Mortgages and Home Loans

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In the 1960’s most home owners saved large deposits to buy and invest in property because mortgages and home loans were hard to get. These days mortgages are available to most people who have a job and this has made property easier to buy but also fuelled massive increases in property values.

Key Elements to Home Loan Mortgages

The key elements to borrowing to buy or invest in property are:

  • Deposit amount (as a percentage of total loan)
  • Total loan amount
  • Loan duration
  • Interest rate
  • Loan Repayments
  • Principal and Interest or Interest only
  • Property Valuations

Principal & Interest

If you are a person looking to borrow money to buy a property the biggest issue on the mind of all lenders is the risk of you defaulting on your loan and not being able to meet your regular loan repayments.

It’s important to understand that most repayments include paying down the loan amount (principal) as well as paying the cost of borrowing (interest) – these loans are called P&I loans.

When you are a property investor and you have a home loan mortgage you can claim the cost of borrowing (ie. the Interest) as an expense for owning that Investment property and investors like that because they can use this cost to reduce their annual income so that they pay less tax – all the while the value of their property actually increases.

Infact, if property values are increasing quickly many investors will try to apply for Interest-Only loans so they don’t need to pay off any of the principal loan amount (which can’t be claimed as an expense)

A different risk is that you won’t be able to repay the loan amount (principal) so Interest only loans are usually slightly more expensive.

Interest Rates & Risk

Everyone looks at the current interest rate that is set by the Reserve Bank of Australia (RBA) as a guide to how much home loan mortgage rates will be but that is only one factor. The other significant factor is “who” is actually providing the money and usually it is depositors who “deposit” their money into the banks to earn interest income.

Where there are not a lot of depositors, like we have in Australia at the moment, the banks and lenders need to find their money elsewhere and often it comes from the United States. If the money comes from the US you need to consider the Interest rates in the US and if they are high or rising, that will effect the cost of your home loan morttage in Australia.

The Global Financial Crisis & Home Loan Mortgages

During the Global Financial Crisis which started in 2007 credit became hard to find because US banks loaned money for homes to people who have commonly been called NINJA’s – No Income, No Job, No Assets. These people are high risk borrowers but most of the people who put their money into the banks as deposits to fund these loans were told that the loans were Investment grade (ie. low risk). Needless to say, many people lost their money and credit was hard to find – it was very hard for even the biggest companies to borrow money!

Between then and now interest rates have come down as governments encourage people to start borrowing and the availability of money to buy homes has increased the demand for homes and subsequently increased house prices.

Australian Banking Royal Commission & Home Loans

In early 2018 the Australian Banking Royal Commission delved into the practices of most financial institutions in Australia, from insurance companies to the big banks and superannuation funds and it significantly changed the criteria that the biggest lenders use to access whether YOU are capable of paying back a loan.

Loan Mortgage Insurance (LMI) & 5% Deposits

Even though a 20% deposit is the ideal situation for banks and other home loan lenders they are often willing to loan you more money for a home loan if you are willing to take out Mortgage Insurance. Mortgage Insurance covers the bank in the event of a repayment default if you are unable to repay the loan.

The cost for Loan Mortgage Insurance increases the smaller your deposit amount is but most people who are very keen to go ahead don’t notice it too much because it is added to the loan and paid off over time, just like the Principal itself.

Total Loan Amount

Your total borrowing capacity is based on many different factors including the

  • amount of your savings you have for a deposit
  • your current salary
  • your existing debts (credit cards, Tax, Study loans)
  • your cost of living (affected by children etc)
  • your age
  • If you have any other assets
  • the value of the property you want to buy

It’s a common belief that if you can service your home loan mortgage then you can buy anything you want but that is not the case. Bank will loan different amounts depending on what type of real estate you’re going to buy.

A tiny bedsitter unit in Sydney less than 40m2 will be treated differently to a comfortable 1 or 2 bedroom unit, a commercial property and a rural block will also be treated very differently to a standard 3 bedroom home in a strong performing suburb like Mayfield in Newcastle.

Most home loan lenders will organise an independent valuer to go to the property you want your home loan for to come up with a valuation for the bank and often it will be based on comparable sales.

Other Fees Can Be Included In Your Home Loan

There are several fees involved in a property purchase transaction but just like the cost of the property they can be included in the total loan amount so you can pay it off over time. These costs include:

  • Stamp duty – this is fee charged by the state (not federal) government
  • Conveyancers costs
  • Buyers Agent Fees

When you get a Buyers Agent to act on your behalf to search for, negotiate and secure the purchase, part of the fees are paid as a success fee when your property purchase settles. This step is called Settlement and it’s where everyone involved meets and confirms all the details and it’s when the banks representative releases the home loan funds for the purchase.

Is a Mortgage Broker Better than Dealing Directly with the Bank?

It doesn’t cost you more money if you use a mortgage broker or deal directly with the bank so you just have to decide what you prefer to do. The reason that many people use a mortgage broker is because they will work on your behalf to help you get a loan.

Mortgage brokers go through training so they can access and use the banks home lending mortgage portals and they receive regular updates from all the main lenders about what is going on, including things like

  • interest rate changes,
  • how they access repayment capacity, and
  • what type of loans they want to write

For these reasons a mortgage broker can often help you get a better result with the bank even if you already have bank accounts with them because they do all the leg work for you. This leg work includes collecting your financial information, completing all the forms correctly and negotiating where possible on rates and other loan conditions.

Mortgage Brokers will often do all this work and then only get rewarded via a commission if you actually get the loan. The biggest way they can differentiate themselves from other mortgage brokers is by providing great customer service and being available to communicate all the time!

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