Australia’s property market is bouncing back strongly after the lows of the COVID-led economic downturn, with most metrics rapidly heading towards pre-pandemic levels.
Business intelligence firm CoreLogic reported that during the first week of November, 1,758 homes were auctioned across the capital cities, with a preliminary clearance rate of 73.2%. This compared with 2,412 at 70.6% the same time last year.
The Australian Banking Association reported in November that the number of deferred loans across the country had reduced by 70% from the pandemic peak.
As competition and confidence returns and auctions continue their rise to pre-Covid levels, buyers can give themselves an advantage in this strengthening market with a conditional approval for a home loan.
Conditional approval, available before you even have a property in mind, can give you the confidence of knowing how much you are likely to be able to borrow, something that’s vital if you’re considering bidding at auction.
A conditional approval is when a financial institution formally indicates how much they may be prepared to loan you to buy a property. As with any loan, they need to assess your financial circumstances first.
While they’re not a guarantee you’ll be approved for the loan you ultimately apply for, conditional approval can give you peace of mind when house hunting. You can approach potential purchases with a workable price range and show a potential seller you’re serious.
Going through the process will also give you a realistic picture of what you can afford before you even start looking, helping avoid a lot of stress and disappointment down the track.
Conditional approval and pre-approval are the same. Also known as an “approval in principle” or a “loan commitment letter”, conditional approval is the highest level of pre-approval.
“Unconditional approval” on the other hand, differs from conditional approvals in that it’s for a specific amount for a specific property, so the loan you apply for when you’ve found the property you want.
Conditional approvals can be given without any property in mind.
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The process for conditional approval varies across lenders, so check with your lender what specific definitions, guidelines and timeframes they have. This will ensure you’re prepared and improve your chances.
Some of the areas that may be assessed include:
One leading bank defines conditional home approval as “when a lender reviews your financial situation and creditworthiness to determine your eligibility for a home loan up to a certain limit.”
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.
Conditional approval is a real advantage, 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 benefits.
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. It stops you wasting time on unaffordable homes.
Conditional approval also gives you more confidence to put an offer on homes that meet your requirements. And you can do it quickly.
Another benefit is it helps you stand out from the crowd and boosts your negotiating power. Many people who attend home inspections aren’t there to buy. Some are just getting a feel for the market, while others are simply having a “sticky-beak”.
When you arrive at an open with conditional approval, you put yourself in a different league to these people. Agents and vendors view you as a serious buyer and may be more likely to accept your offer.
Getting several conditional approvals in a short time with multiple institutions, however, can make you look financially unstable in the eyes of potential lenders and can have a negative effect on your credit rating.
If you’re looking to buy at auction, getting conditional approval is vital.
Arranging your finance beforehand enables you to bid with confidence. You still need to be aware of market values and stay within these, though. Otherwise, you may find your lender values the property you’re looking to buy at less than you’ve agreed to pay. If this happens, you’ll need to find the shortfall.
And if you place the winning bid, you’ll need to have the required 10 per cent deposit, which the agent will ask for after the hammer falls.
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The processes for conditional approvals vary across lenders. Some can provide them within 48 hours, some will take up to two weeks.
The faster your lender can get the information they need, the faster they can process your application, so having your documents ready is key.
A loan can be denied after conditional approval. As the name suggests, conditional approval means you currently satisfy the requirements for a loan, but there’s no guarantee you’ll ultimately receive the loan, as things change.
Lenders reserve the right to deny an application if your circumstances change and you then fail to meet a requirement. These change might include:
This is why it’s vital you 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’ve been conditionally approved. First, the lender will need to verify the information you provided in the pre-approval stage.
They’ll usually need to carry out a property valuation, to ensure your loan doesn’t exceed the value of the property.
The lender will then need to confirm the conditions of the loan with you and whether you’ll need Lenders Mortgage Insurance (LMI).
Unconditional approval means that a lender has taken the time to formally assess all your paperwork, and your signed loan application, and decided to offer you a home loan based on the property you have chosen to buy.
It indicates that your application is not subject to any terms and conditions and the lender has decided that there are no unresolved issues.
If you’ve been given conditional approval for a home loan, unconditional approval can take anywhere from one day to one week, depending on your lender.
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Settlement, which is when ownership of the house formally passes from the seller to the buyer, can range from 30 to 90 days 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. The settlement date will be written into the contract.
After settlement, the lender will usually draw down the loan – meaning they’ll withdraw the amount paid at settlement from your loan account.
Next, you’ll need to pay transfer duty or stamp duty and then, the property will be transferred to your name and you’ll get the keys!
Applying for conditional approval isn’t that different to applying for a home loan.
It’s a good idea to contact a mortgage broker to help you compare hundreds of loan products and determine which one is best for you. They’ll also be able to guide you through the application process.
Once you’ve picked a lender, it’s time to provide the documentation. Generally, they’ll require evidence of your identity, income, spending and residency status. They’ll also assess your assets and debt you’ve accrued.
Most lenders will also now run a credit check. The lender will then be able to use this information to determine if you’re eligible for conditional approval.
Otherwise known as a valuation, the objective of an appraisal is for the lender to ensure the mortgage isn’t giving the borrower more than the property is worth. It’s rare the appraisal would be higher than the offer, but in this scenario, the buyer may have instant equity in their home.
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Words by Erin Delahunty
If you’re looking at buying a property soon, you may want to consider getting conditional approval, so you can house hunt with greater confidence. eChoice’s expert brokers can help with that process.
On the surface, buying and building a house seem pretty similar, but they’re different when it comes to the finance side.
To buy an existing property, a conventional mortgage is used, but when building from scratch, a different type of lending product is needed. It’s called a construction loan.
Specifically designed for people building, construction loans are funded in progress payments that cover the cost of each stage of a build. Payments are sent to the builder as each section is completed.
With low interest rates and a several government incentives on offer, there’s been a surge in the number of construction loans being taken out across Australia of late.
Australian Bureau of Statistics (ABS) data shows the value of new owner/occupier home loans rose 0.8% to $17.4 billion in October, a jump of more than 30% year-on-year.
“The value of construction loan commitments has risen by 65.6% since July, which coincides with the June implementation of HomeBuilder in response to Covid-19,” according to ABS’s Head of Finance and Wealth Amanda Seneviratne.
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A construction loan is a loan designed specifically for those who build a home, rather than buy something that’s already built. They’re generally for new properties, but can also be used for renovations.
Construction loans offer progressive drawdown, meaning the lender pays your loan in small chunks – as and when your builder completes a stage – rather than in a lump sum.
Most construction loans are interest-only for the duration of the build too, so while your home is being built, your costs are kept to a minimum. After this time, the loan reverts to principal and interest. Most lenders, such as the big four banks, offer construction loans.
As with any finance option, there are advantages and disadvantages of construction loans.
Building a home is exciting, but before you start, it makes sense to sit down and think carefully about each step. A design checklist is a great way to do this. The Commonwealth Bank offers some great advice about how.
Whether building on land you own or looking to buy land to build on, research is vital. Look at what’s available, the suitability for what you want to build, the nearby infrastructure and the applicable rules and regulations.
It’s important to spend time finding the right builder and architect, if you want to use one. Get recommendations from friends or family, contact the local Master Builders’ Association and get several licensed builders to quote.
Your builder should provide detailed plans and accurate costings for every aspect of the build. Ensure the contract covers everything and agree to a timeline for completion.
Look into “out of contract” items. These are extra improvements which might not form part of the fixed price building contract. They’re restricted to “non-structural” works, like floor and window coverings. Additional improvements like pergolas, landscaping and swimming pools can also be classed as “out of contract”. All these extras need to formally quoted for.
The builder or architect generally handles getting plans approved. Ensure this is done early, as it can take time to get through council and sometimes amendments might be needed.
Next is the application process. Applying for conditional pre-approval is important, as it’ll help give you a good understanding of what you can afford when choosing the design and builder.
One of the key differences between a traditional mortgage and a construction loan is how it’s paid. They’re funded in progress payments that cover the costs for each stage of your build. Payments are sent to the builder as each section is done and signed off.
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Any other costs you incur, which were not in the original contract, will need to be covered by you. For example, if you choose designer items instead of the standard included in the contract, which cost an additional $2,500, you’ll need to pay this expense at the end.
However, there are exceptions to this rule. Some lenders will allow you to increase your loan to cover more substantial expenses, but you’ll typically need to apply at least a month in advance.
Qualifying for and securing a construction loan is more complex than getting a regular home loan.
Using the plans, a property appraiser will work out the expected value of the property when it’s completed, and from this figure, determine how much money you’ll need to borrow to pay the builder.
If you’re paying a registered builder to build your home, you’ll likely need to provide:
Next up is having the deposit, which can be anywhere from 5 to 25%, depending on the lender. Lenders’ mortgage insurance might also be payable.
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As with any loan, the amount you can borrow for a construction loan depends on a range of factors such as your salary, living expenses, existing equity, whether you’re applying for a joint loan, interest rates and many other factors.
In general, construction loans have a variable rate, with a maximum LVR of 95%. This varies depending on lenders.
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Words by Erin Delahunty
Originally published November 2018. Updated January 2021.
If you’re thinking of building a home, but aren’t sure where to start, eChoice’s expert brokers can help you understand the market and simplify the process of applying for a construction loan.
Chances are you’ve heard the phrase ‘Lenders Mortgage Insurance’ thrown around, or maybe even the acronym ‘LMI’, but how many of us know exactly what this means?
If you’re anything like most first-time home buyers, you may be unsure about this supposed extra cost towards buying a home – that only some people have to pay. You may be wondering who pays LMI, why they pay it and exactly what costs are involved.
If you’re new to the property investment world, don’t fret because we’re about to give you the low-down on everything you need to know about LMI – including what it is, how you can avoid it, and why you might need to pay it.
Lenders Mortgage Insurance is a form of insurance that is paid by the home loan owner but designed to protect the lender, just in case you default on your home loan and can no longer make your repayments.
The important thing to recognise is that not everyone pays for LMI. Usually, LMI is only required when the borrower is taking out a loan for 80% or more of the value of the property (meaning they do not have the ‘traditional’ 20% deposit). This percentage is otherwise known as the Loan-to-Valuation-Ratio or LVR, and in most cases, if your LVR is over 80%, you will most likely be required to pay for Lenders Mortgage Insurance.
An important distinction to make is that LMI is not there to cover you (or your guarantor), it simply exists to protect your credit provider in the event that you cannot pay back your loan.
The Loan-to-Value-Ratio (LVR) is used to help determine whether you will need to pay Lenders Mortgage Insurance. Usually, an LVR value of over 80% suggests that you will need to pay LMI.
The LVR can be calculated by dividing the loan amount by the value of your property. Alternatively, if you’re not a fan of numbers you can use eChoice’s LVR Calculator instead.
For example, if Jenny was getting a loan of $300,000 and her property was worth $450,000, her LVR would be approximately 67%, meaning she would most likely get away with not needing to take out LMI.
However, if Jenny’s LVR was 80% or greater, in most casesshe would need to take out LMI.
|Loan amount||$390,000||Loan to value ratio (LVR)|
|Loan amount||$410,000||Loan to value ratio (LVR)|
Copyright © Finconnect (Australia) Pty Ltd trading as "eChoice", ABN 45 122 896 477 Australian Credit Licence 385888, is a wholly owned subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.
The purpose of this calculator is to assist you in estimating whether you will need to pay lenders mortgage insurance (LMI) based upon the information you put into the calculator.
The results of this calculator are estimates only. They are based on the information you have provided. If you change any of the information, you will obtain a different result. Other fees, charges and costs may apply.
The actual amount you can borrow, and the applicable loan repayments, can only be determined once you submit a full application to us and we assess your application using our credit criteria applicable at that time.
Before acting on the results of this calculator you should seek professional advice and speak to an eChoice consultant.
Lenders Mortgage Insurance (LMI) is usually a one-off payment that lasts for the life of your loan. The cost depends on your Loan-to-Value-Ratio (LVR) as well as the amount you wish to borrow, and generally, as your LVR or borrowing amount goes up, so does the price of your insurance.
The following table can help you to estimate your potential LMI costs.
Know the cost of LMI premiums
|Property Value||Deposit||LMI Estimate*|
|First Home Buyer||Buying Again|
All calculations have a loan term of 30 years and are estimates only.
Calculate the cost of LMI premiums
To help you out, this calculator can also be used to estimate the cost of your Lenders Mortgage Insurance (LMI). Simply follow the link and enter your estimated property value, deposit amount, whether or not you are a first home buyer, as well as your loan term.
Despite its cost, Lenders Mortgage Insurance (LMI) does have some benefits that make it worth weighing up your options.
Whilst LMI is a one-off payment, with most insurers there is usually some flexibility as to how it is paid.
The first way to pay for LMI is in a one-off, upfront payment. While for some this is no problem, for others it can be hard. In this case it may be possible to capitalise the payment into your mortgage.
Capitalising LMI into your home loan essentially means the cost of LMI is added to your home loan. This means you pay it off in regular instalments rather than one lump sum.
In most cases, the simplest way to avoid LMI fees is to have a deposit equal to or greater than 20% of the value of the property.
For those yet to save for a standard deposit, LMI can sometimes be waived by government schemes such as the first home loan deposit scheme (FHLDS). It can also be avoided by having a guarantor sign onto your home loan – such as a parent. This effectively adds more equity to your application and bypasses the need for such a large deposit.
Working out whether you are liable for LMI is dependent on your individual circumstances. Talk to your lender to find out more.
In some cases, LMI is refundable within the first one to two years, however, it depends on the conditions of your policy. For some policies, LMI refunds are not available under any circumstances.
In other cases, if within a certain amount of time (again, usually under two years) the homeowner decides to refinance and move lenders, for some policies the LMI can be refunded (or partially refunded). Again, whether this is possible is entirely dependent on your home loan policy.
It’s important to note that, even if your LMI is refunded, if your equity has not increased and your LVR is still greater than 80%, you will most likely still need to take out LMI (again) for the new home loan policy.
The most important thing to keep in mind is that the option of LMI being refundable is not a given, and it will depend on your particular policy – so be sure to ask!
Unfortunately, when you move lenders, Lenders Mortgage Insurance (LMI) is not able to be transferred. However, in some cases, if you stay with the same lender, they will give you a discount on the new LMI policy – rather than have you move to a new lender altogether.
Always consider that although you may be required to take out LMI again, this new lenders policy might be so good that it offsets this added cost. At the end of the day, every circumstance is different and only you, or your financial advisor, can really say which option is best for you.
Words by Kathryn Lee
Wondering if you’re liable for Lenders Mortgage Insurance? An eChoice mortgage broker can help you to assess your borrowing power and whether you’ll need to pay LMI.
From mourning the end of a relationship to ironing out the living and parenting arrangements, divorce is difficult enough as it is. However, if you have a joint mortgage on a property together, it can add a whole new level of complexity.
Regardless of whether you both remain in the home, the mortgage still needs to be paid off and it’s not always as simple as splitting it 50/50. The good news is, by familiarising with the guidelines around home loans and divorce, you can make sure you’re prepared in the unfortunate event your marriage ends.
There’s no one-size-fits-all solution when it comes to property split in a divorce – it depends on the individual circumstances of your family and home. Typically, in any relationship longer than 12 months, each party is entitled to a share of the assets. How the division of assets occurs depends on a number of factors such as:
This can apply to not only the property itself but also the home loan debt if you are encumbered by a mortgage.
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.
You may be wondering “can you hold a shared home loan account after divorce?” After all, surely paying the loan repayments back equally would be the simplest option. Yes, it is indeed possible to take out a joint mortgage and both remain liable for the debt until it is paid off. However, there are various reasons that this may not always be feasible. Perhaps one partner has a lower income, will have increased rental or childcare costs or simply doesn’t feel they should have to pay for a home they no longer live in. In this case, there are a few other divorce and mortgage options:
Below, we’ll talk through these options in more detail
Yes, you can transfer your share of the property to your ex-spouse. However, this means they would have to refinance the home to buy out your share and take your name off the home loan, as well as the property title.
If you go down this path, you will be eligible for the Capital Gains Tax rollover relief, meaning you won’t be required to pay CGT on the share you sold to your ex-partner. This is because they would be assumed to receive capital gain or loss in the event they sell the property in the future.
On the flipside, you can also buy your partner out of the mortgage and remove them from the home loan. However, in order to do so, you would need to qualify for the mortgage on your own. If you’re eligible, you will be able to refinance and extend your mortgage to 95% of the property value.
You may also be able to increase your home loan to pay out a divorce settlement. In this situation, you may be required to pay Lenders Mortgage Insurance (LMI) if you loan more than 80% of the property value. However, the good news is, you generally won’t be liable for stamp duty, as it’s usually not payable on a transfer of equity.
Yes, it is possible to refinance your home during a divorce. In fact, many couples will decide to do this as it allows one spouse to be ‘bought out’ of the home loan while the other keeps the house.
If one half of the couple does intend to buy the other out, the person keeping the house must ensure they have the means to service the home loan on their own. They must also have enough savings or equity to be able to buy the other half of the couple out for their share.
The share of the house awarded to each party usually depends on divorce proceedings and the individual couple’s circumstances.
The way the equity of a house is divided after a divorce will depend on legal proceedings. Depending on the factors involved, each partner will be entitled to a certain share of the property. This could depend on factors such as:
In order to qualify for the mortgage on your own when buying your partner out, you must meet certain criteria, including:
Technically, you can remove your ex-spouse’s name from the property title yourself. However, this tends to be quite a complex and time-consuming process and the last thing you need in a divorce is more stress!
Firstly, you will need to seek the consent of your home loan provider to take your ex-spouse’s name off the mortgage. Usually, this also includes refinancing the home loan to reflect the new circumstances. With the help of the lawyer or conveyancer, you’ll then fill out a transfer title form. You can usually find this on the website of your applicable state or territory government department. You will need to provide the names of the people involved in the transfer, the Torrens Title details and the share of the property being transferred.
Wondering how to refinance a home loan after divorce, exactly? Well, refinancing is simply replacing an existing debt obligation with another one under different terms. So, in the case of refinance after divorce, you would be putting the mortgage in one name.
If one of you decides to stay in the home, the other partner can put the profit from selling their share of the mortgage towards a new home loan.
Another strategy is selling the home and keeping the assets. There are various benefits to this. It ensures that asset division is fair, reduces the emotional baggage and allows both parties to start afresh using the proceeds from the sale of the property. If you’ve owned the property for many years, then chances are you will also have a considerable deposit for the purchase of another property after the division of the proceeds.
However, if you and your ex-partner are not on amicable terms, this can be a difficult process. You have to collaborate on the sale of the property and agree on a real estate agent and price. You may even have to prepare the property for sale together. If you are not on good terms, you may also want to sell faster. This can lead to rushed selling the property for a reduced price, just so you can move on.
If you do choose to sell the property and divide the proceeds, then it’s important to seek legal advice. This ensures strategy ensures asset division is fair.
What happens if your partner is still on the home loan, but refuses to make their share of mortgage repayments? There are a few steps you can take in this event.
Firstly, you should contact your lender and inform them about the situation. While they will still require mortgage payments, you may find that they are willing to reach a compromise about the repayment schedule pending the division of your property in the Family Court.
You may also choose to sell the home. This ensures your mortgage will be paid and eliminates any potential negative consequences. The balance of the proceeds of the sale may be held in a trust until you and your ex-spouse meet a final agreement.
You may also be able to get a Court Order for spouse maintenance to ensure your ex-partner complies with the ongoing mortgage repayments.
Updated by Kathryn Lee December 2020
Dealing with mortgages after divorce can get complicated and messy, and it’s not something you should have to go through on your own. eChoice’s experienced brokers could help you decide on the best course of action to reach a positive resolution. Contact us today for joint mortgage separation guidance on refinancing or selling.
According to the Australian Bureau of Statistics (ABS), the average mortgage size in Australia is $500,000 (December 2019). Depending on where you live, this may sound like a lot – or very little – and that’s because the state or capital city you live in has a major influence on the size of your mortgage.
Depending on where you lay your stakes, the size of your mortgage can be vastly different.
It may come as no surprise that Sydney tops the list for the largest average mortgage size in Australia. But while Sydneysiders indeed pay a premium for their predictable weather patterns and sunny beaches, Melbourne homeowners are not too far behind.
Take a look at the average new lending amounts across Australia:
During the 2016 Census of Population and Housing, it was found that the median monthly mortgage repayment in Australia was $1,755. However, where you choose to live can have a stark difference on the figures.
Median monthly mortgage repayment by state:
For those who are new to the ‘mortgage world’, getting your head around just how much a mortgage can cost and how much you might be paying each month in repayments can be daunting. Before punishing yourself for paying more attention to your hair during high school maths class, check out eChoice’s loan repayment calculator.
The calculator is plug-and-play and allows you to get an estimate without doing any pesky maths.
The mortgage repayment is determined by the loan amount, loan term and interest rate. According to the eChoice loan repayment calculator, a $300,000 mortgage taken out at an interest rate of 3.92% over a 30-year term would equate to an estimated monthly repayment of $1,419 per month, with a total loan repayment of $510,640.
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The amount of money you can dedicate towards mortgage repayments depends on a variety of factors, such as your current income and living expenses – as well as the current interest rates on offer.
In general, many find the 28% rule a good rule of thumb. Under the model, mortgage repayments should represent no more than 28% of your monthly income.
Of course, this rule is only a suggestion – and it does not account for personal circumstances. To work out how much you can budget towards a mortgage from your monthly income, it’s best to map out your expenses and do the maths or seek the advice of a professional.
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If your monthly mortgage repayments are greater than 28% of your tax-free monthly income, you may be in danger of mortgage stress.
Historically, Australia is currently experiencing the lowest home loan interest rates ever seen. Due to this, many financial advisors feel that home loan holders have become complacent about home loan interest rates, naively believing they won’t rise. According to financial experts, this is a dangerous mindset that could be costly in the long-term, especially if home loan holders don’t have a financial buffer to cover rising expenses.
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There is no ‘set’ amount of time you have to pay off a house by, it all depends on the term of the loan, and other loan conditions which you would have negotiated with your lender. Typically, loans will run for terms between 10 and 30 years, depending on your loan type and the monthly repayments you can afford.
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There is no ‘average’ interest rate for home loans. Interest rates are constantly changing depending on the economic climate and the cash rate set by the Reserve Bank of Australia (RBA).
Historically, Australia is currently experiencing the lowest interest rates on record. As of April 2020, the interest rates for most lenders were sitting at around 4.63% but you can find rates as low as 2.47%. However, as those who were mortgage holders in the 90s would remember, in 1990 interest rates hit record highs, reaching as high as 17%.
There is nothing to stop interest rates from rising in the future – and likewise, nothing to stop interest rates from going down. It all depends on the economic conditions at play, which is why it’s important for home loan holders to be financially aware.
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Interest rates are influenced by the cash rate, and as of July 2020 the RBA the cash rate is 0.25% – a historic low. A low cash rate helps to keep interest rates down. However, the RBA meets every month to discuss the current economic climate, meaning this could rise at any time, potentially bringing interest rates up with it.
Other, more personal, factors also help lenders determine your mortgage interest rate. Your credit score, requested loan amount, loan term and interest rate type are just a few of the other factors lenders take into consideration when calculating your interest rate.
Everyone’s personal circumstances are different, and there’s no definitive way to say what mortgage amount you could qualify for.
When calculating your approval amount, your lender will likely consider factors such as your salary (including joint income if applicable), credit score, living expenses and more. Seeking pre-approval can be a good way to find out how much you could be eligible for.
Alternatively, the eChoice’s borrowing power calculator can be a useful tool to estimate how much you might be able to borrow.
Buying a home for the first time is a scary, daunting, confusing and exciting time. First home buyers are likely to go through a range of feelings, and at one point, a first home buyer is sure to wonder, am I doing it right?
When house hunting, working out just how much you should be borrowing can be hard. In cities like Sydney, where house prices may feel ridiculously expensive, a first home buyer can be left asking, “Is this normal?” Or, “How much should we be spending on a house?”
Just like that time you went to a restaurant hungry and ordered way too much food, and later regretted it, you don’t want to commit to a home loan amount that is more than you can handle.
Although we can’t tell you what loan amount is right for you (leave that up to your financial advisor), we can tell you what the average loan amount is for first home buyers, to help get you started.
Words by Kathryn Lee
Original: 11 April 2019.
Updated on 20 December 2020.
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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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:
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.
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.
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.
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.
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.
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:
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.
Updated by Vidya Kathirgamalingam March 2020
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.
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.
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.
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.