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Fixed Rate Loans

July 11th, 2011 1 Comment
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Fixed rate home loan

What is a fixed rate home loan?

A fixed rate home loan will allow you to lock in an interest rate during the entire fixed term period. A locked interest rate is a fixed interest rate that many bank lenders offer to borrowers for a specified amount of time. You can choose from a 3, 5, 7, 10, 15 or 20 year fixed rate period.

This means that you will be able to know exactly how much your mortgage payments will be for the duration of the fixed rate term. For example, a 10 year fixed term loan will remain at the agreed upon interest rate for the entire 10 years, regardless of variable interest rate fluctuations.

What is a “rate lock”?

Fixed interest rates change very frequently and can change between the time you have applied and the time when your loan settles. A rate lock is the term used to describe when a lender holds a borrower’s current fixed rate quote for a short period of time. Borrowers may request a rate lock for up to 90 days.

If you apply for a fixed rate loan without getting a “rate lock”, there is a chance that you may end up with a rate higher interest than the fixed rate you initially applied to receive. Borrowers usually are required to pay a “rate lock” fee to insure that the interest rate which they applied for has been locked for them. Lenders typically charge a percentage of the loan amount that is borrowed which is usually around 0.15%. Check with your lender because every lender has different policies and rules.

What are the differences between the 3, 5, 7, 10, 15 and 20 year fixed rate loans?

3 Year Fixed Rate Loan
The most popular fixed rate loan is for 3 years. The interest rates are much lower than any other multiple year fixed rate loans, besides the 1 or 2 year loans which have even lower interest rates.

5 Year Fixed Rate Loans
Lenders offer 5 year fixed rate loans at higher interest rates than the 3 year fixed interest rates. The 5 year fixed rate loan is great for borrowers who cannot afford to pay the loan off in 3 years.

7, 10 and 15 Year Fixed Rate Loans
Some lenders may offer fixed rate loans for 7, 10 or 15 years. However, there will be a large break cost to pay off the loans early and break the contract. If you are thinking of getting this kind of loan, you need to be sure that you will be able to keep the property for the length of the fixed rate loan duration.

20 Year Fixed Rate Loans and 30 Year Fixed Rate Loans
The 20 year fixed rate loans and 30 year fixed rate loans are only available to Americans. They are not available in Australia or the UK. These lengthy fixed rate loans do not have any break fees because American borrowers usually have a higher profit margin on their loans.

What are the advantages of a fixed rate loan?

One of the main advantages of having a fixed rate loan is the security of knowing that your interest rate will be locked for the duration of your fixed rate term even if interest rates have increased during that time. This can save you a lot of money in the future.

Some bank lenders that offer fixed rate loans may allow you to make an unlimited number of extra repayments and redraw those extra repayments without incurring any penalties.

What are the disadvantages of a fixed rate loan?

Many lenders who offer a fixed rate mortgages have a limit on the number of extra payments that borrowers can make without the lender charging a penalty fee for the overpayment. Usually these types of loans have a higher upfront cost. They might also restrict the borrower from redrawing extra payments during the fixed loan term. Some lenders may also charge a “break fee” if the borrower terminates the fixed loan term earlier than planned. Break fees can end up costing thousands of dollars. Another disadvantage of a fixed rate loan is that you will not benefit from a lower repayment if interest rates decrease and they do not allow an offset.

What exactly is a break fee?

Lenders who offer fixed rate loans will usually borrow the funds from the money market themselves for around the same amount of time that they give the customer for the fixed rate loan. These lenders “buy” the loan money at wholesale rates and “sell” it to the borrowers at retail rates. The difference between the two loans is the margin of profit gained from the loan.

If a borrower pays off their loan contract early by making extra payments or by paying in full, then the lender will have to lend that money to another borrower or sell it back into the money market. The point of a fixed rate loan is so that the lender can control the repayment amount and number of payments that you have to repay. If you decide to pay off the fixed rate home loan early and the money market’s interest rates have decreased, the lender might lose money. To offset the estimated margin loss, the lender charges their customers break fees for paying off the loan early. However, if there is an increase on the interest rates then the lender may offer the borrower a deal to pay off the loan early. The lender will be able to use the money to lend to another borrower at a higher interest rate, resulting in a higher profit margin for the lender.

Break fees can end up being extremely high. It is highly recommended that you apply for a fixed rate loan for 5 years or less. For example, a $400,000 fixed rate loan for 5 years has a wholesale interest rate of 4.5%. If the borrower pays off the loan in 2 years when the money market’s interest rate is 3%, then the break cost can end up costing $18,000! To calculate this, you take the current loan amount, multiply it by the wholesale rate change, and multiply that by the term remaining on the loan. $400,000 x 1.5% x 3% = $18,000.

95% Home Loans

May 28th, 2011 No Comments
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Mortgage application forms

What does the term “95% home loan” mean?

When a home is purchased, some lenders will offer a mortgage for 95 percent of the price of the home. Refinance loans are not eligible for this type of loan.

At the closing table, the borrower must provide the other five percent to complete the purchase of the property. In addition to the cost of the property, the buyer must have enough money to cover all closing costs including legal fees and stamp duty.

Do all lenders offer 95% home loans?

Following recent events in the lending markets, banks have reduced the percentage of the home price offered through a mortgage loan. The maximum LVR for most lenders is 90 percent or less. Mortgage lenders are aware that selling the mortgaged security to another institution is not possible when the loan balance is close to 100 percent.

When a 95 home loan is offered, the lender can be left holding the property if the borrower is unable to sustain the payments on the loan. The mortgage insurers carry the risk of loss when a 95 home loan is underwritten. Since the insurers are less likely to insure these high-percentage loans, the banks are unwilling to offer or approve the 95 home loans.

Market competition is driving more lenders to offer 95% home loans!

Mortgage insurance pricing is becoming more affordable for institutions that offer 95 home loans. Since the risk can be mitigated by insuring the mortgage, large banks are more willing to offer a 95 home loan option to borrowers who meet the stringent qualifications.

What causes 95 home loans to vary in cost?

Perceived risk of default will drive up the cost of a 95 home loan. Lenders will require extensive proof of ability to pay from the borrower prior to offering the 95 home loan. If the mortgage insurer charges the bank more money to accept the risk, the price of the loan will increase through the interest rate that is offered. Mortgage insurance costs are passed on to the borrower.

Most lenders have very high requirements to prove that the applicant can afford the loan and will make payments on time. This information is then provided to the mortgage insurer as proof of lower risk.

Contact multiple lenders prior to agreeing to the terms of the loan since mortgage insurance will affect the cost of the loan. The cheapest loan may not offer the best terms in the long run.

Two approaches to lenders mortgage insurance

Lenders follow one of two methods for calculating the actual percentage of the loan offered. The first method includes the cost of mortgage insurance by adding the premium charged to the loan value. This approach will drive the percentage of the loan up to 97 or 98 percent. More risk is carried by the lending institution.

The second method is to require upfront payment of the insurance premium at the time of settlement. This approach ensures that the insurance is paid prior to the completion of the loan agreement.

Many lenders are adopting the second method as part of the proof that the borrower has sufficient funds to afford the loan. Since the loan applicant must qualify for the 95 home loan and then pay the insurance cost, the bank perceives less risk and will underwrite the loan.

Qualifying for a 95 home loan

Since the home loan covers a very high percentage of the home price, the borrower will be required to provide substantial proof of his ability to pay. The application will require detailed information concerning every aspect of the financial history. Even if the applicant can pass the lender’s approval process, the mortgage insurer will be given the opportunity to review the application. High-percentage loans will have more stringent insurance requirements since the perceived risk of default is higher. When the lender is also the mortgage insurer, the terms can be easier to meet.

These are some of the most important qualifications that 95 home loan applicants must meet:

1. Savings habits – Lenders rely on this factor more than any other when considering an applicant’s ability to afford the 95 mortgage. The savings account must contain the entire five percent of the home price and reveal a track record of saving money for at least the previous six months.

Active savings habits that continue during the home loan approval process are an indication to the bank that the borrower has the cash flow necessary to continue to make payments and maintain the property. Some banks will not approve the loan if deposits to the bank account have not been consistent.

If the borrower is not able to prove the existence of genuine savings, the lender will not proceed with the approval process. The perceived risk will be too great to approve the mortgage so the process will stop.

2. Flawless credit history – Lenders require the applicant to have a credit history that has zero adverse comments. There are not exceptions to this requirement when applying for a 95 home loan. Every outstanding debt must be in good standing for the past six months without any late payments.

3. Stable employment – Applicants must have full time employment for the previous 12 months with the same employer. Some exceptions can be made for someone with six months of employment with the same company and more than two years in the same industry. Lenders will accept some other variations.

4. Readily saleable property – The property to be purchased must fall within the standard guidelines set forth by the lending institution. Remote locations, high-rise condominiums, and very small properties will not be considered for high-percentage loans by most lenders. Prior approval of the property will save time and frustration by the applicant and the lender.

5. Age-appropriate asset ownership – Many banks are willing to approve 95 home loans for applicants with steadily growing asset portfolios. If the debt ratio is very high and credit has been used excessively, the 95 home loan is not likely to be approved.

Are there maximum loan amounts for a 95 home loan?

Theoretically, a borrower can find a lender willing to loan up to $1,000,000 at 95 percent of the property price. Since the mortgage insurers set the actual insurance amount for the mortgage security, most lenders have lowered the actual loan amounts to $650,000 in metro areas. For properties located in rural areas, the loan limits are lower because of the speciality properties that exist on the market. At the beginning of the application process, provide the postcode to the lender since the loan limits are tied to property location.

Home mortgage lenders evaluate the entire financial package of the borrower. People seeking to purchase a property worth $1,000,000 or more should be able to save more than five percent of the purchase price. Banks evaluate the ability to repay the loan through a complete financial evaluation and expensive properties will be scrutinized more closely to prevent default on the home loan.

Get a 95% mortgage today.

Loans To Trusts

May 21st, 2011 1 Comment
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Most everyone is familiar with the process of applying for home loans as an individual or couple. However, many people don’t know that it is also possible for a trust to obtain a residential loan. Loans to trusts are a bit more complicated in nature, but if you have the right type of trust and can locate an appropriate lender, the loan you need can be secured. 

What is a Trust?

A trust is a legal agreement in which the assets of a person, group of people, or family are owned on their behalf by another person or company. The person or entity that owns and controls the assets is known as the trustee, and the person, group of people, or family allowing the trustee to control said assets are referred to as beneficiaries of the trust. The arrangement is controlled by a trust deed, which is a document stating various rules that must be followed by the trustee, as well as how the profits of the assets are to be distributed among beneficiaries. Most trusts are created to either maximize tax benefits or protect the assets in question. 

Why Are Trusts Created?

The majority of trusts are created to protect a given asset. Since the assets included in the trust are not the legal property of the beneficiaries of the trust, so the assets are therefore safe from the liabilities of the beneficiaries. For example, if the beneficiary of the trust files bankruptcy, the assets in the trust will not be included in the bankruptcy process. In the case where a loan is taken out by the trust, the lender will of course secure a guarantee of repayment. However, no other creditors will be able to touch the assets protected by the trust. 

A trust may also be developed in order to attain certain tax benefits. The government offers the beneficiaries of a trust a 50 percent exemption on capital gains tax. However, this tax benefit does not extend to a company’s shareholders, thus making a trust arrangement more profitable. Trusts can also be used to pass assets from parent to child without incurring taxes. Property can usually only be transferred to one’s children without incurring tax in the event of one’s death, but a trust allows this tax-free exchange to take place while the parent is still alive. Finally, a trust can be used to divide investment income between spouses under a lower tax rate. This process is known as income-splitting. Income-splitting was once also used to divide income among other family members as well, but this is no longer possible. 

Securing a Loan Through a Trust

If you are looking to secure a loan through your trust, you must be careful in choosing the type of trust you will arrange. Some types of trusts are not appealing to lenders. In addition, not many loan brokers are well-educated in the area of trust lending. As a result, many bank employees and residential lenders will not want to lend to a trust and will instead direct you to the commercial lending division. Borrowing from the commercial lending division means more fees and higher interest rates, so it is better to secure a residential mortgage loan if you can. 

The best type of trust to arrange if you hope to secure a loan is a family trust. This type of trust is typically created to protect a family’s assets and provide tax benefits to family members. A family trust is considered a discretionary trust, meaning that the trustee use his or her best judgement to distribute the income and assets included in the trust as long as the rules of the trust deed are not violated. Having this type of trust will offer you the most options for securing a loan through the trust.

It is also possible to borrow through a unit trust, though residential loans to unit trusts are only available from select lenders. A unit trust is a type of trust in which the assets included are divided into shares, or units. Individual beneficiaries will own different numbers of units that represent their entitlement to voting power, income, and capital gains. Units can be held by companies, individuals, or even by other trusts. In addition, a unit can be categorized based on what type of asset it represents. This type of trust is most common when beneficiaries are not all family members. 

Unit trusts do not provide the same degree of tax benefits as a discretionary trust, with the exception of cases in which units are owned by a discretionary trust. In addition, unit trusts aren’t as good at protecting assets either. If for some reason a beneficiary of a unit trust becomes bankrupt, his or her units will be included in the proceedings and will most likely be sold to pay off debt. 

A third type of trust to which loans can be extended is a self-managed super fund trust or SMSF. An SMSF trust is typically created for people that wish to be in charge of their own super fund. In this type of trust, the typical amount of money from a person’s employer will be added to the fund as well as anything he or she wishes to add. Typically, the person in question will act as trustee and retain direct control over the fund. 

Residential loans to a self-managed super fund trust are rare and difficult to secure, but they are possible to obtain. Most lenders require a loan-to-value ratio of no more than 70%, however a select few will allow up to 80% for a SMSF mortgage. Typically, such loans are extended so that the SMSF can invest in residential property. In order for this to work, the property in question must usually be purchased by a limited liability company and held in a trust for the SMSF trust. Once the loan on the property is repaid, the SMSF will have the right to acquire the property. 

The final type of trust we will discuss is the hybrid trust, which combines the features of both a unit trust and discretionary trust. However, it is nearly impossible to secure a loan through this type of arrangement. There are very few lenders that will consider extending a residential loan to a hybrid trust.

Trusts can be very beneficial in many ways. They are used to attain tax benefits as well as to protect important assets from the liabilities of the beneficiaries. In addition, it is sometimes possible to secure a loan through a trust. However, it is important to be careful of the type of trust you create if you intend to use it to obtain a loan. There are several types of trusts that can receive loans including family trusts, unit trusts, and self-managed super fund trusts. The best type of trust for securing a low interest residential loan is the family trust as it is the one with which lenders are typically most comfortable. Finally, it is sometimes possible to obtain a loan through a hybrid trust, though this is a rare occurrence.

Learn more about loans to trusts.

The Cost Of Mortgage Insurance

May 12th, 2011 No Comments
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A lender is at risk for financial loss when they agree to grant a home loan to a borrower. If the borrower should default on the loan, the lender will lose the amount left on the mortgage at the time of the borrower’s final payment. In order to prevent losses on mortgages and maintain a payable business venture, the lender will often take out mortgage insurance, especially if a large amount of the home’s purchase price is financed. 

A lender’s mortgage insurance policy will compensate the lender for losses incurred in the event that the borrower cannot repay the loan. The coverage offered by the insurer is typically between 20% and 50%, but it sometimes may be higher. The premium for mortgage insurance could be paid by the lender, but it is usually paid by the borrower in situations with less than 20% equity on the home in question. 

The cost of the mortgage insurance is determined by three different risk-related variables. The first variable considered is the amount of the loan. Higher loan amounts are associated with increased risk for the lender, and thus for the insurer. The second variable considered in the calculation of lender’s mortgage insurance premiums is the loan to value ratio. The loan to value ratio is the amount of the loan expressed as a percentage of the property value. Higher loan to value ratios indicate higher risk of loss for the lender and insurer. The final variable considered in the determination of the mortgage insurance premium is the type of loan involved. Loans with less documentation are considered to be more risky to the insurer than loans with full documentation. The premium will be charged as a percentage of the amount borrowed. The higher the risk of default (as perceived by the insurer), the higher the mortgage insurance premium will be. 

Mortgage insurance will typically be imposed on borrowers of full documentation loans that have a loan to value ratio of 80% or more. In the case of lo doc loans, mortgage insurance may apply for loans with a loan to value ratio of 60% or more. Many lenders choose to insure all of their loans without consideration for the loan to value ratio, but if the ratio is less than the aforementioned percentages, the lender will typically pay the premiums themselves. 

Not all lenders have the same mortgage insurance premiums. In fact, the cost of mortgage insurance can differ by as much as $10,000 between banks. When choosing the best loan for any scenario, how much you will pay for mortgage insurance should be a serious consideration. The price of mortgage insurance imposed on a borrower can differ for several different reasons including the way the lender calculates the premium, the loan amount, and the lender’s chosen insurer. 

Most lenders determine the cost of their mortgage insurance premiums by adding the premium to the loan instead of asking the borrower to pay the premium out of pocket at the loan’s settlement. This method of “capitalising” the premium can save the borrower a significant amount since the premium amount will be calculated based on a lower loan to value ratio. A bank that chooses not to use this method will charge significantly more for its mortgage insurance premiums. 

Another huge difference in mortgage insurance premiums is related to the loan amount. The middle loan amount range is considered to be $300,000 through $500,000 by one lender. Loans under $300,000 are in the lower loan amount band, while loan amounts over $500,000 are in the higher loan amount range. However, another major lender’s bands are slightly different with the middle loan amount range going up to $600,000. For someone borrowing between $500,000 and $600,000, the choice of insurer would make a significant difference in the cost of the mortgage insurance premium. 

In fact, if a borrower is using one of the banks that don’t choose to capitalise the premium, the fact that the loan amount used includes the premium may actually push the loan into the higher loan amount range, thus dramatically increasing the mortgage insurance premium. For example, a borrower who wants a loan in the amount of $495,000 will pay significantly more if the premium is not capitalised. The premium amount, which will surely be more than $5000, will push the loan amount into the higher range, thus causing a dramatic increase in insurance cost. These differences must be considered when choosing a lender. 

The two main mortgage insurance companies in Australia are QBE and Genworth. Some lenders may choose to insure some of the loans themselves, but this is rare. In the case where a lender does insure some of their own loans, they will typically insure loans with high loan to value ratios through an outside company. 

Determining the amount of mortgage insurance you will pay for your home loan can be a difficult process. It will depend on the lender you choose, as well as the insurer used by your lender. However, with the dramatic difference that can be made by something as simple as whether or not the lender uses the capitalisation procedure, it is important to shop around before making a final decision on the lender you will use. The easiest way to work out your premium is to use a mortgage insurance calculator.

If you have the money available, it may even be in your best interest to make a large enough deposit to avoid mortgage insurance altogether. If you cannot make such a deposit but would still like to avoid paying mortgage insurance, another option is to use a guarantor. A guarantor is someone who agrees to take responsibility for the repayment of your loan in the event that you cannot make the payments yourself. This is usually a family member, but in some cases could be a friend. He or she will use owned assets as collateral, which can lower your loan to value ratio enough to keep you from paying mortgage insurance.

In some cases, it may even be possible to have the guarantor sign a limited guarantee, which means that he or she will only be responsible for a portion of the loan. For example, if your loan to value ratio is 95% and the lender requires mortgage insurance for all loans with a loan to value ratio of 80% or more, you could ask a friend or relative to sign a guarantee for 16% of the loan amount, which will bring your loan to value ratio under 80%, thus eliminating the need for mortgage insurance.

Mortgage insurance can be very costly for home buyers. The cost of mortgage insurance is determined by the loan amount, the loan to value ratio, and the type of loan. The cost of mortgage insurance premiums also varies by lender based on the mortgage insurance company they use, as well as whether or not they capitalise the premium. Due to the fact that it is possible for premiums to vary by $10,000 or more, it is important to explore all of your options before deciding on a lender. Cheaper mortgage insurance can make one lender’s offer much more appealing than that of another. The borrower is usually only required to pay mortgage insurance premiums if the loan to value ratio exceeds 80% for standard loans or 60% for lo doc loans. If you want to avoid mortgage insurance altogether, you could put down a large enough deposit to bring your loan to value ratio under the applicable limit, or you could use a guarantor.

85% Home Loans

May 10th, 2011 No Comments
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If you save up a 20% deposit on your home loan, this allows you to avoid needing to pay for lender’s insurance. Unfortunately, this isn’t always a possibility. If you can afford a 15% deposit, however, this is still much better than a 90% or 95% loan.

You can use either a 15% deposit or 15% equity in another property to apply for an 85% home loan. This offers the bank reassurance that, even if you were to foreclose, they would be more likely to break even. In most cases, you can apply for an 85% mortgage for any purpose, whether you will be buying the home for yourself, as an investment or to refinance you loan.

Some lenders will have no limit on the the amount of money that you can “cash out” on, while others will set a limitation of 20% of the value of the loan. Regardless of the lender, you will almost certainly be required to bring documentation explaining what the money will be used for.

If you have saved up a 15% deposit, you have done more than many other borrowers are willing to do. Some banks may try to convince you that you haven’t saved up enough. For this reason, it is a good idea to get in touch with a mortgage broker. In some cases, they may have deals with the lenders that allow you to apply for a mortgage with no lender’s insurance, even though you haven’t saved up the standard 20% deposit. Even if this isn’t possible, a mortgage broker will be able to find the best deal in the shortest amount of time, simplifying the process a great deal.

Lenders also consider “genuine savings” to be an important part of the decision. Genuine savings are the funds that you have saved up in addition to the deposit. In most cases, a lender would prefer that you have saved up at least five percent of the value of the loan. There are some lenders who don’t require this. Once again, a mortgage broker can be helpful in finding these lenders.

That said, whether or not a lender will be willing to work with you shouldn’t be your only consideration. The extra five percent of genuine savings provides you with a buffer that will protect you from any unexpected costs that you might have to deal with. Most financial experts will argue that it is best to keep all of your basis covered. The last thing that you want to deal with after purchasing a home loan is additional debt.

When comparing lenders, it is important to compare not only the interest rate, but the cost of lender’s mortgage insurance. The ultimate questions are how much you will spend each month, and how much the loan costs overall. All other considerations are secondary.

Eligibility

Not everybody is eligible for an 85% home loan, of course. While every bank has it’s own criteria that they use to determine whether or not to offer any particular loan to any particular borrower, here are some of the most common factors that they take into account.

First of all, your credit history will play an important part in the decision. With a 15% deposit, it is not quite as important that you have a completely clear history. It is, however, helpful to have a credit report free of any seriously negative decisions. Ideally, you will have made all of your payments on time for the past six months, including rent, credit cards, and other loans. This is especially important if you hope to avoid paying for lender’s insurance.

In most cases, the lender will also prefer that you have at least six months of employment with your current employer. This is not always a necessity, but it can make the application process more difficult if you don’t meet this requirement.

Your income is especially important. Your income is the source of the funds that you will be using to pay off the debt to your lender, and many banks consider it to be the most important factor of all. The higher your income in comparison to the cost of the loan, the better. Simply earning enough money to pay off the loan isn’t enough. Banks feel more comfortable if you will have extra funds leftover. Generally, it is a better idea to choose this type of loan anyway, as it is much less stressful to pay off, and provides you with the extra money that you need in order to enjoy yourself.

Banks will also consider your assets and your savings. They will often compare your current savings and assets to other people in your age. They feel that this says something about your reliability as a borrower. The more assets you have accumulated, and the more savings you have put away, the more responsible they feel you are as a borrower.

Apply for an 85% home loan.

Guarantor Loans

May 10th, 2011 3 Comments
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If a person is trying to obtain a home loan and he or she does not meet the requirements, a lender may ask the person to supply a guarantor. The lender asks for this because they do not feel comfortable with the borrower’s ability to make repayments. This situation usually occurs when an applicant has no deposit, bad credit, or little proof of income. Young people and people with low incomes are the borrowers most commonly in need of a guarantor loan.

A guarantor loan is a loan in which the borrowers do not qualify for the loan amount and must gain additional support from a third party. The third party, or guarantor, can be a family member, or in some cases even a friend. The guarantor will either provide additional security or collateral for the loan, or he or she may even help make the payments for the loan.

Having a guarantor, whether it is a friend or a family member, can allow you to get a loan for the full price of the home you intend to purchase. In some cases, you may even be able to get a loan of up to 110% to cover additional costs you may incur, such as stamp duty. Sometimes, this money can even be used to consolidate personal debt.

A guarantor loan is sometimes referred to as a family guarantee loan, family pledge loan, or fast track loan, depending on the lender.

There are two distinct kinds of guarantee agreements. A guarantor loan can either be a servicing guarantee or a security guarantee. The most common type of guarantor loan is the security guarantee. In this type of guarantor loan, the third party’s assets are used as additional security for the loan. If the borrower doesn’t have enough money for a sufficient deposit on the property, or if the borrower doesn’t want to pay mortgage insurance, this type of guarantee will be used. In this case, the lender will allow the guarantor to only guarantee around 20% of the loan instead of the entire amount. This is called a limited guarantee.

Servicing guarantees are typically utilized when the guarantor agrees to help the borrower to make regular repayments on the loan. This type of guarantor loan is very rare and isn’t offered by many lenders. At the beginning of 2011, new nationwide lending laws were put into effect, and, as a result, it is likely that this type of agreement won’t be available for much longer. The new laws require all brokers and lenders to verify that borrowers can handle the proposed debt on their own without hardship, which would not allow service guarantees.

Below are three different guarantor loan examples:

Example 1: Security guarantee.

A couple wishes to buy their first home for the price of $500,000. They are able to afford the loan, but they don’t have the deposit amount of 5% which is required by the bank. A family member acts as a guarantor for the couple by using an owned home, worth $1,000,000, for security on the loan amount of $525,000 (purchase amount plus fees). This gives a loan to value ratio of 35%.

Example 2: Limited guarantee

A couple wishes to buy a home costing $500,000, which they can afford to service. However, they do not have the required deposit amount of 5% required by the lender. A family member agrees to act as guarantor, but only for a percentage of the loan. The guarantor guarantees 20% of the required loan amount of $525,000 (purchase price plus fees) which comes to be $156,250. This gives a loan to value ratio of 80%.

Example 3: Servicing and security guarantee

A couple wishes to buy a home for $500,000, but they cannot afford to service the loan, nor do they have the lender’s required deposit amount of 5%. A family member agrees to act as guarantor for the couple by providing them both with repayment help and security for the loan. The guarantor owns a home worth $1,000,000. This gives a loan to value ratio of 35%.

If you are thinking of becoming a guarantor, it is not a decision to take lightly. If the primary borrower defaults on the loan, you as guarantor will take full liability for the debt. You need to be sure that the person for whom you are acting as guarantor is able to pay back the debt, otherwise you will become responsible for it.

This decision should be thought through very carefully. You should consult your family, as well as a mortgage broker or other financial advisor. As long as the borrower doesn’t default on the loan, agreeing to act as a guarantor can be an excellent way to help someone you love.

If you choose to use a guarantor when you apply for a mortgage, the loan will still be in your name. As such, you will still be able to apply for any applicable government grants including the First Home Buyer Grant.

Get more information on guarantor mortgages.

Maximum LVR’s And Loan Amounts

May 7th, 2011 No Comments
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The loan to value ratio (LVR) influences the size of the loan that you are able to obtain from a lender, as well as they way that they view your risk. If you are interested in knowing what your LVR can be based on the size of the loan, this article will serve as a guide. Of course, it is important to realize that every lender is different, and that your own financial situation certainly has an influence on these figures as well. 

With an LVR of 95%, you are only offering the bank security against a 5% fluctuation in the price of the home. They consider this to be fairly high risk, and will almost certainly require that you pay for lender’s insurance. Generally, you could expect approval for a $650,000 loan. The two biggest mortgage insurers will be willing to consider loans as high as $750,000, but your credit and income situation will have to be very robust to receive approval. There are two other important lenders who will go as high as $1,000,000. Again, it take a strong application to receive approval. 

At 90%, you can expect to be able to apply for an $850,000 loan. Unlike a 95% mortgage, you will have better luck trying to apply for a refinance or debt consolidation loan. With only a 10% deposit, it still may be difficult to obtain these types of loans, but they are available to those with a strong application and a rational justification. Any type of “cash out” would usually be limited to less than $100,000. More lenders are willing to go as high as $1,000,000 on a loan at 90% than at 95%. 

At 85%, your options start to look quite a bit more varied. Depending on your income, it shouldn’t be difficult for you to receive a loan with a value of $1,000,000 from almost any lender. There may be some restrictions on the amount of equity that you can release for your own purposes. Some lenders will be able to offer this option without asking you to sign up for lender’s insurance. 

An 80% home loan should provide you with all of the options that most people would be interested in taking advantage of. Their is no lender’s insurance required by the vast majority of lenders, and there are few restrictions on the amount of equity that your can release. If you have the income to pay for one, a loan as large as $1,600,000 should be available to you. Even larger loans may be available with lender’s insurance. 

Finally, once you start looking at 70% loans, you reach a point where the size of the loan is unlimited, subject to your ability to pay for it. There are even fewer restrictions on refinancing. Some lenders might limit the size of the loan to $5,000,000, although this limitation will have almost no effect on nearly all borrowers. 

Lo Doc Loans 

The situation is somewhat different for what are known as “lo doc loans.” These loans are for people who would prefer not to disclose their financial information. In other words, they are not required to provide proof of income. This is ideal for people who are self-employed, or for people who simply don’t want to provide this information. Borrowers are still required, in most cases, to declare their income, and they still need to undergo a credit check. 

Under these circumstances, banks will still ask you to pay lender’s insurance if you apply for an 80% home loan. Despite this, you might be eligible for a loan as high as $1,000,000. Most lenders will only provide a loan to purchase a property. They may be willing to refinance or offer a home equity loan, but the restrictions are much tighter than in a standard 80% loan. While the lenders may limit loans to $1,000,000, both of the major insurers provide an exposure limit of $2,500,000 for each borrower. 

Self-employed workers who won’t or can’t provide proof of income are only exempt from lender’s insurance if they apply for a 60% loan. At this point, they have an unlimited capacity to borrow in most cases. At 60%, fees and rates are standard. 

Lenders other than banks may approach lo doc loans differently. It is possible for a borrower to receive a loan for $600,000 with an 85% LVR. That said, they should be prepared to pay a higher interest rate, about 4% higher than the standard bank rates. Risk fees and applications fees will also be charged. 

At 80%, the interest rates are slightly lower, about 3% higher than the bank rate. Again, risk and application fees are applicable, and loans are limited to about $750,000. At 70%, non bank lenders may offer loans as high as $1,500,000. Loans below $1,000,000 will charge interest rates about 2% higher than the banks. Smaller loans have a relatively low cost application process. 

By the time you have saved up a 50% deposit, you can expect to have no problem applying for a $3,000,000 loan from a non bank lender. Loans that are smaller than $750,000 will have an interest rate less than 1% higher than that of other banks. The larger the loan amount, the more the lender will prefer a relatively short term for the loan.

Get more information about maximum LVR’s and loan amounts.

Lenders Mortgage Insurance (LMI)

May 6th, 2011 No Comments
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If you are in the market for a new home, you may have heard or seen the term “lenders mortgage insurance” or “LMI”. Each time a bank approves a home loan, they are at risk of the borrower defaulting on that loan. If the lender has to foreclose on a property but does not sell the property for the outstanding loan amount, they lose money. LMI protects the lender against that loss.

LMI is usually obtained when the amount of the home loan requested is above 80% of the property value for a traditional loan. For a non-traditional loan, such as a “Lo Doc” loan, LMI is obtained for amounts over 60% of the property value. The term for this percentage calculation of amount borrowed compared to the value of the property is known as loan-to-value ratio (LVR).

How Much Does LMI Cost?

Each lender has their own LMI rates, and they base those rates on certain criteria: loan type, loan amount, and LVR. Another amount to add to the LMI cost is the government duty on insurance premiums, which can be anywhere from 5% to 10% of the premium.

For example, let’s assume you have a loan of $100,000 and an LVR of 90%. The bank’s rate for that loan amount combined with that LVR is 1.22%. Let’s also assume that the government duty is 10%. So, on a $100,000 loan, your LMI would be $1,342. ($100,000 loan x 1.22% premium rate x 10% duty)

Banks have different rates for different types of loans. For instance, one person could have a traditional loan of $100,000 while their neighbour has a Lo Doc loan of $100,000. They both could have the same LVR of 80%, but their premium rate could be different. Even though they are neighbours living in the same state, their government duty would be different because their premium rate is different.

Traditional Loan: $100,000 x 0.41% premium rate x 10% duty = $451
Lo Doc Loan: $100,000 x 0.59% premium rate x 10% duty = $649

Luckily, LMI is a one-off premium that is usually paid at the end of the loan term.

Who Obtains the LMI Policy?

It is the lender who applies for the LMI policy, and it is the lender who is the beneficiary of the policy. This coverage does not protect the borrower in the event of loan default. However, the lender must provide information to the insurance carrier relating to the financial stability of the borrower in order for the carrier to approve the LMI policy.

Why Does the Insurance Carrier Need My Information?

The insurance carrier must also approve your home loan. These carriers usually have stricter guidelines than the bank for approving loans, especially those that are at higher risk. They will review the credit history, employment history, and sometimes the savings history to determine if a condition exists that may jeopardize your chances of repaying the loan amount.

Some lenders have and Open Policy with their insurance companies. Also known as Delegated Underwriting Authority (DUA), this relationship allows the lender to approve the mortgage on behalf of their mortgage insurer. This benefits the borrower because the bank will have the ability to approve the loan without the fear of the LMI provider declining it.

What is the Benefit of Having LMI?

Lenders can use LMI as a tool to enhance the borrower’s perceived credit. By using the insurance in this way, it allows them to offer more innovative and cost-effective mortgage products to the borrower. Typically, lenders prefer to only approve mortgages for 80% of the property value. However, if the property is valued at $500,000, and you only have a $60,000 deposit, having LMI could be the difference between being approved for the home loan without the extra $40,000 and being denied for the loan altogether.

Why Must Borrowers Pay for LMI?

Most lenders will have the LMI wrapped into the borrower’s payments as a condition of the loan. While it may not seem fair for the borrower to have to pay for insurance that seems to only benefit the bank, the borrower should remember that LMI opens the bank’s ability to approve what may otherwise be a high-risk loan. By using LMI, the bank is able to offer mortgages to borrowers who otherwise would not have the desired LVR.

Sometimes a borrower is ready to buy a home, except they do not meet the minimum deposit requirements. Borrowers who benefit from LMI include:

• First time home buyers
• Low- or no-deposit home buyers
• Buyers who have the required deposit amount, but wish to reserve some

Knowing that the lender may require the LMI to be paid by the borrower, it is wise for a borrower to research which lenders have the lowest LMI rates. Unfortunately, the bank is not likely to allow you to choose which insurance carrier the LMI on your home loan is through. Because banks take out numerous LMI policies daily, most have agreements with various carriers for discounted rates on all their policies. The insurance carrier that you found quoting the lowest LMI rate may not be the lowest-rate carrier the bank can use.

Can the LMI Be Capitalised?

Some lenders will allow LMI Capitalisation, where the premium is added on to your loan. What this means for the borrower is that instead of borrowing strictly the loan amount, they will be borrowing the loan amount plus the LMI premium. For example, if you borrow $100,000, and the LMI premium is $250, then the total amount you would borrow if the LMI is not capitalised would be $99,750. With the LMI capitalised, the total amount you borrow would be $100,250.

What Types of Loans Does LMI Cover?

Depending on the relationship with the lender, LMI can cover traditional and Lo Doc loans, such as:

• Owner-Occupied Home Loans
• Home Improvement Loans
• Extension Loans
• Property Investment Loans
• Construction Loans
• Principal and Interest Loans
• Interest Only Loans

Is LMI Required?

LMI is not mandated by law. Some lenders will approve mortgages without LMI, but those loans are likely to have a higher interest rate and/or an additional fee. These lenders have the advantage of not being forced to adopt the policies of the insurance carrier over their own policies. If you wish to avoid paying LMI, it is best to wait until you have the minimum deposit required (usually 20% or more) before applying for a home loan.

Can I Get LMI to Cover Me?

The simple answer is no. However, there are other insurances that will cover the mortgage payments if you are made redundant, fall ill, or die. However, these types of insurance are typically paid on an annual basis, unlike the one-off payment for LMI. If you are interested in purchasing a policy to protect you, ask you insurance broker for mortgage protection insurance or income protection insurance. Keep in mind, though, that having these insurances will not prevent the lender from requiring LMI.

Who Regulates LMI Carriers?

The Australian Prudential Regulation Authority (APRA) is the governing body that sets the prudential standards and reporting requirements to which LMI carriers must adhere.

Get more information about Lenders Mortgage Insurance (LMI).

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