What are the costs involved in breaking a fixed rate home loan?

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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.


What is a fixed rate home loan?

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.

You might also like: What is a comparison rate?

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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What does it mean if you break a fixed rate home loan?

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.

What fees do you have to pay if you break a fixed rate home loan?

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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When do break costs apply?

A break cost will apply:

  • If at any time before the end of a fixed rate period you choose to or are required to prepay all or part of the loan, then you must pay the lender the prepayment break costs that they calculate. However, you could be able to make additional prepayments up to your prepayment threshold over the total fixed rate period without incurring a break cost.
  • If at any time before the end of a fixed rate period you switch to another product, interest rate (fixed or variable) or repayment type, then you must pay the lender the switching break costs that they calculate.

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.

Compare your interest rate today.

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Why do lenders charge break costs?

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.

How are break costs calculated?

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: 

  • The original Wholesale Interest Rate on the date your interest rate was fixed; 
  • The current Wholesale Interest Rates at the time of your prepayment or switch; 
  • The prepayment threshold that lenders could allow you to prepay over the fixed rate period;
  • Any unpaid interest you may have; 
  • The timing and dollar amount of repayments required under your loan contract; and 
  • The remaining fixed interest rate period.

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.

You might also like: Fixed rate home loans lowest on the market

What is an early repayment cost?

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.

What are exit fees?

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. *

You might also like: Fixed Rate Vs. Variable Rate Home Loans: Which is Right For You?

How long is a break cost quote valid for?

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

Sources:

Is your current interest rate still competitive? Contact one of our mortgage brokers to compare your options and find a deal that suits you. 

Refinancing Your Home?

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You saved up for the deposit, did all the paperwork and scored yourself a home loan. Congratulations, all your hard work has paid off! But what happens if after a month, a year or a decade you realise your home loan situation is no longer the best fit? Whether you didn’t score yourself the best possible mortgage rate at the time or your financial circumstances have changed, it’s a common scenario.


The good news is, you’re not locked in for life. At any time, you can refinance and switch over to another home loan. But what are the costs of refinancing, and how do they stack up against the benefits? Here, we give you the lowdown on everything you need to know about refinancing your home loan.

What’s involved in refinancing your home loan?

Generally, the objective of refinancing is to find another mortgage with a lower interest rate or repayments. So, the first step is to speak to your current lender to see if they have a more competitive option. This may include discounted interest rates or waived fees.

You should also look around at the rates and specials offered by different lenders, as well as the costs involved in switching over.

Once you have decided which path to go down, you will need to apply for your new home loan. While the application process varies amongst different lenders, you will normally need to provide any relevant personal, financial and property documentation.

Approval can take anywhere between a day to eight businesses days. From there, your new lender will communicate with your old lender to let them know you will be exiting, and take care of any necessary steps like title transfer. Or, if you’re staying with the same lenders, they’ll switch over your mortgage. Then, you will go through the settlement process again, just like you did with your original home loan.

What fees do you have to pay when refinancing?

So, what costs are involved in refinancing a home? And is there a penalty to refinance your mortgage? Here’s the breakdown:

Discharge: While early exit fees are no longer a concern for those looking to refinance, you will typically need to pay a discharge fee to your old lender to close down the loan. This ranges from between around $100-$200 and the details of the discharge fee can usually be found in your initial loan contract. If you have a fixed rate loan, you may also need to pay an extra break fee for ending your loan during that period.

Setup fees: Your new lender will charge you an application fee to cover processing your documentation. This generally includes the application fees, valuation fees, mortgage registration fees and settlement fees. Mortgage registration fees will usually cost around $120, a bank valuation fee will cost around $220 and application fees will usually cost around $500.

Title insurance: If you choose to do a fast-track refinance, you may also be asked to pay title insurance to cover the period before your property title is officially transferred, which can set you back around $500 to $3000. However, some lenders will cover this cost for you.

Lender’s Mortgage Insurance: If you’re refinancing a larger loan or haven’t yet accrued 20% equity on your current loan, you may also need to pay Lender’s Mortgage Insurance (LMI). Your lender will sometimes carry out a new property valuation on your property. If you’re valuation is low, lenders will be likely to make you pay lenders mortgage insurance. Before choosing to refinance, be sure to ask for an upfront valuation as a precaution to avoid paying this extra and often costly fee.

All of these fees can add up quickly, so it’s important to determine upfront what you’ll owe to avoid any hidden costs.

Why does refinancing cost so much?

Refinancing your mortgage may seem like a large up-front investment. This is because you’re dealing with two different lenders, who both charge their own fees. However, for many people, these initial costs are outweighed by the amount they would need to pay in interest fees if they didn’t refinance.

Do you pay stamp duty when you refinance? 

You may have to pay stamp duty if you are refinancing. The stamp duty will usually amount to 0.35% of the loan and will include GST, but this will vary between states. You may be liable to pay stamp duty if you increase the amount of your loan during the process of refinancing or name of the borrower is changed. On top of these costs, you may be charged with a mortgage registration fee for switching to a new lender.

Can I refinance my mortgage with no closing costs?

Yes, some lenders offer no-closing cost refinancing, but the trade-off is normally a higher interest rate which affects your total mortgage balance. This is because a borrower will pay closing costs in order to pay for the title searches, title insurance and application fees. By paying a higher interest rate, you will end up covering these costs. While it can be tempting to reduce your up-front costs, be sure to ask how it will affect your total mortgage repayments.

Do you have to pay title insurance again when refinancing?

When refinancing, your old lender will need to transfer property ownership to the new lender. This involves title insurance costs, which is often paid by the lender. However, some lenders do charge you a title insurance fee, so be sure to ask about it from the get go. The process of transferring ownership from the old lender to the new lender can take up to two weeks, and insurance will be able to act as a safety net in circumstances where the property has not been transferred properly. 

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What are typical title fees for refinancing?

Title insurance can cost anywhere between $500 to $3000 for fast track refinancing and will typically paid before the title is officially transferred. Most mortgage providers will also need to do a title search, to confirm you own the deed to the property but this only costs around $30. 

Which bank or lender is good for refinancing?

The best bank or lender is always the one with a home loan that fits your individual financial needs. To ensure you’re getting the best possible deal, it’s a good idea to talk to your current lender first.

Different banks offer different refinancing incentives. For example, Commonwealth Bank offers a $2000 cashback bonus when you apply by 6 April 2020 and fund by 12 June 2020 for loans that are $250,000 and over. This applies to:

  • Owner occupied home loans with principal and interest repayments only
  • All investment loans
  • All Viridian lines of credit
  • Excludes bridging loans and interest-only owner occupied loans. 

What are the advantages of refinancing?

So, is it smart to refinance your home loan, or a big mistake? Well, there are plenty of good reasons you might refinance your property. Many people choose to do so to reduce the interest rate on their existing home loan. This can lower your monthly repayments and allow you to build equity in your home at a faster rate.

Some people also choose to refinance to switch from a variable rate home loan to a fixed rate one, to give them more security against the fluctuating property market.

Or vice versa, they may want to switch from a fixed rate to take advantage of the lower insurance rate that normally comes with a variable home loan. As we’ll cover later, some people also choose to refinance and take cash-out, which allows them to borrow against the equity in their home.

Do I need a lawyer to refinance my mortgage?

To ensure your home loan is legally-binding, your broker or lender will typically enlist a solicitor to prepare your loan documents on their behalf. These are sent to the solicitor for them to review, and back to you to sign. This is to ensure the whole legal transaction will run smoothly and will mitigate the chance of any legal dramas in the future.

You can also approach a lawyer yourself for legal advice on your mortgage and assist you to manage the various channels of correspondence that will be involved in the refinancing process.

What documents do you need to refinance your mortgage?

The process of refinancing can be complex and one that you are not familiar with. For those who are new to refinancing, you are probably wondering what kind of paperwork and documents you need to provide to your lender. Many of these will be similar to the documents you provided when you applied for your current mortgage. Typically you will be asked to provide: 

  • Proof of identity, including passport, driver’s licence and/or birth certificate
  • Proof of income, including payslips and/or tax returns
  • Records of living expenses and debts such as credit cards or other loans
  • Your current home loan statement
  • Mortgage documentation like the loan period, financial penalty for exiting early and the date of the loan’s commencement

How soon can you refinance?

There’s no minimum term to refinance your home – you can do so within the first year. However, you may find some lenders will not refinance a mortgage they issued to you within the last 120-150 days, in which case you will need to wait or go elsewhere. The actual refinancing process can take anywhere between three days if you choose a lender that offers a ‘fast-track’ process or up to four weeks if you go with the standard process.

When’s the best time to refinance your home?

There’s no definitive right or wrong time to refinance your property. However, there a few things to take into consideration to make sure it’s worth the cost and effort at this point in time. Firstly, you want to look at how much equity you have already built in your property. This is the difference between the value of the home and how much is still owing.

Generally, you will be in a more favourable position to refinance when you have at least 20% equity in your home. This is because the lender will generally see you as lower risk and provide you with a better deal. It’s also a good idea to find out whether you will need to pay for Lenders Mortgage Insurance again. This can easily add up to thousands, which can outweigh the benefits of switching your home loan.

How often should you refinance your house?

According to the Australian Bureau of Statistics, there has been a decrease in the total value of home loan switching commitments were down 2% in November 2019 from $9.83 billion to $9.63 billion. You should only refinance when your current home loan terms are no longer serving you. If you’re happy with your lender, there’s no reason you have to make the switch.

What is cash-out refinancing?

You may be wondering ‘should I do a cash-out refinance?’ This is when you borrow against your home’s current equity. This can generally be used for whatever you like, whether it’s renovations, a new car, a wedding, education or another property — but only up to a certain amount. Generally, most lenders allow you to borrow 80% of the value of the property, minus the debt that you have left to pay. A cash-out refinance may be a good option for you if you are able to invest the money into something that will pay off in dividends, such as renovating a property to increase its value or negative gearing on an investment property.

Do you need an appraisal to refinance?

Most lenders will issue a valuation (not an appraisal) when you apply for a home loan and refinancing is no exception. Unlike an appraisal, this is legally-binding and must be carried out by a qualified professional. Valuations are usually far more detailed than appraisals, which are primarily carried about to give real estate agents an idea of a property’s value. The purpose of the valuation is to get an unbiased evaluation of your home’s market value, to help the lender determine their risk in lending to you.

What do valuers look for when refinancing?

When inspecting your home, valuers are generally looking at the location, type and size. They also pay attention to its age, condition and any zoning restrictions.

How can I increase the appraised value of my home for refinance?

Something as minor as cracks in your walls or an untidy garden can affect your property valuation and as a consequence, affect the success of your refinancing application. Some ways you can score better on your property valuation include:

  • Making sure your property is clean and well-presented
  • Doing any necessary minor repairs around the house
  • Replacing worn out carpet and flooring
  • Applying a fresh coat of paint where necessary
  • Keeping the lawn and outdoors areas tidy and free from clutter
  • Ensuring there is plenty of storage areas in the home
  • Decluttering your house

What happens if my valuation comes back lower than expected?

A low valuation can make refinancing more difficult for property owners. In fact, a study by online lender State Custodians showed that one in seven home owners were unsuccessful in refinancing their mortgage because the value of their property had fallen.

However, this doesn’t necessarily mean you’ve reached a dead end. In this scenario, you should seek a second opinion on the value of your home. You may want to consider making the touch-ups recommended in the previous section. It can also help to be present for your valuation, so you can answer questions about anything that isn’t immediately clear.

Now that you know the costs of refinancing as well as the benefits, you can make an informed decision as to whether it’s the right choice for you. Whether you’re buying your first property or want to make the switch, eChoice’s mortgage brokers can help you compare hundreds of home loans to find a suitable option.

Are you looking to purchase a property or refinance?

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.


What is a contract of sale?

If you’ve ever bought or sold a property, it’s likely you would have signed a contract of sale. The contract is usually prepared by a qualified conveyancer or solicitor. Within this contract, the terms and conditions that the buyer and seller have agreed upon will be clearly stated.

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.

understanding-the-contract-of-sale

What does ‘off-the-plan’ contract mean?

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.

Some of the unique requirements that apply to this kind of property include the need to include a disclosure statement and attach draft planning documents to the contract, as well as an extended cooling-off period of 10 days.
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What can a contract of sale include?

The particulars of sale

This section lists the details of the sale, such as the:

  • Name of the vendor and buyer
  • Agent
  • Conveyancer details
  • Certificate of title for the land (volume, folio, lot and plan details)
  • Property address

Goods sold with the land

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.

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Payment

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.

Settlement

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.

Lease

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.

Loan

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.

Special Conditions

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.

How is the contract of sale finalised?

If you are purchasing a property, you will usually be the one signing the contract of sale first. This offer will then be submitted to the seller. The property will be sold once the purchaser and vendor have exchanged and signed the contract, and the ‘cooling-off’ period has elapsed. It’s important that you know exactly what you are signing, as the contract will become legally binding from the moment it’s signed.

The bottom line

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.

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While it can seem that a poor or even bad credit score is the end of any financial hope of securing a home loan, the good news is your credit score can be improved. However, it will take time and effort on your part, and a strategic, well-thought out plan to rectify any problems.

In order to fix or improve your credit score you firstly need to know what you should be focusing your time and energy on. This means obtaining a copy of your credit report, checking its accuracy and developing ways for you to manage your money better. Let’s look at how you can get the credit score you crave.

Related Text: ASIC’s new responsible lending guidelines aim to provide clarity on credit

Ways to Improve Your Credit Score

1. Obtain a copy of your credit report – Your credit report is a record of your financial history, which includes any credit applications, overdue payments and bankruptcies, as well as loan and credit repayments. This document gives you a rating based on how well you manage your money, which, in turn, gives a lender an indication of their level of risk.

To obtain a copy of your credit report contact www.mycreditfile.com.au. You can get a free copy of your credit report once every 12-months, or if you’ve applied for credit and it’s been declined, then you have 90-days from the date of your application to obtain a copy of your report.

2. Review your credit report – When your report arrives go through the document and make sure all entries are correct. If you find that there are debts listed which have been paid, then you need to contact the credit agency who sent you the report so that the errors can be changed.

3. Pay off debts – If you have any outstanding loans and debts, then start making regular payments on these. If you can, pay more than the minimum required payment. This will increase your credit score over time.

4. Reduce credit limits – If you have a credit card or cards then reduce the limits on these to the minimum level. Then pay off any outstanding balance. This will reduce the temptation to spend more than you can afford, and help you to get your finances under control.

5. Speak to creditors – If you’re having problems paying your bills, then contact the company you owe money to and make arrangements to pay back what you owe using a payment plan. This can help you to avoid incurring a bad payment record on your report, which will affect your credit score.

6. Seek professional advice – If you’re finding it difficult to manage your bills and to create a budget, then contact a budgeting assistance group. Financial advisers and other money management organisations can help you manage your money better and to devise a plan to get your finances under control.

Overall, be patient and persistent. You’ll develop a better credit score over time.

Do you need to improve your credit score? Then contact eChoice. we’ll help you to understand your credit report.

Owning your own home is a rite of passage for many Australians, but it can be a hard feat to reach – especially with only one income. While it’s undeniably easier for working couples to save for a house – given their combined living expenses are often lower – those saving for a house on a single income are by no means out of the game.

Whether you’re a single mum, dad, the sole breadwinner, or you’ve just given up on dating, here’s everything you need to know about how to seek a home loan approval with a single income.


What am I up against?

With only one income coming in, those saving for a home loan with a single income are already behind the pack. To top it off, with an annual income that’s likely less than their two – income counterparts, single income seekers will need to settle for smaller loan amounts, vastly diminishing property options.

But luckily, all is not lost. Acquiring a home loan on a single income may be more challenging, but it’s not impossible – especially with these money – saving – tips.

Home loan tips for single income households

Be smart with money

Reckless spending on festivals and nights out will not earn you any favours with your lender. When on a single income, lenders are likely to be more scrupulous, so it’s important to be able to show evidence that you’re responsible with money.

This means having demonstrated evidence of the ability to save over a long period of time, as well as ‘clean’ expenses – e.g. nothing irresponsible. A good tip is to have at least a 6 – month history of demonstrated savings. This will help prove your ability to meet monthly repayments – that is, without shaking the piggy bank.

Budget

When it comes to being responsible with money, budgeting is king. A budget will help ensure you stay on track to meet your financial goals, and it can also help with any financial surprises that come your way.

Budgeting means tracking your monthly expenses. At its core, it involves making a list of all your monthly expenses and dividing your income between them, while also considering savings goals. Think about it like dividing your money into separate boxes. If you find you are spending too much, cut down on anything unnecessary to help boost your savings. If you feels stuck, the ASIC Smart Money budget planner can help you get started.

First home owners grant

If this is your first home, don’t forget that you may be eligible for government grants, such as the First Home Owners Grant or the January 2020 First Home Loan deposit scheme.

These grants can go a long way towards helping you meet the financial means necessary to afford your dream home. To find out what you’re eligible for, be sure to check the specifications for your area. The First Home Owners Grant is administrated separately by all the states and territories, so the exact specifications differ across the country. Likewise, the First Home Loan deposit scheme is dependant on the region you intend to buy in, to account for the diversity of the Australian property market.

Find a guarantor

When on a single income, it’s likely to take a lot longer to save up for your dream home than for two income households. To top it off, most lenders require at least a 20% deposit to avoid lenders mortgage insurance (LMI).

In June this year, the median house price in Sydney was $875,000, which equates to a $175,000 deposit. Even in Adelaide, where the median house price was $470,000, home seekers would still require a $94,000 deposit to avoid LMI.

If it’s going to take too long to reach the magic twenty, consider finding a guarantor to sign on to the loan. With a guarantor, many home seekers are able to secure a loan without the full deposit, all while avoiding LMI.

Words by Kathryn Lee

Saving for a home loan on a single income? While it might be harder, all is not lost. Contact eChoice, and we’ll put you in touch with one of our brokers who will be able to guide you through the options available.

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Nationally, Christmas spending is predicted to hit $50.1 Billion, a 3% increase since last season. At the same time, all states and territories are expected to experience a 2-4% boost to their 2018 spend. Online spending is also forecasted to lift.

These are the predictions of National Retail Association (NRA), who announced their Christmas forecast this week.


According to the NRA, the period between the second-half of November and all of December is the busiest retail period of the year.

But NRA CEO, Dominque Lamb, says it won’t just be feet in stores pushing figures up.

“Shoppers are set to splurge an average of $54,347 per minute in online sales alone…The total digital spend will reach $3.6 billion over the six weeks,” she said.

christmas-debt-could-hinder-home-loan-plans

Afterpay on the rise

Historically, Christmas is a time for heavy spending, and the use of Afterpay is rising.

Last year, an ASIC report found that ‘buy now, pay later’ services are affecting spending habits, with over 50% of users spending more. It also found that 1 in 6 users of the service have become overdrawn, delayed other bill payments or borrowed additional money.

According to a survey by Mozo, pay later services are also the most popular way to pay this year’s Christmas bill. Over 27% of respondents said that they would be using the services, with debit cards being the next most popular method.

Credit score woes

Despite their popularity, finance experts are warning Australians to stay away from ‘buy now, pay later’ services if they have home loan plans.

Pink Finance founder and mortgage broker Nicole Cannon says that she frequently discusses the services with clients, and that their use has been known to affect credit scores.

christmas-debt-could-hinder-home-loan-plans

“For the consumer, Afterpay and Zip may seem great from a cashflow perspective because they can pay off their items over a period of time, but most people don’t realise credit inquiry is listed on their credit file,” she said.

“So they’ve already got listed a $1000 or $2000 credit limit which the banks have to assume is maxed out which can reduce your borrowing capacity.”

Mortgage Choice chief executive Susan Mitchells agrees, telling news.com.au:

“If you’re looking to apply for your first home loan in the near term, stay away from buy now pay later services,” she said.

Words by Kathryn Lee

Looking for your first home loan, or wanting to refinance? Contact eChoice today, and one of our brokers will help you find the perfect mortgage deal.

Supporting the purchase of a property alone is a demanding and taxing journey. You might not have enough money for a deposit or have enough borrowing power for the property you want. Even once immediate costs like a deposit and stamp duty are met, monthly repayments generally persist for decades.

It’s in circumstances like these, people consider buying an investment property with family or friends, also known as co–ownership property investment.

Co–ownership property investment is where you and family or friends enter into a joint ownership agreement known as a tenants–in–common. This type of agreement allows you to buy an investment property sooner and to build your asset pool faster.


The Benefits

It’s easier to raise money

Rather than years of saving for a deposit, co–ownership can reduce this to months.

The 20% deposit you need to save to buy an investment property can be divided among co–owners. For instance, if you need to save $80,000 and three friends are interested in co–ownership, then you each only save $20,000.

You can collate your borrowing power

The assets, income and other financial commitments of all co–owners are taken into consideration when calculating borrowing power. This means you can possibly borrow more. Joint owners are seen as less risky by lenders as there are multiple people in an agreement who can step up should one fail.

Shared costs

The most enticing factor is the sharing of the price–tag. All costs are shared between co–owners. This includes the purchase price, legal fees, stamp duty and conveyancing, as well as mortgage repayments and maintenance.

The Disadvantages

The disadvantages can be enough to stop a joint venture altogether. Here are some factors to consider.

Legal advice is a must

Before you co–own an investment property, seeking legal advice is a non-negotiable. Failure to seek legal advice can be costly in the chance things turn sour.

Therefore, make sure you have a solicitor draw up your co–ownership agreement, setting out everyone’s expectations, rights and obligations. Most importantly this agreement will be binding in court.

Less rental income

The income generated by the co–owned investment property is shared, meaning reduced profit.

Disputes

Relationships can change – and fast. In fact, many relationship breakdowns are due to money or property disagreements.

For this reason, it’s best to appoint a conflict resolution manager who does not have a vested interest in the property. This will take the emotion out of disagreements and make the situation less volatile. This should be done right from the get go.

It’s harder to treat is as a business

It’s much harder to stay objective when you’re close to your co–owners. Risking hurting the feeling’s of loved ones can leave you staying silent on what you think is right or what you want.

Consider the risks

What if one person wants to sell and others don’t? You will need to map out potential disagreements to avoid surprise in the future.

Common disagreements are on:

  • selling the property
  • buying a party out
  • refinancing
  • splitting income and costs
  • mortgage repayments
  • one party not pulling their weight

Credit rating

If one co–owner falls behind on a mortgage repayment, all owners will have their credit rating negatively affected.

Interested in knowing more on coownership or looking to buy an investment property with family or friends? Contact eChoice for tailored advice from mortgage brokers with access to 100’s of products and lenders.

In some circumstances, super can be used to pay off mortgage debt, and according to the research, many Australians are already using their superannuation to pay off their home loans.

According to the data, this is due to the rising cost of living. In fact, most Australians feel that they’ll enter retirement with considerable debt. But with planning, this doesn’t need to be the case.


Australian Debt

Those stressing about keeping up with their home loan repayments are not alone. A 2019 report published by the Australian Housing and Urban Research Institute shows that a concerning number of older Australians are suffering from mortgage stress. Key findings from the report include:

  • The mortgage debt held by Australians aged 55 years increased by 600% between the period of 1987-2015.
  • Changes to tenure and demographics will mean that the need for Commonwealth Rent Assistance will increase by 60% by 2031.
  • More than 50% of 55-64-year-old homeowners will still be paying off their mortgages in 2031.
  • 80% of the average total debt of older Australians comprised of property debt.
  • One-quarter of the total asset holdings of older Australians comprised of superannuation.
  • There has been an increasing decline in homeownership amongst older Australians, with ‘mortgage stress’ being the primary cause of this.

Retirement Funds

With many Australians feeling they won’t have enough to retire on, it’s important to understand why this is, to improve your own retirement options.

The latest MLC Wealth and Retirement Behaviour Survey has given a snapshot of Australian retirement behaviours, showing:

  • 3% of retirees have used equity in their home loan to fund their retirement.
  • 17% reported it’s the high cost of living that causes the most anxiety in relation to life in retirement.
  • 1 in 20 of those surveyed believe that by the age of 75 they’ll still be in the workforce.
  • 29% of people surveyed aged 55-69 are investing in defensive assets such as cash investments, which experienced a 3% increase from the previous year.
  • $631,000 was the average amount that retirees said they needed in order to afford their desired retirement lifestyle.
aussies-using-super-pay-off-mortgages

Increasing use of super

The 2019 Household, Income and Labour Dynamics in Australia Survey (HILDA) has revealed an increased reliance on superannuation among older Australians. The survey found there’s been:

  • A decline in the reliance on welfare as a source of income for people aged over 65.
  • An increased use of superannuation is believed to be the cause of this decline.

The survey also reported super as being the most salary-sacrificed item. Over 50% of people who use a form of salary sacrifice engaged with some kind of superannuation fund.

The results were reinforced by recent data from the Australian Bureau of Statistics, which has revealed that the number of households who are using superannuation as their primary income source has increased by over 200,000 households.

Reliance on super to reduce financial stress

With more people relying on their superannuation money, it’s no surprise that superannuation is being used to alleviate mortgage stress.

A 2019 Report from the Treasury has revealed that it is also becoming increasingly common for people to apply for an early release of superannuation benefits in order to make mortgage payments. However, in order to be eligible to pay off your mortgage with super, you must fulfil the criteria of having ‘compassionate circumstances’ or show ‘financial hardship.’

Despite the tiresome application process, statistics show that you could have good chances of having your application approved. Statistics from the Treasury in 2017 show that almost a fifth of applications that were approved for early release were for mortgage payments.

You can use super to pay off your mortgage, but it should be a last resort

So, are your finances putting you in a position of anxiety about retirement debt? Alleviate your stress by acting early, and you could be using your super to start chipping away at your mortgage.

But remember, planning for retirement can avoid you having to use your super in the first place. Planning 10 to 15-years before you retire should give you adequate time to get your finances in order.

Words by Vidya Kathirgamalingam

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.

What does conditional approval mean?

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.

You don’t necessarily need to have a property in mind in order to get conditional approval – it can simply be a useful tool for ascertaining how much you could borrow.

Is a conditional approval the same as a pre-approval?

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.

What does conditionally approved mean at Commonwealth Bank?

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.

The Commonwealth Bank defines conditional home loan approval as “when a lender reviews your financial situation and creditworthiness to determine your eligibility for a home loan up to a certain limit. Note that pre-approval is not a lender’s acceptance of your application for the home loan itself, but rather their estimation of how much they’re willing to loan you, subject to conditions.”

Is conditional approval a good thing?

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.

First Home Buyers Grant: Everything you need to know

First introduced by the government in 2000 but notorious for chaning its conditions, here is everything you need to know about the first home owners grant.

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.

Auctions and home loan conditional approval

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.

How long does conditional approval take?

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.

How long does conditional approval take?

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.

Can a loan be denied after conditional approval?

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:

  • Recently leaving a job
  • Incurring more debt
  • A recent late payment
  • Failure to provide verification of rent

For this reason, it’s important to notify your lender about any changes in your employment or financial situation after being conditionally approved.

What happens after conditional loan approval?

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.

How long does it take to get unconditional approval?

If you have been given conditional approval, it can take anywhere from one day to one week for formal approval to come through.

How do you know when your home loan has been approved?

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!

How long does it take to close on a house after loan approval?

Settlement usually takes around six weeks after you’ve signed your contract and paid your deposit. Generally, a settlement period of less than a month isn’t recommended, as some lenders may not be able to meet that deadline.

Do you get the keys at closing?

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!

How do I get conditional approval?

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.

What if the appraisal is higher than offer?

Otherwise known as a valuation, the objective of a home appraisal is for the lender to ensure the mortgage isn’t giving the borrower more than the property is worth. It’s very rare that the appraisal would be higher than the offer, but in this scenario, the buyer may have instant equity in their home.

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.