One of the biggest decisions when considering your mortgage is whether to choose a fixed rate or variable rate home loan, or a combination of the two. With fixed rate home loans currently the lowest on the market they’re a popular choice for new mortgagees but breaking your loan down the track can be an expensive process.
A fixed rate home loan is a mortgage that locks in an agreed interest rate for a certain amount of time and is different to a variable rate home loan where the percentage of interest you pay fluctuates with the market. This is a legal contract guaranteeing that you’ll repay a fixed amount of interest on a loan for a specified time period.
Variable interest rates are often more popular with borrowers when interest rates are high to avoid locking in a high interest rate for a long period of time and in the hopes that they’ll be able to take advantage of a lower rate if the market shifts.
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Fixed rate home loans tend to be more appealing when interest rates are low. Thanks to historically low cash rates fixed rate home loans are proving one of the best options available right now. A fixed rate home loan also makes it easier to keep to a budget and offers peace of mind knowing your repayments will be the same month-to-month, as well as offering some insurance against rising interest rates. However, a fixed rate home loan locks you into your mortgage, meaning if you plan on selling you’ll have to pay fees and other costs to break your contract.
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A fixed rate home loan gives you peace of mind that your repayments will remain consistent, but if also gives your lender peace of mind that they’ll receive repayments for the given length of time.
If you choose to end your contract by selling your property, switching loans or lenders or refinancing, your lender will require you to compensate them for lost interest.
A fixed rate home loan is considered broken with the borrower switches to a different product, makes extra loan repayments outside of contract stipulations, repays the loan in full before the end of the fixed rate period, or when the loan is in default.
When lenders agree to lend you money at a fixed interest rate, we obtain money from the money market at wholesale interest rates based on you making your payments as agreed until the end of the fixed rate period. If you don’t, and wholesale interest rates change, we can make a loss.
The most common fees associated with breaking a fixed rate home loan are break costs and exit fees.
You may also be required to pay a discharge fee to cover administrative costs, typically around $300-$400, which also covers the cost of the lender removing the mortgage that was registered on the title of your property.
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A break cost will apply:
Each of these events is considered a “break”.
When there is a break, you will also need to pay an administration fee regardless of whether a break cost is payable.
Most lenders will allow for some early repayments each year for fixed rate home loans without being charged additional fees.
Each lender will have their own set of terms and conditions that will detail when break costs will apply and how they’re calculated.
However, break costs are more likely to be applied when the current cash rate is lower than the rate when you took on your mortgage, and the lender is set to lose money when they establish a new loan.
If current interest rates are higher than your fixed rate, they might be more willing to let you out of your mortgage contract without charging costly break fees as they benefit from your exit.
When you agree to your mortgage contract your lender borrows money from the wholesale money market using the current Bank Bill Swap Rate (BBSR), which is locked in at the same time as the interest rate of your fixed rate home loan.
The lender agrees to pay this debt back but does not have an option to repay a loan early so when you break your loan they will need to lend the money back out to another mortgagee. If this new loan is taken out at a lower interest rate than your initial loan the lender loses money on the loan you broke.
While break costs can seem like an unfair fee, this is a way for the lending institution to recoup some of their lost funds.
While breaking your fixed rate home loan might not always incur large break costs, if the interest rate is not in your favour this can become quite a high cost.
Your break cost is calculated by finding the difference between the cash rate at the time you took out your mortgage and the current market rate, and using this to calculate the loss to the lender if they were to lend out the fund allocated to you at the current market rate.
Generally, you will need to pay a break cost if, at the date of the prepayment or switch, current Wholesale Interest Rates are lower than your original Wholesale Interest Rate.
Wholesale Interest Rates are lender estimates of the current cash rate at which lenders can transact fixed rate funds with the money market.
Among other things, the break cost formula takes into account:
Each lender will have their own calculations that they’ll use to determine the break costs and should be able to provide you this formula as well details on their specific policies.
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An early repayment means early repayment of the whole, or part, of the unpaid balance of your loan account, before the end of the Fixed Rate Term that was current at the time. An Early Repayment Cost or Early Repayment Adjustment may be charged when you repay a fixed rate loan before the end of the fixed rate term. This will occur when the cost of funds at the start of your fixed rate loan exceeds the cost of funds at the time of repayment, resulting in a loss to the lender.
Early Repayment cost amounts can change from day to day. We recommend speaking to your lender to find out what your early repayment costs could be and what options they recommend.
From 1 July 2011, the National Consumer Credit Protection Regulations 2010 (National Credit Regulations) prohibited early termination fees for residential loans, subject to some limited exceptions.
According to the Australian Securities & Investments Commission many home loans and loans for residential investment properties have early termination fees, which are payable if a customer terminates a loan within a specified time (e.g. three to five years). Early termination fees can be a barrier to consumers switching loans by ‘locking’ them into loans with unfavourable interest rates if the early termination fee is also high.
An early termination fee does not include any fee or charge that is payable regardless of whether the loan is repaid early or not (e.g. standard discharge fees and charges).
This type of fee is said by lenders to be charged to recover the economic cost to the lender of a customer terminating a fixed rate loan before the end of the fixed rate term. It is not charged for variable rate loans. *
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Given that break costs are calculated using the daily interest rate the applicable break cost for your mortgage changes day-to-day. However, lenders will generally provide an estimate that is valid for 2-5 business days depending on your lender. Once your quote expires you’ll need to seek a new one at the current interest rate.
Words by Danielle Austin
Is your current interest rate still competitive? Contact one of our mortgage brokers to compare your options and find a deal that suits you.
After scouring the housing market for some time, you’ve fallen in love with a home that ticks all your boxes. Now you’re wondering how you make an offer on the house without paying more than you need to. We explain everything you need to know during this exciting time.
Australian homes typically sell by private treaty, where the vendor sets the price of the property, or via auction, which involves making a bid over the reserve price to secure the property. Both buying processes are completely different and how you make a house offer will depend on the selling process of the property.
Before taking a serious look at the property market, seek pre-approval from your lender first. By doing this you will know the limits of your budget and won’t set your sights on something outside what you can afford.
Seeking pre-approval, sometimes called conditional approval, also puts you in a stronger position when making an offer as it makes you more attractive to vendors.
Although you can make verbal offers on a house, for clarity on details and terms it is best made in writing.
In your letter of offer the following should be included:
You may also want to seek legal advice before making any formal offers.
Making your offer is as simple as contacting the property agent and letting them know the amount you’re willing to pay – to start with a verbal offer is fine.
Tips on making your offer:
Once you’ve given your verbal offer to the agent, they’ll take you through the process of formalising a written offer.
There are three typical outcomes once you make an offer on a house.
Even after making a formal offer the buyer has several stages to withdraw from the sale before it is finalised.
An offer is not a legally binding contract and can be withdrawn before the seller accepts. You can revoke your offer by giving the agent a written letter informing them of your offer withdrawal. If you decide you want to revoke an offer, don’t waste time. It becomes much more difficult and costly to revoke and offer once it is accepted.
Most states also have mandated cooling-off periods. This gives the buyer several days to reconsider their purchase after the exchange of contracts. However, withdrawing from the sale at this point will come at a financial cost to the buyer.
Home loan lingo got you down? Check out the eChoice finance glossary for help with those pesky terms!
A lowball offer is an offer considered to be less than what the property is actually worth, and is a tactic many home buyers might consider in a slow market. However, while it’s natural to want to get ‘bang for your buck’ in any purchase, a lowball offer is not always a good tactic in home buying.
Research the sale history of the property and look at similar property types in the area that have recently sold to get an idea of the worth of the property.
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Generally speaking, a vendor cannot back out of a sale once an offer has been accepted, however, there are few exceptions. This could include a vendor cooling off period being stipulated in the contract or the buyer not meeting the requirements of the contract.
As a seller, you should seek legal advice for a better understanding of what breaking a legally binding contract would mean for you.
The amount of money you put down as a deposit is subject to your lender and their criteria. Some let you borrow up to 95% of your property’s value so you may only need to put down 5% to have your loan approved.
But, it’s a good idea to aim for more – you won’t have to borrow as much, you will have lower repayments and you will lower the amount of interest paid over the lifetime of your loan.
You’re also in a better position to negotiate lower interest rates with lenders because you pose less of a risk with less to repay.
When you put down 20% of the sale price or more, you also avoid paying Lender’s Mortgage Insurance. This is a way to protect the lender when you borrow a large fraction of your purchase price. This cost can either be upfront or made in addition to your repayments.
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Selling a property comes with its own set of worries, one of the most important being knowing when to accept an offer.
Take time to consider what you are willing to accept and what conditions you might negotiate on when you place your home on the market. Some things to consider:
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It is best practice to respond to all offers, and if you are selling through agent, they will likely push you to give an answer to any offer. If you choose to reject or counter the offer make sure you respond in a timely manner.
Buyers making an offer can bid lower than the asking price, although some agents may not commit to writing an offer if it is too low. Most vendors will not go below 5% – 10% of their asking price but there are factors to consider:
There is no legal requirement to use a lawyer to make an offer on a house but it is advisable to speak with either a lawyer or a specialised licensed conveyancer to look after your transaction. They can help guide you through negotiations and offers, although the real estate agent will also provide guidance where needed.
In a slow market or a buyer’s market, you may want to consider lowering the price of your home. Before you lower your asking price, consider what offers you are willing to accept and whether it’s the right time to sell if offers are low.
Selling in a buyer’s market – when there are many properties for sale and competition among vendors is high – means prices are driven down. Consider how motivated you are to sell at the given time and assess whether your asking price is inflated. Consider reducing the price or waiting out the market.
Some other things to consider include:
When a property is “under offer” but the sold sticker has not gone up, this means that it is still subject to a few conditions. This can include cooling off periods or pest and building inspections. At this point you can phone the agent and find out which conditions are still being determined so you can keep track of whether it will return to the market. You can still inspect the property to make sure it ticks all your boxes, and then if need be, sit tight and wait.
Often contracts for the sale of residential property come with a cooling-off period, though, it is rare buyers to pull out of a sale. Under a contract of sale, terms can be changed to waive, reduce or even extend a cooling-off period. These terms are discussed and settled in pre-sale negotiations.
Extra conditions may be added to your contract of sale such as your ability to obtain finance or the sale of your current property.
If you buy a house at an auction, say goodbye to a cooling off period. Cancelling after securing the property at auction will become an expensive exercise, so be confident in your choice and your finances before this.
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Contract cancellations need to be made in writing and usually within a period of time and at a cost. Look above to find the cooling off laws in your state, and if you fall within that time.
You can also pull out if the seller fails to fulfil a condition under the contract. But if you want to withdraw after this period of time you should speak to a lawyer about the consequences of breaching a contract.
Legally there is nothing stopping a real estate agent from disclosing if other offers have been made and what the magic number was. But, according to Lisa Suryawan, Sales Manager of Xynergy Realty, she says:
“It’s best not to share what the offer amount is however we could give an indication of a range where the offer might fall.”
Ask the seller why they wish to sell
The best offers aren’t always the highest price. You also need to understand what is motivating them to sell and try to use this to your advantage.
This is why it is important to ask:
Look at what recent sales suggest, then assess if the offer seems high or low.
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Looking for a home loan? Contact eChoice. With access to 100s of mortgage products from over 25 different lenders, eChoice brokers have the resources to help you find the perfect home loan. Best of all? We do all the paperwork!
This information is a guide only and is an estimate only based on the past 12 months of aggregated online mortgage enquiries from eChoice and partner programs.
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Have you ever signed a contract without actually reading the fine print? While you can probably get away with it with your Netflix subscription, contracts of sale are different.
When it comes to purchasing a property, it’s vital that you understand what a contract of sale is, the effect of the contract, as well as the role you play in this type of agreement. By understanding the legal aspect of buying a house, you will reduce the risk of falling into a dispute – as well as the risk of a lengthy (and costly) litigation.
When entering a contract of sale, it’s important to take note of what kind of property you are purchasing. Consider whether it’s an established home or an ‘off-the-plan’ property, as your contractual obligations may differ.
It’s also important to take note of what state you are living in. The legislation surrounding the requirements of a contract of sale differs by state. Despite this, there may be common elements.
In NSW, requirements for ‘off-the-plan’ contracts were amended this year. Through the Conveyancing (Sale of Land) Amendment Regulation 2019, ‘off-the-plan’ specifies residential lots that have not been created at the time the contract is formed.
This section lists the details of the sale, such as the:
If you’re buying an established home then this should be stipulated in this section, along with the home’s fixtures and fittings (if these are included in the sale). If you have negotiated to buy furniture items within the home or sheds, cubby houses or other items, then these should be listed in this section.
You may also find that any exclusions or items that are not included in the sale are listed in this section. For example, the agent may state that all house fixtures and fittings are sold with the home except the custom water feature hanging in the atrium. This then means that the buyer is not selling their custom water feature and that this is not inclusive in the sale of the property.
The total cost of the property will be written in this section of the contract. It is typically listed in the ‘Price $’ allocation. The deposit amount will be written under this dollar amount along with the date of the payment and any monies that have already been paid. The balance due at settlement will also be stipulated so that the buyer knows how much they will have to pay at the time of settlement.
An agent will ask a buyer for some type of deposit at the time of signing the contract. This is typically a figure that is negotiated between the agent, who is representing the seller, and the buyer. The deposit is a sign of the buyer’s authenticity and commitment to buy to property.
This section defines the date of settlement or when the property will be transferred from the vendor to the buyer. On the settlement date, the buyer’s lender will transfer the money to the property and collect the deed for the property from the vendor’s lender. Once the settlement has been finalised the agent who was selling the property will be notified. They will then contact the buyer and let them know that they can collect the keys to the property.
If the property is currently tenanted, then ‘subject to lease’ will be written in this section. The details of the lease should then be disclosed below this statement. Tenant details, when the lease expires, the rental amount and when the rent is collected should all be included. If the buyer requires vacant possession of the property, then they must notify the vendor, who will give the tenant 60-days notice in accordance with tenancy laws.
If this section is blank, then it means the property is not leased. The buyers are then able to move into the property themselves or they can elect to lease the property.
If the property is to be paid for by a loan, then this will be stipulated in this section of the contract. Details will include the amount of the loan, the date of the approval and possibly the lender’s details.
Any conditions that apply to the sale of the property will be listed in this section. Special conditions typically refer to any clauses that could affect the sale of the property, such as loan approval or the sale of another property or business. In most cases, if there are conditions then these will be listed as ‘subject to’, which means that the sale of the property will not occur unless these conditions have to be met.
Most contracts will also have a general cooling-off period of 3 business days (72-hours), which is effective from the time of contract signing. During this time either the vendor or buyer can change their minds about selling or buying the property. If they change their minds during this time then they can elect to dissolve the contract and the sale of the property will not go ahead.
It’s vital that before signing the contract of sale, you make sure you read the document thoroughly. Ask as many questions as possible to clarify points. Check, then re-check details, such as names, addresses, and the amount of money to be exchanged. Also check the legal terms and conditions and make sure you understand everything associated. If you are positive all is in order and correct, then sign the contract of sale.
If you’re still trying to wrap your head around the concept of a Contract of Sale, don’t stress. We recommend seeking independent legal advice to help clear up any confusion that you may have.
Words by Vidya Kathirgamalingam
Looking to refinance your current home loan? Contact eChoice today, and one of our friendly brokers will help you to find the best deal.
Buying a home is likely the biggest and most important purchase you’ll ever make. Thankfully, it’s also one of best investments, making all of those years of diligent saving worth it. Although getting a deposit together is the hardest step, it’s not the only transaction involved in buying a home.
There are many additional costs — both big and small — that are often overlooked by first time buyers. This can leave buyers blindsided and out–of–pocket with extra costs to cover. We’ve compiled a guide listing the upfront and hidden costs involved in buying a home to ensure you’ve covered all bases.
There are various upfront expenses you’ll need to pay your lender when securing your mortgage. These are usually consolidated into a lump sum and included in your overall loan.
Apart from your deposit, stamp duty is usually the second–largest upfront cost. Stamp duty is the tax you must pay on your property purchase and like your deposit, it’s calculated based on the value of the home you’re buying.
Lenders Mortgage Insurance
LMI is a one–off payment, usually between 1–3% of your loan amount. You can waive this cost if you have a deposit of more than 20% or if you have a guarantor.
Title transfer fee
This is a fee charged by the local government to transfer ownership of the home from one person to another. It varies from state to state, but generally costs are between $100 and $140.
Mortgage registration fee
Another government fee which registers your physical property as security on your home.
Some lenders prefer you to pay for stamp duty via other means, such as your savings. However, in many cases your lender will include stamp duty (potentially your Lenders Mortgage Insurance too) in your overall loan amount.
Yes, you will need to pay your deposit — also known as a down payment — to your lender upfront to secure your mortgage. However, there are some exceptional circumstances where a no deposit home loan is available. If you already own a property, you can also use any existing equity in place of a down payment.
Unless you’re exempt under the First Home Owners Grant, you will be required to pay stamp duty — which is tax charged by the government on your property purchase. If you use your property as an investment property, you will also need to claim it as income in your annual tax return.
Most upfront fees tend to be fairly well–known among buyers. Here are the hidden fees that tend to fly under the radar:
Moving in to your home can be more costly than you think. A Guide to the Cost of Home Purchase estimates a bill between $550–$3500.
Legal and conveyancing fees
It’s wise to hire a licensed conveyancer or solicitor to ensure your transfer goes smoothly and your legal documents are airtight.
From visiting your lender to being on site for the inspections, it’s important to keep petrol, parking and toll costs in mind. These smaller travel expenses can add up quickly.
Unfortunately, the costs of being a homeowner don’t stop after the settlement date. Some ongoing costs to factor in include:
You’ve worked hard to buy your new home — now it’s time to protect it. Many mortgage providers actually require you to purchase home insurance (sometimes also contents insurance) in order to cover your home when repairing and rebuilding. The cost of this can vary by as much as $1,335 in Australia, so it pays to shop around.
Strata fees and council rates
Usually billed quarterly, council rates are your contribution to local projects, infrastructure and the maintenance of public spaces. The amount you pay will depend on where you live. If you live in an apartment or townhouse, you will also need to pay strata fees to cover the upkeep of common areas like the pool or laundry, or even the building itself.
Whether your home requires some fix–ups now or later, it’s important to factor in foreseeable renovations when choosing a home.
Utilities and household bills
Unless you rent your property out, gas, electricity, internet and water are all ongoing expenses you’ll need to cover. The amount you pay for gas and electricity depends not only on your provider but also the size and location of your property.
While selling your home is far kinder on the wallet, there are still some costs involved. These include:
If you still have a mortgage owing on the property you’re selling, you will need to pay your lender an early exit or discharge fee. This discharge process can also take between 14 to 21 days.
Ask your lender upfront how they expect to be paid. Some agents work with a flat rate, while others will ask for a percentage of the sale price. Some agents also use bonuses as an extra financial incentive to try and sell the property above the agreed–upon reserve.
Much like buying a home, it’s recommended that you use a professional conveyancer or solicitor to handle the title transfer of your home
While real estate agents will generally recommend a marketing plan, it’s up to you to foot the bill. These costs can include professional photographs of your property, copywriting for your listing, creating a floor plan, signage and more.
Better known as conveyancing, legal ownership of the home must be transferred from one person to the other. While you can choose to do this yourself, it’s best to consult a licensed conveyancer or solicitor to ensure settlement goes through without a hitch.
Hiring a solicitor or conveyancer can cost you anywhere between $500 to $2000.
There may also be some additional disbursement charges, which are charges paid by the conveyancer to a third party. These include settlement fees, certificates and searches such as land tax and heritage listing.
Technically there’s nothing stopping you from handling your own conveyancing. Some states such as Victoria and Queensland even offer DIY conveyancing kits for around $100, which guide you through the process. However, it’s important to note that conveyancing can be quite time–consuming and overwhelming. It can also be quite costly if you make an error and set back your settlement process. If you’re not well–versed with legal terms or comfortable handling complex paperwork, it’s best to hire a qualified conveyancer or solicitor.
You can generally expect it to take between 4 to 6 weeks from putting in your mortgage application until the settlement date.
Some solicitors and conveyancers do accept payment via credit card, up to a certain amount.
Yes, a conveyancer or solicitor will normally conduct a search of property title records during settlement. They can also order other appropriate searches, such council or water rates, roads, land tax searches and heritage listings.
The conveyancing process can take anywhere from 30 to 90 days depending on where in Australia you live, so be sure to check in with your local guidelines.
The cheapest way to buy a house is not always the best, as it’s more important to ensure the property is a robust long–term investment. However, there are some ways you can reduce the costs involved in buying a home. You may choose to look in a more affordable area or purchase a cheaper fixer–upper that will increase in value with renovation. It’s also a good idea to take advantage of the First Home Owner Grant if you are eligible, as this can make purchasing a home considerably more affordable.
Research shows that only 10 to 20% of home transactions are done without the assistance of an agent. While there’s no legal requirement to use a real estate agent, there’s a good reason most people choose to do so. Real estate agents are likely to have a much better understanding of the suburb and market you are buying in. Agents will also have better negotiating skills, meaning you’ll be left with a better deal.
Although first home buyers are expected to pay the upfront and administrative costs mentioned, they may be eligible for a range of concessions – depending on the state or territory and property price. Each Australian state and territory has their own version of the First Home Owners Grant, so be sure to check out our guides to your area.
Words by Emma Norris
By making sure you’re aware of both the upfront and hidden costs involved in buying a home, you can approach a lender with confidence and avoid any unpleasant surprises. Need help getting a home loan? At eChoice, our experienced brokers can assist with your application and help you find the right mortgage for you.
The renting versus buying debate has raged on for years. Many people feel that it’s unaffordable to buy a home, so they prefer to rent. Others think renting is a waste of money and would prefer to buy.
So, is buying a house rather than renting the best choice for you? Well, this depends on your circumstances and on where you choose to live. Let’s look at the pros and cons of renting and buying a home in greater detail.
Many people classify renting as dead money. Here’s the deal: basically, when you pay rent you are paying off someone else’s mortgage or providing them with an income. Therefore, your money is not working for you, but it is working for someone else. Thus, your money appears as ‘dead’ or of little value to you.
What’s the bottom line? Well, before you rush into buying a home you must also look at the costs as paying off a home loan can be more expensive than renting. So, if you find that you are in this situation because of the location you’re renting in, then there is a way you can make renting work for you. Simply invest your money elsewhere. This will then allow you to grow your wealth and create a better financial future.
You can invest in a few ways. Firstly, you could buy an investment property in a more affordable area, while you rent a property in an area that is more expensive. Over time, your tenant will pay off your investment property mortgage for you. Secondly, you could buy stocks and shares and then watch these grow in value.
Buying your own home is what many people refer to as the great Australian dream. Factually speaking, this term is true, as when you buy a home you are forcing yourself to save and to build long-term wealth. In addition, you’re also developing your own security and controlling your financial decisions.
Of course, if you’re concerned about the level of financial commitment when buying a home, then one option you should consider is renting out a room in your home to help you cover costs. This way you won’t overstretch your budget and you’ll be able to watch your home appreciate in value.
The best way for you to decide whether buying a house rather than renting is for you is to review your current financial circumstances. You can do this by looking at the purchase prices for property you’d consider buying in areas that you like. Research the market. Look at sales data and go to open inspections. There’s a massive difference between thinking you can afford to buy a home and knowing you can afford to buy a home.
Next, look at the costs of homeownership and compare these to renting, before you decide to rent or to buy. It’s also important for you to consider your lifestyle and flexibility. If you plan to move for work or study, or travel around Australia or overseas, then it may be a clever idea for you to rent rather than to buy a home.
Want to know the best part? You can easily calculate the costs of buying a home and find out your borrowing power by using stamp duty and borrowing power calculators. There are also rent versus buy calculators available that will allow you to gauge whether you’d be better off renting or buying.
While you’re able to earn an income, you have financial security. But, if your ability to earn gets compromised due to an accident, illness, or old age, then you’ll need an alternative means to provide you with an income. For many people, owning their home gives them peace-of-mind that if they need to they can sell this asset so they will have enough money to live on. The same does not apply to renting.
When you own your own home, you make the rules. You can renovate your house, welcome your furry friend and do simple things like hang pictures on the walls. These are freedoms that are often not available to renters and can impact your quality of living significantly.
The process of moving from home to home is laborious- and a challenge that serial renters know all too well. Having a home to call your own will mean that you have the security to stay and leave as you choose. You will no longer have to deal with the anxiety of the landlord kicking you out – which is common in Australia where residential leases typically only span six to twelve months.
We all dread paying tax, but with selling your own house you don’t need to worry about all your money falling into the pockets of the government. This is because Australians are exempt from the Capital Gains Tax when they sell their primary place of residence, so you will be the one profiting when you sell your home.
Buying a home typically allows you to create wealth, with rising house prices and low interest rates being the optimum formula. This is because equity will be increasing.
Equity is the difference between the value of your property and the value of your mortgage. It can be used for further investments, or for other business/financial purposes.
Let’s say that you bought your home for $420,000 and 12 years later an agent values your home at $580,000. Over the 12 years, you’ve also reduced your mortgage from $260,000, down to $90,000. Therefore, the amount of equity you have in your home is its current market value of $580,000, less what you owe on your mortgage being $90,000, which equates to $490,000.This equity, which you’ve built-up, could then put you in a position to be able to secure the purchase of an investment property
Buying a house doesn’t have to be a far-fetched fantasy only available to the wealthy. Data from the November 2019 ANZ CoreLogic Housing Affordability Report has revealed that there are regions in Australia where it is actually cheaper to buy than rent.
These are all very different areas. Some of these places are rural, some are suburban, and some are tourism hotspots. Begging the question, what is making these areas cheaper to buy in?
The ABC has identified various trends in the areas where it was found to be cheaper to buy than rent. For instance, mining towns were cheaper to buy due to the high numbers of fly-in mining and construction workers which has created a demand for rental properties.
Similarly, regions such as the Gold Coast, Whitsundays and Alice Springs, which appear on the list, can thank the booming tourism in the area that has made it cheaper to buy due to the high rates of rental occupancy.
Research from Domain has also found that the combination of declining interest and mortgage rates has increased the number of suburbs where buying is cheaper. They also noted that many of the regions were in lower socio-economic areas.
Now that we are living longer, retirement can be a three–decade period, sometimes more. That’s a long time to be worrying about debt.
Despite its significance, a large number of Australians aren’t thinking about retirement early enough. As a result, more and more Aussies are now working into what used to be considered ‘retirement’ years to pay off their mortgage. On the other end, those who do retire are more likely to experience financial insecurity.
But with some planning, you can make a big dent in your debt and improve the quality of your retirement.
Significantly more Australians are retiring with debt, according to a recent study by the Australian Housing and Urban Research Institute (AHURI). With house prices rising and wage growth on a slower trajectory, many retirees are struggling to keep up with mortgage debt.
Between 1987 and 2015, the average mortgage debt for over–55s jumped from $27,000 to over $185,000.
It was found that mortgage repayments were the largest expense for retirees, eating up to one third of their spending. With ongoing repayments some retirees are left without enough funds to cover basic living costs. About 8% of older Australians with mortgages have reported falling behind on utility bills, compared to the 3% of outright homeowners.
Looking at data from the Australian Bureau of Statistics’ survey of income and housing, there are similar findings, with an increase in homeowners owing money on mortgages across every age group between 1990 and 2015. But the biggest rise in debt is among homeowners approaching retirement.
It is undisputed that being indebted adds to psychological distress. Alarmingly, these impacts are more profound for older individuals who have less ability to recover from financial shocks.
This growing debt has also increased the chance of poverty during retirement. With unwelcome risks including forced retirement due to health or an employment shock, plans to keep up with repayments may be derailed.
From 2000 to 2010, approximately half a million Australians age 50 and over lost their homes.
Financial planners suggest that you should be looking to pay off your home at least ten years before you retire. To do this, you need to map out how you will reduce your home loan debt.
Words by Michelle Elias
Want to know more about your options for investing in property during retirement? Contact eChioice and we’ll help you find the right deal. Our brokers have access to 100’s of home loan products, so we’ll be able to find you the right mortgage.
While buying a home is an exciting life milestone, it can also be rather daunting. It almost feels like going through a lengthy audition process!
From securing a loan to having your offer accepted by the real estate agent, there’s a lot of ‘waiting by the phone for a verdict’ involved. The good news is, there’s one thing you can do to give you a little more confidence and security during the home-buying process – getting conditional approval.
So, what is conditional approval, what are the benefits and how do you go about getting it? Here, we give you the lowdown.
Conditional approval is a preliminary approval you get from a lender that indicates they would be willing to give you a home loan up to a certain limit. To do so, a lender will assess your eligibility in light of your current financial circumstances.
Yes, conditional approval and pre-approval are one in the same! Also known as an ‘approval in principle’ or ‘loan commitment letter’, conditional approval is the highest level of pre-approval you can get.
Conditional approval means different things to different financial lenders. So, be sure to check in with your lender about their specific definition, guidelines and timeframes. This will ensure you’re prepared for the process and will improve your chances of a successful application.
Yes, conditional approval is certainly a positive thing, as it indicates you’re on the right track to purchase a home! While it’s not a compulsory step in the home buying process, it has many notable benefits.
Firstly, it gives you a good idea of how much you can afford. This means you can attend open houses with a strong idea of what’s in your ballpark. Rather than looking at property beyond your means, you focus on homes within your budget. Knowing what you can afford before you start looking for a property stops you wasting time and drooling over unaffordable homes. As a result, you have realistic expectations. Conditional approval also gives you more confidence to put an offer on homes that meet your requirements.
Another benefit of conditional approval is that helps you stand out from the competition and boosts your negotiating power. Many people who attend home inspections aren’t always there to buy that house. On most occasions, open home visitors are getting a feel for the market and doing their research. Some are also just seeing how the other half live.
However, when you arrive at an open inspection with conditional approval for your home loan, you place yourself in a different league to these other people. Agents and vendors view you as a serious buyer and may be more likely to accept your offer.
If you’re keen to buy a property that is going to auction, getting conditional approval is vital. Arranging your finance before auction enables you to bid confidentially. However, it’s important to note that you will need to be aware of market values and stay within these. Otherwise, you may find your lender values the property you’re looking to buy at less than you’ve agreed to pay. Consequently, you’ll then need to find funds from elsewhere to make up the shortfall.
Plus, if you place the winning bid, then you’ll also need to have the required 10% deposit, which the agent will ask for after the hammer falls. For instance, if you’re buying a home for $520,000, then you’ll need to have a deposit of $52,000 available.
The timeframe for conditional approval depends on the lender and how complex your application is. It can take anywhere from four hours up to two weeks for it to come through after you apply.
You may be wondering “does conditionally approved mean I got the loan?” Unfortunately not. As the name suggests, it means you currently satisfy the requirements for a loan up to that limit with your current circumstances. However, there is no ultimate guarantee that you will receive the home loan.
Your lender reserves the right to deny your application if your conditions have changed or you fail to meet any of the mortgage requirements for a loan. Some reasons you may fail to close on your home loan include:
For this reason, it’s important to notify your lender about any changes in your employment or financial situation after being conditionally approved.
There are a few steps involved in formalising your home loan once you have been conditionally approved. Firstly, the lender will need to verify the information you provided in the pre-approval state to ensure you will be able to repay the loan.
They will also usually need to carry out a property valuation, to ensure your home loan does not exceed the value of the home. Then, they will confirm the conditions of the loan with you and whether you will need Lenders Mortgage Insurance (LMI). If applicable, they will need to seek approval from the insurance before you can receive your loan.
If you have been given conditional approval, it can take anywhere from one day to one week for formal approval to come through.
You will receive a letter from your lender confirming that your loan has been formally approved. This is when you know it’s time to celebrate!
After settlement, the lender will usually draw down the loan – meaning they’ll withdraw the amount paid at settlement from your loan account. Then, you will need to pay transfer duty or stamp duty, which normally occurs on settlement date. Then, the property will be transferred to your name and you’ll finally get to hold the keys to your brand new home in your hand!
Going for conditional approval isn’t too different to applying for the home loan itself. You’ll want to make sure the timing is right and you have all the necessary documents at the ready.
Before you apply, it’s best to have an idea of what kind of property you’d like to buy. After all, your conditional approval will only be valid for three months so you would need to re-apply if you don’t find a property within that time. Consider doing some preliminary research into what areas you’d like to buy in and the size and type of the property. This will also determine how much you need to borrow.
It’s also a good idea to contact a mortgage broker, as they will be able to help you compare hundreds of home loan products to determine which one is best for your needs. They will also be able to guide you through the application process.
Once you have determined which lender you would like to go with, it’s time to provide all the necessary documentation. Generally, they will require evidence of your identity, income, spending and residency status. They will also assess your assets (such as another property, car or shares) and any debt you have accrued (like a credit card, personal loans or other mortgages). At this stage, they will generally run a credit check, too. The lender will then be able to use this information to determine if you’re eligible for conditional approval.
Now, you know what conditional approval is, what it involves and how it can help you streamline buying a property. If you’re looking at buying a property in the near future, you may want to consider taking this important step so you can apply for a home loan with greater confidence and peace of mind.
While saving for a home deposit is undoubtedly challenging, decoding home loan jargon can prove almost as difficult! From caveats to capital gains tax, you may feel like you need an encyclopaedia just to get through a meeting with your lender. But while not all home loan terminology is going to be relevant to your personal situation, there’s one that all home-buyers should familiarise themselves with: the loan to value ratio, or LVR.
No matter what type of property you’re buying or where in Australia you live, this is a concept that applies to anyone taking out a mortgage. Read on for your guide to the loan to value ratio, including what it is, how to calculate it and what it means for borrowers.
The loan to value ratio (LVR) is a term commonly used by lenders to determine your borrowing power. Essentially, it’s the amount you need to borrow, calculated as a percentage of the current value of your home.
So, how is the LVR calculated, exactly? In order to calculate LVR on a mortgage, lenders must first determine the value of your property. They do so by carrying out an independent valuation of the property. They then divide the loan amount by the value of the property and multiply it by 100 to get a percentage.
For example, if the lender valued your property at $300,000 and you have a $270,000 loan amount, you would calculate your LVR like this:
$270,000 ÷ 300,000 = 0.90
Therefore, your LVR would be 90%
You can use this loan to value calculator to help you determine your LVR.
Lenders use independent valuers to give them an accurate and unbiased appraisal of a property’s value. There are a few factors lenders use to determine how much a property is worth. These include property type, age and condition and geographic location, as well as current market conditions and zoning restrictions. There are also three different types of valuations.
Full valuations: This involves a full, in-person inspection of the home. It’s generally used in scenarios where there is a higher risk to the lenders, such as high loan amounts, more complex transactions or properties in areas where there was been a rapid increase in property prices that may not be sustainable.
Curbside valuations: This is essentially a ‘drive-by’ valuation of the property, where the lender will examine the condition and location externally from the street. This is generally used in situations with a lower loan amount, where no lenders mortgage insurance will be paid.
Desktop valuations: This is when no inspection of the property is carried out and the lender calculates the LVR using the median price of the property. It’s generally used in capital cities and with low loan to value mortgages.
Not all lenders will ask for a full property valuation, which typically cost between $250 and $450 each. Some lenders won’t worry about a property valuation if the property already satisfies their lending criteria. Other lenders will use a desktop or computer-generated assessment.
A lender usually orders a property valuation if:
This occurs most commonly when a property has been purchased off the plan and the value has gone up or down since the contract was signed. It can often happen in situations of favourable purchase, which is when someone is purchasing a property off their family as a discounted price.
While some lenders will allow you to borrow up to 90 to 95% of your property’s value, you will begin to accrue LMI (Lenders Mortgage Insurance) once you surpass 80%.
The amount you need to pay in Lenders Mortgage Insurance depends on a number of factors, including:
To get an estimate for your LMI premium, multiply your LMI rate your LMI rate by your loan amount.
For example $90,000 x 0.932% = $838.80. Then, add the applicable stamp duty on LMI for the state you are buying the property in.
So, what is the maximum loan to value ratio? Turns out, some lenders will allow you to borrow 100% LVR if you have a guarantor to support the application. This would involve using a family member or friend who owns a property to use it to secure the higher home loan.
Going just $1 over the 80% threshold can easily cost you thousands of dollars in lender’s mortgage insurance. The good news is, you can reduce your LVR by saving up a larger deposit for the property you want to purchase – therefore reducing the amount you need to borrow.
Your loan to value ratio isn’t the only metric used by lenders to determine your borrowing power. When applying for a loan, your debt to income ratio is one of the primary factors used to determine your risk.
It refers to the percentage of your gross monthly income that goes to paying your monthly debt payments. To calculate your debt to income ratio, add up all your monthly debt obligations (for example, credit card repayments or other loans), then divide them by your gross monthly income (how much you earn before tax and other deductions).
Lenders also use the loan to value ratio to calculate how much cash you can pull out on a refinance. As the property value of your home may have changed since you bought the property, they will carry out an independent bank valuation. Most lenders will allow you to borrow up to 80% of the value of the property, minus the debt that you have left to pay.
Home equity is the difference between what your home is worth and the amount you owe on your mortgage. A home equity loan allows you to access funds by borrowing against this balance through a lender.
Given most banks will likely lend you no more than 80% of your home’s current value, here’s how to calculate your home’s usable equity:
Let’s say your home is worth $500,000 on today’s market and you still owe $200,000 on your mortgage.
So, if your home is worth $500,000 and you still owe $200,000 on your mortgage, you have $200,000 of useable equity towards the purchase of an investment property.
Yes, just like any type of credit, you must pay back a home equity loan within the timeframe laid out in your terms. Failure to do so can result in legal action or in a lender taking your property as payment. However, you generally have a much longer time to pay back a home equity loan, as well as more flexible terms around repayment.
Need help securing a loan to purchase your dream property? Our experienced brokers have access to hundreds of competitive home loan deals, so we can help you find the right lender for you.
Trying to sell your home while buying another can be tricky – especially when it comes to timing. Sometimes you’ll find the ideal property before selling your existing home, leaving less funds available for your purchase. But the good news is that a bridging loan is sometimes available to cover the shortfall.
Bridging loans can be complicated to get your head around and it is a decision that requires careful deliberation. We have created an entry-level guide answering popular questions to help you gain a better understanding on the matter.
A bridging loan is designed to ‘bridge’ the gap when you’re trying to secure a new mortgage for a new property but haven’t yet sold your existing property. This loan allows you to buy your new place without waiting for the old one to sell. They are particularly helpful in locations where properties can stay on the market for a while. Before buying, you should look into the clearance rates of your area to get a rough idea of how long selling might take. This also means that while you wait for your first property to sell you are accruing interest on both loans.
Bridging loans usually take two forms: open bridging loans or closed bridging loans.
Closed bridging loans are used when a date of sale on your existing property has been determined. These loans are considered less risky by lenders as the property is already sold and they are aware of when they will receive payment. In this type of bridging loan, you will pay for the loan, any interest accrued and fees on the date of the sale.
Open bridging loans are used when you have found your next property but have not yet sold your old property. You should know that lenders aren’t a big fan of the uncertainty that comes with this arrangement. In this situation, you’ll need proof that your old place is being advertised and be ready to answer a lot of questions on your new property too. An open bridging loan can be made between six months up to 12 months. If this one-year limit is exceeded, you may face higher interest rates.
A bridging loan can be quite risky and isn’t the best option for many people. You may be better off asking for an extended settlement period or just waiting for the sale of your old property.
In an open bridging loan – the usual form – you will have between six and 12 months to sell your existing property. If you have a closed bridging loan, your loan will last until your date of sale. This is called the ‘bridging period’ and your repayment terms will depend on your lender. During the bridging period, you may be asked to make repayments on the loan. However, some lenders will freeze your bridging loan repayments and only ask for repayments on your existing loan.
Under a bridging loan, you can borrow up to 80% of the peak debt. Peak debt is made up of your new property’s sale price plus your existing mortgage. This means you need to have at least 20% of the peak debt in your savings to act as a deposit for your new place.
How much your bridging loan costs is a simple calculation made by the banks. The banks take the price of your new home, add the remainder of your mortgage and then subtract the most likely sale price of your current home. This valuation from the bank will cost you a couple of hundred bucks per property. They will also reduce your projected sale by about 15% as a “fire sale buffer” in case your property falls short of the expected price.
This final number is called an “ongoing balance” or “end debt”. Much like a normal loan, the banks will then assess your ability and reliability in paying off this loan.
The total amount borrowed is called the “peak debt” which includes the ongoing balance of your existing mortgage, plus your new mortgage and all associated fees including stamp duty, legal fees and lender fees.
It can – if you repay your bridging loan on time, this will improve your credit score. But, if you make late repayments this will be detrimental to your credit score. We recently put together a guide on credit scores which will give you an in-depth explanation.
Traditionally, those looking for a loan are expected to provide their credit score to judge their reliability to lenders.
With a bridging loan though, the lender is mainly worried about the security put up by the borrower – this part is non-negotiable. With a bridging loan, the lender is protected because defaulting on repayments would give them the right to sell the security under the terms. As the lender has this added protection, less weight is given to the individual’s credit history.
Yes – bridging loans are designed to finance your new purchase before your old property is sold and settled.
Yes, they do, and some lenders have now lowered interest rates to standard rates. Previously, the rate for a bridging loan was higher.
No, you cannot. Under a bridging loan you can borrow up to 80% of the peak debt. Your peak debt is the sum of your new property’s sale price plus your existing mortgage. This means you need to have at least 20% of the peak debt in your savings to act as a deposit for your new property.
Words by Michelle Elias