the government healthcare search engine to compare policies.
All these adjustments can add up to significant savings.
Even your one-coffee-a-day caffeine habit can cost you between $98 and $140 per month. That is up to $1,680 a year! And if you buy your lunch on top of that it can end up in the thousands of dollars.
If you currently have a mortgage and haven’t reviewed your interest rates in a while, then contact us urgently to research your options.
You may be able to make significant savings when we do a finance review across your home and personal debt.
If your mortgage has, or is about to, come off a ‘fixed rate’ it may be an option to roll your finance over to a lower fixed or variable rate before any possible interest rate rises.
If you are currently a property investor with a negatively geared property and don’t already use the PAYG withholding variation application, this could help reduce the amount of tax withheld from your salary each pay period by your employer. See the ATO site for more information and conditions or contact your accountant for more details.
If you think you are in severe financial hardship, there is government assistance available through the Family Assistance Guide and information is available online at ACIS’s Money Smart site.
As your financial specialist, we are here to help guide you through your options and we have experience working with people with various financial situations and goals.
*Members Equity Bank Limited, Household Financial Comfort Report 5 Feb 2018
Extra mortgage repayments
Who owns your extra mortgage repayments?
According to a recent Household Financial Comfort Report* more Australians are feeling strapped for cash and are being forced to dip into their savings to cover the rising cost of living.
Perhaps you have been making additional mortgage repayments to help you manage the ups and downs of life’s expenses and drawing on them when life gets tough or your circumstances change.
Although we have no doubt that all borrowers read every detail of their mortgage documents, and while each lenders policy is slightly different, few borrowers actually realise that some lenders have the discretion to refuse to allow a redraw under certain circumstances. These may include:
– missed loan payments under the contract, or,
– if you financial circumstances have significantly changed since the settlement date
Some lenders also have in their mortgage documents that they can, at their discretion, suspend, reduce or cancel the redraw facility at any time.
It is important for you to understand the terms and conditions of your mortgage, particularly at a time when many people are feeling the strain and looking for options to ease their financial burdens.
If you are feeling you in in – or heading towards – financial stress, as your mortgage specialist, it is always better to chat with us first before making any redraw decisions that may result in a worse financial outcome
There are a few options to control how you access additional mortgage repayments.
Redraw facilities and offset accounts have many similarities. But there are some important differences too.
Both facilities can help you pay off your home loan sooner and reduce the amount of interest you pay on your home loan.
This facility is not a separate account but a feature attached to your loan to allow you to make additional payments towards paying off your mortgage.
However, it may not be as flexible as an offset account.
Access from redraw facilities can be limited to minimum amounts and can some with fees.
Some lenders have the ability, right or discretion to freeze a redraw capacity. Each lender’s mortgage documents are slightly different with respect to working on draw and limitations on access by borrowers.
An offset account is a savings or transaction account linked to your home loan. Instead of earning interest (where you would be subject to tax) the account’s balance is ‘offset’ against your home loan balance. As a result you are only charged interest on the difference between the two.
You may have your salary deposited into a savings or transaction account linked as an offset to automatically save you money on your interest payments.
Most people would consider the most financially effective options if the 100% offset savings account. The good news is that lenders cannot restrict your access to these funds as they are your savings, however offset accounts do not suit all people.
Everyone’s situation is different. All lenders are different. Assessing the best way to manage your finance and home loan depends on a range of factors according to your personal circumstances, spending and saving habits.
Make sure you call us first before taking any action.
*ME Household Financial Comfort Report August 2018
Switching your loan
“Is switching loans a suitable alternative for me?”
Your home loan is usually your largest financial commitment. We understand that changes in interest rates can have a big impact on your monthly repayments and how long it takes you to pay off your loan.
Switching loans might cost you thousands in early exit fees* and other required fees, but it could possibly SAVE you thousands of dollars as well.
When you contact us we will compare you existing loan with other lenders’ products!
We will use the following steps:
We use our financial calculators to compare interest rates, fees and features of your current loan with several other home loans available in the market.
We might also be able to negotiate (on your behalf) a discount below the listed interest rate, especially if you have a large loan. We will talk to your current lender and tell them you are thinking of switching to a cheaper loan offered by another lender.
They may offer to reduce the interest rate or suggest a cheaper ‘no frills’ loan. This could save you significant switching costs. Often, by using us, your Mortgage Broker Newcastle, we can secure a better rate than if you try to negotiate this yourself.
Our role is to calculate the fees you will be charged if you change loans, plus other expenses you may need to pay eg lender’s mortgage insurance (LMI).
We will show you how long it will be before you start making savings after the cost of switching. We can also compare the minimum repayments of potential new loans.
We determine a range of potential loans that may be suitable for your circumstances and check them against your existing loan. We will compare the features such as:
– the ability to make extra repayments
– having an offset account
– having a redraw facility
You may pay more for a loan with extra features and flexibility so we will need to determine if these features are important to you and whether they are worth the extra expense.
We will present you with the potential cost savings and differences in features between loans.
You will only reap the potential savings if the new loan stays cheaper over the long term. The longer it takes for a switch to save you money, the greater the chance that the interest rate savings may fade.
Your savings can be used to pay off your new mortgage more quickly to make lower repayments to alleviate some of your current financial burden.
If you decide you would be better off switching loans, then let’s take action together!
*Exit fees on home loans were banned from 1 July 2011. They may still exist on home loans that originated prior to this date. Fixed loans usually include a break fee for existing before expiry of the fixed term.
Disclaimer: This article is generic in nature. All finance and investment decisions should be considered wisely and based on your personal and financial circumstances. Seek proper advice before committing to any course of investment action. This is not deemed as advice.
Retirement…. have you thought about it?
Planning a single retirement?
A 2017 report found that 52% of people aged between 25 and 64 can expect a ‘comfortable retirement’. On the flip side that leaves of 47% of us (or 5.1 million people) unlikely to have enough put aside to live comfortably in our retirement years.
However, the story it tells for single people is even more disturbing with claims that only 22% of single women and 31% of single men can expect a comfortable retirement.
What is ‘comfortable’?
In 2017 the superannuation balance required for a comfortable retirement was estimated at $640,000 for a couple and $545,000 for singles. This figure assumes the retiree(s) will draw down all their capital and receive a partial age pension.
Based on 2016 figures the average superannuation balance for a women at retirement is $231,000 for men it is still $454,000 – still significantly short of the required threshold. You can see why singles, particularly women, may find retirement more financially challenging than others!
Is the age pension important?
The answer? VERY. Without it, only 20% of couples, 17% of single males and 9% of single females could afford a comfortable retirement. As our policy makers struggle with the costs of supporting both present and future ageing populations, what will happen to the age pension? A heavy reliance on the pension may be to your disadvantage.
Of course to compulsory super guarantee contributions, people expected that retirement meant leaving on the pension. So what has changed? We are:
Retirement ‘risk’ factors…
Lower super balances are certainly a risk for single women. The imbalance between men and women is usually due to factors such as lower incomes, time out of the workforce caring for families and part time work.
Renters will need more retirement savings to cover the cost of rent. A female retiree may also be paying rent for longer.
Divorce after 50. Divorce at any age can set you back financially but the older you are the less time you have to replace what was lost in the division of assets. This can significantly impact a previously well planned retirement.
If you’re building your retirement nest egg on a single income and making financial decisions solo the following tips may help:
Think you are too young to worry?
You may think you don’t need to worry yet. However with advances in medical technology it is predicted younger generations will live even longer than baby boomers.
They should also have the benefit of a lifetime of super contributions to boost retirement balances. But did you know the Australian government recently passed a law that will delay the introduction of the 12% super guarantee until July 2025? That’s 7 years later than the date set in our previous laws! Who knows if it will change again?
Planning is the key
Whether you are a couple, single, males or female the question is: will your super balance be enough in retirement? If the current generation is any guide – probably not.
*EBA/Rice Warner Retire Ready Index
*www.superannuation.asn.au/ASFA Retirement Standard Summary. Assumes retiree(s) own their home mortgage free and are in good health.
*ABS, Feb 2016, Economic Security 6151
Could you retire on property?
Fast forward your retirement with property investment
According to a recent ‘Super Shortage’ study, for Australians to live the retirement lifestyle they aspire to from 65, their savings will last just five years.
With the average life expectancy of Australians being 82.5 years old, this creates a super shortage of 12.5 years.
There are many investment options, but one way to become financially secure and avoid the ‘super shortage’ is to grow a substantial asset base through property investing.
Long term property investment can pay off IF investors ride out the highs and lows of the property market.
Did you know that only 1.5M Australian individuals are property investors? That is approximately only 6% of the population.
With the right strategy and risk prevention, property investment can give you long term financial security. So why are so many people reluctant to take the next step and invest in one, two or more properties?.
When working with our clients on their property investment strategy, some of the things they worry about are:
– losing their home
– not being able to afford another property
– losing their job or other income, and
– interest rates rising
These are genuine and appropriate concerns for property investors, especially in the current lending environment. With tighter regulatory requirements for the finance industry, lenders are now scrutinising borrowers’ capacity to service debt.
Borrowers may be anxious about higher future interest rates and repayments but lenders closely assess:
– a borrower’s capacity to repay their debt
– potential interest rate rises, and
– vacancies from tenants, amongst other factors
This is where we play our part. We are obliged and trained to ensure you do not undertake any finance that is not suitable for your circumstances, now and in the future.
In a less favourable property market, selecting a good property in a high demand area with low vacancy rates will minimize difficulties in finding tenants.
Investing in mortgage protection insurance and landlord insurance is important and should protect you if you unexpectedly lose your job if tenants don’t pay their rent or damage your property.
Structuring your finance is a vital step if you are planning to grow a property portfolio.
Your investment property strategy will depend on your age, income, stage of life and years remaining until retirement.
It is important to investigate:
– the Australian property market and where the best potential gains are likely to occur
– your long term serviceability, finance structure, and
– your current AND future financial position
Give us a call today to start your journey in property investment!
Think you need to be wealthy to invest?
…you may be surprised!
If you think you have to be wealthy to invest in property you might be mistaken! In fact the skills and experience you’ve gained managing a budget on a lower income could make you a better property investor than some big spending high income earners.
We often meet people who are hooked on the good life: living in expensive suburbs, driving fancy cars, frequently dining out and taking overseas holidays. Many will have built their wealth through a successful investment strategy but you may be surprised to find out how many don’t have adequate savings for retirement or redundancy, let alone a solid investment plan.
Why people do it
Around 20% of Australians invest in property for:
Why others don’t
Around 80% of Australians don’t invest in property because they:
Will you be apart of the 20% OR will you be in the 80% of Australians who will need to rely on government support at retirement?
If you don’t act, nothing changes. Remember:
Lower income earners are often the ones who knuckle down and save. Careful budgeting, motivation and discipline are very important attributes of successful investors. If you have had plenty of practice stretching your dollar further and living within your means, you might already have what it takes!
Lower income earners can often have a more realistic view of investment risk
They know they need to do something to get a better financial future. Many people are hesitant to invest because they just don’t like having debt. That’s a fair call… but you can reduce your risk.
We can help you look at property investment options suitable for your own financial situation now and in the future. We can calculate how much you could afford to borrow to invest or explain how to use your home equity to allow you to get ahead financially with limited risk.
-ATO Taxation Statistics Report 2011-12
-Australian Health and Welfare Institute August 2013