Home Loan Rate – Australia

Mortgage brokers play an important part in the success or failure of the economy. They facilitate the sale of mortgage loans, and make it easier for borrowers to find the best deal on a home loan. You can think of your broker as the middle man between you and your lender. Since it is less than easy to find the right lender for the right price, it is in your best interests to take advantage of the broker’s intimate knowledge on the subject.

The broker typically has access to contacts in the lending industry, either within a specific territory or throughout Australia. This makes it easier for them to find a good deal on a mortgage. They save you a great deal of time, and often money, in the process.

Brokers don’t work for the lending industry directly, but their clients make up a large percentage of the people who apply. Over a third of home loans in Australia involve a broker. When you take into account the fact that the industry has only existed in the country since the 1980s, this is quite an achievement.

Despite their name, a mortgage broker can also be helpful in finding a personal loan or business loan, or refinancing current loans. Many of them are now available online, allowing them to work with more clients at the same time.

Benefits of Mortgage Brokers

– You can find cheaper interest rates. The fact that the broker can negotiate on your behalf, that they have contacts throughout the industry, and that they know what type of loan suits your financial situation means that they can offer you a better deal than if you were to deal with lenders directly.

– Do we need to say it again? Brokers have contacts that you don’t. End of story.

– Brokers have exploded in popularity over the last several decades for a good reason. You get more flexibility out of a broker than you get out of any particular lender. When you are dealing with a broker, it is not unlike dealing with all possible lenders at once.

– Unlike the bank, the broker doesn’t care if you have a terrible credit record. A broker is on your side. Since your financial history is of no risk o them, they will work with you regardless of your past. They will do what they can to get you in touch with a reputable lender willing to work with you, something that is incredibly difficult to do on your own.

– Efficiency is key here. You save time, money, and effort. Best of all, from you perspective, the mortgage broker is usually free. There may be fees from time to time, but in most cases the broker is paid by the lender, meaning that your only expenses will be for the loan itself.

In Review

A mortgage broker is your representative in the world of mortgage lending. They know people in the industry, they can act on your behalf, and they can save you time and money that simply isn’t worth wasting.

Mortgage lenders in Australia rarely deal with brokers that cannot submit a high volume of successful home loan applications to them each month. For example, a particular bank or non-bank lending institution might refuse to deal with an entity that cannot close at least one million dollars worth of mortgages with them on a monthly basis.

For most mortgage brokers this may not seem like a daunting task. One million dollars worth or home loans may constitute anywhere between one and five successful applications. Most brokers would be able to close at least that much business each month and would therefore be able to do business with the particular lender.

However a problem arises when the scope of the mortgage broker business model is considered in full. Brokers are in business to offer choice to their customers. In Australia, brokers offer mortgage products to their clients from up to around thirty different lenders. It is this choice that attracts customers to brokers instead of applying directly with a lender. A problem arises when each of the thirty lenders demand that at least one million dollars worth of business is closed with them each month. This would mean that in order for the broker to maintain a business relationship with all thirty lenders, they would need to close over thirty million dollars worth of home loans each month, evenly spread between each lender. This is an impossible task for even the best mortgage broker to achieve.

Aggregators solve this problem by acting as an entity between the lenders and brokers. An aggregator will have several brokers working for them – perhaps hundreds – and will allow them to submit their home loan applications through them. The aggregator will in turn send the applications on to the lenders. This business model ensures that more than enough applications are sent to each lender each month to maintain the relationships. The final result is that each broker working for the aggregator will be able to offer home loan products from the full range of lenders.

Mortgage aggregators are often found in the form of franchisors. The franchisor can have up to several hundred franchisees working for them. The franchisees will use the brand name of the master franchise and will often receive benefits such as training and software. It should be noted that while the franchise model is popular with mortgage brokers in Australia, not all aggregators are master franchises.

Because mortgage brokers receive their income by way of commissions awarded by lenders for successful home loan applications, it follows that aggregators receive a portion of the commissions for all loan applications put through them. Brokers therefore surrender part of their commission in return for the benefit of using an aggregator. There may be additional franchise fees payable if the broker is a franchisee, although this arrangement will vary from franchise to franchise.

Mortgage managers, banks, credit unions, brokers, insurance groups all offer a seemingly endless choice of loan options – introductory rates, standard variable rates, fixed rates, redraw facilities, lines of credit loans and interest only loans, the list goes on. But with choice comes confusion. How do you determine what the best type of home loan is for you?

First, set your financial goals, determine your budget and work out how long you want to pay a mortgage for. You can do this yourself or with your financial advisor or accountant.

Second, ensure the organization or person you choose to obtain your mortgage from is a member of the Mortgage Finance Association of Australia (MFAA). The MFAA Member logo ensures you are working with a professional who is bound by a strict industry code of practice.

Third, research the types of loans available so you can explore all options available to you with your mortgage provider. Some home loan choices are:

Basic Home Loan

This loan is considered a no-frills loan and usually offers a very low variable interest rate with little or no regular fees. Be aware they usually don’t offer additional extras or flexibility in paying of extra on the loan or varying your repayments.

These loans are suited to people who don’t foresee a dramatic change in personal circumstances and thus will not need to adapt the loan in accordance with any lifestyle changes, or people who are happy to pay a set amount each month for the duration of the loan.

Introductory Rate or ‘Honeymoon’ Loan

This loan is attractive as it offers lower interest rates than the standard fixed or variable rates for the initial (honeymoon) period of the loan (i.e. six to 12 months)

before rolling over to the standard rates. The length of the honeymoon depends on the lender, as too does the rate you pay once the honeymoon is over. This loan usually allows flexibility by allowing you to pay extra off the loan. Be aware of any caps on additional repayments in the initial period, of any exit fees at any time of the loan (usually high if you change immediately after the honeymoon), and what your repayments will be after the loan rolls over to the standard interest rate.

These loans are suited to people who want to minimise their initial repayments (whilst perhaps doing renovations) or to those who wish to make a large dent in their loan through extra repayments while benefiting from the lower rate of interest.

Tip: If you start paying off this loan at the post-honeymoon rate, you are paying off extra and will not have to make a lifestyle change when the introductory offer has finished.

Redraw Facility

This loan allows you to put additional funds into the loan in order to bring down the principal amount and reduce interest charges, plus it gives the option to redraw the additional funds you put in at any time. Simply put, rather than earning (taxable) interest from your savings, putting your savings into the loan saves you money on your interest charges and helps you pay off your loan faster. Meanwhile, you are still saving for the future. The benefit of this type of loan is the interest charged is normally cheaper than the standard variable rate and it doesn’t incur regular fees. Be aware there may be an activation fee to obtain a redraw facility, there may be a fee for each time you redraw, and it may have a minimum redraw amount.

These loans are suited to low to medium income earners who can put away that little extra each month.

Line of Credit/Equity Line

This is a pre-approved limit of money you can borrow either in its entirety or in bits at a time. The popularity of these loans is due to its flexibility and ability to reduce mortgages quickly. However, they usually require the borrower to offer their house as security for the loan. A line of credit can be set to a negotiated time (normally 1-5 years) or be classed as revolving (longer terms) and you only have to pay interest on the money you use (or ‘draw down’). Interest rates are variable and due to the level of flexibility are often higher than the standard variable rate. Some lines of credit will allow you to capitalise the interest until you reach your credit limit i.e. use your line of credit to pay off the interest on your line of credit. Most of these loans have a monthly, half yearly or annual fee attached.

These loans are suited to people who are financially responsible and already have property and wish to use their property or equity in their property for renovations, investments or personal use.

All In One Accounts

This is a loan which works as an account where all income is deposited in the account and all expenses come out of the account. The benefit of the All In One Account is its ability to reduce the amount owed and thus the interest payments while providing a one-stop finance shop where your loan, cheque, credit and savings accounts are combined into one. Normally these loans will be at the standard variable rate or slightly higher and may incur monthly fees. Be aware that if the account is split into the loan account, with credit, cheque and ATM facilities placed into satellite accounts, you will need to check your access to funds, how many free transactions you receive, and what associated fees the loan may have.

These loans are suited to medium to high income earners.

100% Offset Account

This loan is similar to an All In One Account however the money is paid into an account which is linked to the loan – this account is called an Offset Account. Income is deposited into the Offset Account and you use the Offset Account for all your EFTPOS, cheque, internet banking, credit transactions. Whatever is in the Offset Account then comes directly off the loan, or ‘offsets’ the loan amount for interest. Effectively you are not earning interest on your savings, but are benefiting as what would be interest on savings is calculated on a reduction on your loan. The advantages are similar to the All In One Account. These loans normally have a higher interest rate and higher fees due to their flexibility.

These loans are suited to people on medium to high income earners, and to disciplined spenders as the more money kept in the offset account the faster you pay-off your loan.

Partial offset account and an interest offset account are also available.

Split Loans

This is a loan where the overall money borrowed is split into different segments where each segment has a different loan structure i.e. part fixed, part varied and part line of credit. Often called designer loans, you benefit from one or more types of loans. Splitting the loan offers a saving on stamp duty and other charges.

These loans are suited to people who want minimize risk and hedge their bets against interest rate changes while maintaining a good degree of flexibility.

Professional Package

This loan is available at a minimum amount to people on higher incomes or people of a specific profession if they meet certain requirements. The benefit of this loan is being able to borrow higher amounts with a high degree of flexibility and a discount on the standard variable interest rate. The level of discount is dependent on the size of the loan, and the duration of the discount depends on what’s negotiated and can sometimes apply for the life of the loan. Generally these products combine all fees into the one annual fee. Lenders of this product usually provide a lot of added values such as credit cards, discounts on their insurance and investment products.

Tip: If you don’t need the additional extras other loan types may offer a better interest rate.

Non Conforming Loan

These loans are only available from non-bank lenders where interest rates are higher due to the greater risk and shorter life of the loan. The advantage is they are available to people who don’t fill the traditional lending institution criteria. There are two types of Non Confirming loans:

1. A Low Doc Loan usually has a slightly higher interest rate and fees than the standard interest rate and will have a maximum borrowing amount and/or will usually only lend 70% of the value of the property. After demonstrating the ability to meet the payments the interest rate will often revert to the standard rate.

   These loans are suited to people who do not wish to disclose their income or have the inability to show a true income i.e. if you are self employed.

2. Sub-Prime Loans usually have a much higher interest rate and fees than the standard rate and usually require you to use an asset as security. They are based on a sliding scale in accordance to the level of risk of loaning the money. Refinancing is available once the borrower can establish a good payment record.

   These loans are suited to people with poor credit histories.

Other Loans and Products in the Market Include:

Construction Loans: For those building a home when you don’t need the entire amount from the start – you only pay interest on what you’ve spent over the stages of construction.

Bridging Loans: For when the sale of an existing property takes place after the settlement of a new property – when you want to buy a new home before selling the old one, where the funds from selling the old home are paid straight into the loan for the new home.

Consolidation Loans: Enables you to use your mortgage to consolidate other debts such as credit cards, personal loans, car loans etc. – interest rates on the mortgage are usually cheaper than personal loans.

Home Loans Australia may or may not be a company but it’s the most common search term used by Australians who are looking for information on the best home loans Australia has to offer.

In fact the best home loans Australia has on offer changes almost daily. Banks continually change their product line up and tweak their offers to attract different segments of the market all the time. In order to find the best home loans Australia has at any one time you need to locate a favourite web site that continually updates the information and provides links to various unbiased information sites.

It’s all a matter of choice but as a guide to what to look out for here are some tips on choosing your best sources of information as you search for the best home loans Australia has on offer.

1. Individual Banks and Lenders sites will only contain information about their own products. Sometimes the information may say things like ‘Winner of Best Home Mortgage 2006’ or something similar. This may be misleading, simply because the category of the award may not suit your circumstances or needs. Also it does not mean that it is the best rate. Awards are judged on different criteria and you need to know what these are before you can judge the products they are claiming to be the ‘best’.
2. Not all banks or lenders have sites that fully explain how their products work. It is a simple fact that home loans are very complex and each individual applicant will have special differences. It is these differences that make choosing the best home loan from web site information almost impossible.
3. Generic information sites like infochoice and Cannex have an amazing amount of information that may point you in the right direction. They also offer an unbiased approach. However, they also have so much information that it is difficult to fathom your way through the information which is relevant to you.
4. Mortgage Brokers often have the most relevant information to make your decision making easier. This is because they can filter out the less pertinent products and information and narrow your choice. This certainly makes life easier for you, provided you choose the right Broker.
5. Most Mortgage brokers sites are difficult to find and often they fall into the same category as the banks, ie a lot of information but nothing specific to your needs.
6. Look for Blog sites where you can see how up to date the information is. Anything more than a week or so old may indicate stale information.

Don’t despair however. Once you find a Mortgage Broker you can trust, either through a recommendation from a friend, or simply calling a few and comparing their approaches, you will be well on the way to finding the best home loan Australia has for you.

You can ask the same questions and see what answers you get. Hopefully the information you receive will be consistent and your choice will then probably be based on how comfortable you felt during the discussion.