Home Loan Rate – Australia

Significant numbers of first home buyers get their foot into the property market buying buying a property off of their parents or a family member. If the parents have several investment properties then they may even choose to sell the property to their son or daughter for less than its market value.

By selling it below what it is worth, they are giving their children a huge head-start in life. No longer do they need to go through the struggle of saving a large deposit before they buy a home.

Benefits of buying off your family

There are several major benefits of buying a home from your family:

• You can often buy the property below value.
• Your parents may offer you “vendor finance” or other favourable sale terms.
• Your parents do not need to hire a real estate agent & so will save on sale commissions.
• You may be able to reduce your conveyancing costs by using the same conveyancer (note: there may be conflict of interest issues).
• You can often borrow 100% of the purchase price if you are buying the property below its market value (see below).
• You can move the settlement date to suit your needs, e.g. to match when your current lease expires.
• You will be aware of any possible issues with the property.

Overall purchasing a property from your family is financially a very good decision when compared to buying off of a stranger. However if your family relationships may be strained by the process of buying a house then it may be better for you to consider other options instead.

How do you arrange the contracts?

In some states of Australia you will not need to create a Contract of Sale (COS). A signed transfer is all that is required. You can approach a conveyancer or solicitor and they will help you to make the legal arrangements.

Overall it is quite simple to do, once your conveyancer has given you the ok to proceed then it is time to speak to a mortgage broker about arranging the finance.

How to finance your purchase

Applying for a home loan to buy a property from a parent is quite different to buying a property from a stranger. There are several major differences:

• The bank will always value the property.
• The bank may ask you or your conveyancer to confirm the full details of the sale.
• The lender may use policies similar to those that they use for when people have a gift as a deposit.

The qualifying criteria for a mortgage are also different to those of a normal home loan:

• You can borrow up to 95% of the valuation as long as you have 5% in genuine savings and that the loan does not exceed 105% of the purchase price.
• You can borrow up to 90% of the valuation without any savings as long as your loan does not exceed 105% of the purchase price.
• Many lenders will not allow you to borrow over 80% of the valuation unless you have savings of your own.

You can consider using a specialist mortgage broker such as the Home Loan Experts who specialise in helping people to get a family purchase home loan. They can assist you to choose a lender that allows you to buy below the market value and borrow 100% of the purchase price.

What is Sepp 5 zoning?

A Sepp 5 development is a specialized block of units, townhouse estate or village where the occupants are restricted to be either over the ages of 55, pensioners, disabled or elderly couples. These developments have approval from the local council to build more units on a block of land then what is usually allowed, this means the cost of each unit to build and sell is cheaper than the same type of units in the same area. This way it can be marketed better to the baby boomer generation.

These developments have been specifically designed to assist the day to day living for elderly people who require certain features for example:

• Access ramps in ever building
• In area medical centre
• Specialized bathrooms
• Larger doorways
• Public transport which comes straight to the development
• Meal deliveries
• Community activities
• Community with people of similar ages
• Low maintenance security upkeep

A Sepp 5 development is different to a retirement home, it is an independent living accommodation where the occupants has ownership of each separate title and there is no in-house nurse, there is no set time for dinner and activities. It is an over 55s friendly environment where the occupant is free to do what they please and is self reliant.

Why Invest in a Sepp 5 Security?

The reasons for purchasing a Sepp 5 accommodation to live in have been outlined above; the reasons for investing in one are below:

• Excellent rental yield
• Good price – for the price of the same unit dimensions unit in the same area Sepp 5 is generally cheaper
• Usually located in growing areas within 10 mins from major cities
• Usually cash flow neutral or positive

How can I apply for a Sepp 5 home loan?

Sepp 5 or over 55 securities are only taken on as standard securities by less than a hand full of financial institutions, depending the where the security is and the loan amount. Most banks are uncomfortable in lending against these securities as they believe that is harder to resell as it is a restricted market.

It is best to contact a specialist Mortgage Broker who deals in these kind of scenarios on a daily basis. You will have to show that you can afford to make repayments and have ongoing cash flow. Unfortunately if you are retired and on the pension then this will restrict the size of the loan that can be approved. However investors buying these properties to rent out can get approval for a mortgage.

When applying for a mortgage, no doubt you have shopped around for the best interest rate and lowest fees. However almost nobody checks to see if their application meets the lenders guidelines & credit policy!

You see, the problem is that lenders don’t publish their rules to the public. That would make it too easy for people to find loopholes and “game” the system. Every financial institution in the USA, UK & Australia has its own set of rules they must abide by before approving a mortgage.

The credit assessor in the bank who signs off on the approval must follow the guidelines which has been created by the bank, otherwise they risk losing their job. For this reason credit policy is often treated like gospel, and it is rare for policy exceptions to be made.

Each financial institution lending money has different guidelines with specific differences and certain things they cannot approve. This is where the assistance of a mortgage broker is essential as they have knowledge and access to all the lenders guidelines to make sure that your application is perfect for the bank that it will be placed with.

For a standard application with a large deposit, long term employment and no credit history issues this is considered as the perfect application for a bank & will be accepted by everyone. But let’s be serious, not many applicants are like this. Many people have credit impairments, short term employment, unsecured debt, a small deposit or a combination of all of these.

What is in the Lenders Guidelines?

The Lenders Guideline is the rule book of what the Bank looks at and what they can accept when approving your loan:

• Employment – Banks generally require a minimum of 6 months in current job, most do not accept probation and usage of casual or 2nd Job Income must be evident over 12 months.
• Credit Report – Mainly for credit impairment the lenders guideline will advise how many defaults, amounts or timing of defaults which are acceptable to them.
• Savings – Generally all lenders are now requesting that evidence of the deposit be saved over a 3 month period this being called “Genuine Savings”.
• Age – Although lenders are not allowed to discriminate against age, but they may show a stricter view to people who are close to retirement.
• Security – All Lenders will have a list of what type of securities they can take on, this will also provide of list of types they cannot accept and certain areas that they will not do either. Vacant land is a prime example this will advise the maximize size of land they can accept.
• Types of loans – The Lender Guideline will outline what type of loan the bank can accept from purchase, refinances, low doc, guarantor loans, trusts or company purchases.
• Documents – from payslips to tax returns this will outline what is required for each client.

As you can see the guidelines are complex. However the key is that they vary between lenders! Apply with the right lender and your problem is solved! The best way to find the right lender is to use a mortgage broker who specialises in the credit policy of each bank.

Has mortgage jargon left your head spinning? Cut through the confusion with this easy to understand guide that explains the common features of a mortgage & how they can help you to repay your loan sooner!

Redraw

Loan redraw gives the borrower the power to withdrawal any additional repayments to which were made on top of their minimum loan repayment. Eg If the borrower has been making an additional repayment of $100 on a monthly basis, then after 12 months they will be able to redraw $1,200. Note that the borrower is not restricted by the 12 months duration before they can redraw. However, please be advice that some lenders may charge a fee for loan redraws and in the case of fixed rate loans, redraw is not available.

Extra Repayments

This feature grants the borrower the freedom to make extra repayments into their loan on top of their minimum loan repayment. Eg, the borrower has a minimum monthly loan repayment of $1,000; but instead of paying the minimum figure they pay $1,500 per month into their loan. This means that they have made an extra repayment of $500 into their loan. Please note that for fixed rate loans, extra repayments is not available.

Discounts Available for Higher Loan Amounts

This feature is a discount against the loan interest rate to which most lenders provide against their standard variable (professional package) loans. Eg, CBA offer what is called a MAV concession for their customers for loans starting from $150,000 – $349,999 at 0.50% discount per annum. The larger the loan amount is the higher the discount is.

Mortgage Offset Account (100% Offset)

An offset account is a regular cheque account that has ATM, cheque book and internet access that is linked to the borrower’s home loan when the loan is setup. Instead of earning interest on the money in their offset account, the borrower is able to save interest on their home loan. Eg, if the borrower has a loan with the balance of $100,000 and they have $10,000 in their offset account then the interest is only calculated on the loan net balance of $90,000.

Line of Credit Option

A line of credit mortgage is a type of loan that allows you to use the loan as your cheque account and allows you to draw down and repay the loan as you choose. It is similar to a credit card in that it allows you to withdraw funds at anytime up to a set limit. You are also given a choice to make repayments on either a monthly basis or with some loans you don’t have to make a payment as long as you remain below the limit. A line of credit can be used to purchase most types of properties, whether it be a family home or an investment property. As the borrower you can use the line of credit to carry out renovations, pay your bills or invest in shares.

Ability to change to Fixed Rate (Fixed Rate Loan)

This is the feature to which the borrower is allowed to change from a standard variable rate loan to a fixed rate loan. A fixed rate loan is a loan where the interest rate is guaranteed to remain the same regardless of what happens with the variable rate market. Usually, the interest on a fixed rate loan is only fixed for part of the loan term, typically 1 – 5 years.

Yes! It is possible to get approval for your home loan while casually employed. The secret to getting approved is to know what the lender’s policy is, and to apply with a bank who can accept people in your current employment status.

Typically lenders see casual employees as unstable. Your income may fluctuate from week to week or you may go for some time without shifts at all. In addition to this you are not paid for holidays and have less job security than a full time employee.

Lenders simply haven’t come to the realisation that in this day and age nobody has the same job security that was available in the past. Many industries such as hospitality or nursing tend to have a very high number of casual employees, yet the experienced staff are never out of work. However other industries (such as finance!) tends to have many permanent full time employees that are concerned about their job security!

As a result of the way banks see casual employees they typically will not accept any of your income until you have been in your job for 12 months and even then may only use 50% of the income that you earn!

So what is the secret to getting your home loan approved?

It’s simple! Apply with a lender that has flexible policy for casual employees. Some lenders will accept 100% of the income that you earn and only require you to be in your current job for 3 months or more. They will confirm the date you started then use the Year to Date (YTD) figure from your payslip to work out your annual income.

Some lenders can also use your group certificate to calculate your earnings. A good mortgage broker can help you to decide which documents to provide to your lender so that they assess your income in the most favourable way.

You can apply with a specialist mortgage broker who understands casual employees such as the Home Loan Experts who can quickly work out which lenders can help you. Generally there are no fees for the services of a mortgage broker, they can quickly work out which lenders you qualify with even help you with the paperwork.

How can you buy a home without a deposit? In a post-GFC world there are no loans available that will allow you to borrow 100% of the purchase price without providing additional security. In the past it was possible to obtain loans for up to 106% of the purchase price through lenders such as First Permanent, who did not require any additional security for their loans.

In modern times, the only loans that can allow you to borrow 100% are known as guarantor home loans. There are several different types of guarantees, however the most common is known as a family pledge home loan where your parents offer their home as additional security for your loan.

This isn’t as risky as it sounds! The guarantee can be limited to just 25% or less of the loan amount. You can apply for income protection insurance and life insurance to reduce the risk that you will be unable to make the loan repayments. You can also avoid borrowing to your limit which will enable you to have enough spare funds to make additional repayments, and so clear the guarantee as quickly as possible.

What are the benefits for you of using a family pledge mortgage? Firstly you can borrow 100% of the purchase price, or even a little more to cover costs such as stamp duty & solicitors fees. Secondly the approval criteria is less stringent because the lender has more security for their loan. Thirdly you will not be required to pay for expensive Lenders Mortgage Insurance (LMI).

What are the risks to you and the guarantor? The main risk is that if you are unable to make the payments on your home loan then the lender may ask the guarantor to make the repayments for you or may call in the guarantee. In the worst case scenario the lender will try to sell the borrower’s property before trying to sell the guarantors.

We see the main complication of family pledge home loans is generally not when the borrower cannot make the repayments, as this is very rare. The main complication is when the guarantor and borrower have a falling out and the guarantee is required to be removed. In these cases the borrower can apply to remove the guarantee and if they owe over 80% of the property value then they may be required to pay LMI.

Several lenders such as St George Bank, CBA, ANZ, Westpac & NAB all offer this type of loan product. However only St George calls theirs a “family pledge home loan”, the others refer to their loan using different names such as family equity, fast track or deposit kickstart.

Always borrow responsibly and seek legal & financial advice before applying for any type of loan with a guarantee involved.

You just scored that new job, changed careers for more stimulating work opportunities or have been head hunted due to your professionalism and strong work ethic. Despite all the excitement that comes with changing jobs, you could be subject to a probationary period. Often the length of probation is written in your employment contract. It could be three to six months, sometimes longer!

During this time you may wish to finance the purchase of a new home. But what if you can’t get approval! Some banks are less inclined to lend to those on probation, due to the higher risk involved. You may be a working professional with lengthy experience within your industry and your salary may have increased substantially, so why should a probationary period stop you from buying that dream home? The right broker will ensure that you are approved!

Generally banks are more inclined to lend to those once the probationary period is over. This is because they see a probationary period as a reflection of your unstable employment situation. Lenders prefer those who have full time employment and not those that are still unsure as to whether they will secure a permanent place within a company.

Your chances of approval are higher if you are changing departments or jobs, within the same field or industry. Lenders want to see opportunistic people with a good track record of employment. Not those that tend to move from job to job. These are all factors that banks take into consideration when assessing your application for a home loan, while you are on probation.

For those of you who are yet to commence work, have just finished university and are looking to enter into the workforce, there is still a high chance of approval if you are moving into the same field that you studied in. Your situation will be more favourable if you have studied for over two years and can evidence this.

This is similar for those of you who may have recently taken maternity leave and wish to return to work. Generally this will not be a problem if you are returning to the same employer, however banks will often request a copy of your child’s birth certificate so that they can prove that this is the reason that you have been absent from the workforce.

Have you recently moved to Australia from overseas? Are you a returning ex pat? You can still get approval! If you are on an Employer Sponsored Visa, or are an Australian resident or citizen who is returning to work in the same field that you worked in overseas, you may still qualify for a loan.

Expert help is necessary to ensure approval. Brokers usually deal with many people who face similar employment situations to you. It is not uncommon for them to successfully approve those who are on probationary periods or have just started work. Get in touch with a mortgage broker today!

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.