Posts Tagged ‘mortgages’

Fixed Rate Loans

July 11th, 2011 50 Comments
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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 25 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 33 Comments
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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 22 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.

Lenders Mortgage Insurance (LMI)

May 6th, 2011 11 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).

Try the LMI calculator today.

3 Year Fixed Rate

May 5th, 2011 27 Comments
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Almost everyone will need to take out a loan at some point in his or her life. Whether it be in the form of a home loan, to start a business, or to purchase a vehicle, loans are necessary for many of the major transactions we enter into. Choosing the best loan, however, can be a very tricky process at times. With all of the different terminology involved, the lending process is confusing for a lot of people. However, if you make an effort to understand the various options available, you can save yourself a lot of trouble later on. This article will discuss one of the most popular loan options- the 3 year fixed rate loan.

When looking for a loan, there are several different types you can consider. Some loans are variable rate loans, which means that the interest rate is subject to change over time, while other loans are fixed rate loans. A fixed rate loan is a type of loan in which the interest rate will remain the same for a predetermined period of time. One of the most common fixed rate loans is the 3 year fixed rate loan, though other lengths are also available such a 5 year or 10 year fixed rates.

If you decide to obtain a fixed rate loan, you will probably want to find the lowest rate possible. Since the fixed rates available are constantly changing, the lender that has the cheapest rate today may not be the same one whose rate is cheapest tomorrow. The best plan of action when applying for a 3 year fixed rate loan is to wait until you are ready to go through with the transaction and compare the rates available at that time.

Though the rate percentage is extremely important, there are several other aspects of the loan other than the rate percentage that should be taken into consideration. First of all, one needs to consider the rate lock fee. These fees can be considerably different depending on the lender. Some lending institutions charge on flat fee for the rate lock, while others may charge a given percentage of the loan amount. If your loan will be relatively small, it will probably be in your best interest to find a lender that charges based on percentages. However, borrowers of large loans will benefit more from a flat fee. Finally, there are some lenders that may not charge any rate lock fees, so it is important to compare all of your options before you make a final decision.

Another aspect that needs to be taken into consideration when choosing a bank is the revert rate. Some fixed rate loans revert to the variable rate at the completion of the fixed rate period with no discount whatsoever. However, it is possible to find fixed rate loans that revert to a rate that will likely be lower than the standard variable rate.

Finally, when you are considering different lenders, you need to pay attention to the flexibility allowed. A lot of fixed rate loans will not allow you to make any extra repayments for the duration of the fixed rate period. However, some lenders will allow the borrower to make repayments during this time. This extra flexibility can be very beneficial should you feel the need to pay the loan off early. Believe it or not, some lenders allow you to make extra repayments on a fixed rate loan.

The 3 year fixed rate loan is the most popular among fixed rate loans because many of these types of agreements will penalize the borrower should he or she decide to make extra repayments or exit the loan early. In fact, many fixed rate loans require the borrower to pay something called a “break cost” if they end the loan early. A break cost can be very expensive. For this reason, 3 year loans are often preferred because the time is long enough to make the fixed rate worthwhile, but not so long that the borrower would feel the need to exit early. That being said, it is very important to understand the break costs you will incur should you choose to exit the fixed rate loan before its predetermined end date, so be sure to factor these costs into your comparison as well.

In order to get the best of both worlds, many clients choose to take out a split loans or mortgages in which part of the loan is a fixed rate and the other portion is a variable rate. This option allows the client the security of a fixed rate on one portion of the loan while allowing him or her to make extra repayments on the variable rate portion if he or she so desires.

It should be noted that taking out a 3 year fixed rate loan in the last 20 years has actually been more expensive than a standard variable rate loan in the end due to the trends of the variable rate. For this reason, it is very important to compare your options carefully before signing any type of loan agreement so you don’t lose in the long run.

Home Loan Types

May 3rd, 2011 21 Comments
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A loan is a form of debt incurred when someone, called a lender, lends an amount of money, called the principal, to another person, called the borrower. The borrower is then expected to repay an equal or greater amount of money at a later date. The money is usually expected to be repayed in regular payments of the same amount. 

In the majority of cases, the lender provides the loan at an additional cost, called interest. Without interest, there would be no financial incentive for the lender to provide the loan. In legal loans, all of these obligations are regulated by a contract. Most legal loans, such as mortgages, are obtained from financial institutions such as a bank. 

Loans are often used in major transactions such as home purchases and vehicle purchases since most buyers cannot afford to pay large amounts of money out of pocket. Often, the borrower will be required to put down a deposit on the loan in order to secure it. In cases where the loan to value ratio is high, the lender may also ask that the borrower pay mortgage insurance on the loan. 

There are several different types of loans available including standard variable loans, basic variable loans, fixed rate loans, line of credit loans, combination loans, discount variable loans, lo doc loans, and non-conforming loans. These different types of loans are detailed below. 

Standard variable loan

A standard variable home loan is a loan in which the interest rate changes throughout the duration of the loan. These types of loans may be combined with a package that allows them to eligible for a lower rate. A standard variable loan will also include a mortgage offset account. 

Basic variable loan

A basic variable loan is also a loan in which the interest rate can change throughout the duration of the loan. The interest rate for this type of loan will be similar to that of a standard variable loan, but will usually have a packaged loan discount. Basic variable loans typically have less features than the standard variable loan. 

Fixed rate loan

A fixed rate loan is a loan in which the interest rate is fixed over a set period of time. These loans usually penalize the borrower should they choose to exit the loan before it is set to end. The borrower will have to pay a “break cost,” which can be very expensive. If there is any chance that the borrower will repay the loan early, he or she should not take a fixed rate loan. 

Line of credit loan

A line of credit loan is a loan without a set amount. Instead, the borrower can draw any amount up to the credit limit at any time. There are no set repayments, and the loan will have a variable rate. Payments can be made toward the balance at any time. Some lenders ask that the borrower make at least one repayment each month, while others don’t ask for any payments until the credit limit has been reached. The required payment in the first case must usually at least equal the interest accrued in the previous month. 

Combination loan

A combination loan is an option offered by many lenders in which the borrower receives a professional package. The package includes multiple fixed rate loans, variable rate loans, and line of credit loans. The borrower will then be asked to pay an annual fee for the package. A common type of combination loan involves the borrower receiving a portion of a loan as a variable rate and the remainder as a fixed rate. This offers the borrower the benefit of not having to worry about rate increases on the fixed rate portion while still being able to make extra repayments on the variable rate loan without penalty. 

Discount variable loan

A discount variable loan is a variable rate loan that includes a lower interest rate. This discount will typically be more than the discount received with a packaged loan. The discount is typically valid for one year, so it is possible that this type of loan will work out to be more expensive in most cases. 

Lo Doc loan

A lo doc loan, or low documentation loan, is a loan in which the borrower is not required to provide tax returns or financial reports. This type of loan is most often used by borrowers that are self-employed and don’t have access to such paperwork. Most lenders do require some proof of income, however, which can be in the form of bank statements. 

Non-conforming loan

A non-conforming loan is a loan that does not require the borrower to meet the standard lending criteria. This type of loan is not usually available from mainstream lending institutions. A non-conforming loan is typically given to borrowers with credit problems or a history of late or missed repayments.

 Get more information about home loan types.

Understanding Non Bank Lenders

May 3rd, 2011 12 Comments
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Most people think of banks when buying a home, but banks are not the only ones writing mortgages. An Australian banking license is not required for issuing a mortgage, and sometime non bank lenders can provide you with more competitive terms and better rates. Before making a decision on financing, you should understand some basic information about mortgages. 

Understand the Terms

All lenders use the same terms. Here’s a quick review of what you must know when seeking a home loan, regardless of what type of lender you choose. 

Loan to Value Ratio (LVR) – The bank will not loan you more money than the house is worth, and they like to loan you a little less. LVR is determined by dividing the amount of the mortgage by the value of the home. If your house is worth $100,000 and you borrow $80,000 towards it, then your LVR is 80%. 

Assets – Any property you own is an asset. Your home will be the largest asset you own. 

Equity – The home’s value above and beyond what is owed on a mortgage is the equity. A home that is worth $200,000 with only $75,000 owed on it has $125,000 in equity. 

Liabilities – Any other debt you have is a liability. This includes loans for University, credit cards, and autos. 

Loan Maintenance Fee – This is a fee levied by lenders over the term of the loan. 

Principal – This is the amount of money that is currently owed and that interest will be paid on. 

Types of Mortgages

Basic Variable 
This mortgage is very basic. The interest rate is set according to the Reserve Bank and will go up or down along with it. Extra payments are typically allowed, and terms are usually 25 or 30 years. 

Standard Variable 
This is the most popular mortgage type. The interest rate will be slightly higher than a basic variable loan, but there is more flexibility. Extra payments can be made and there are other attractive features. Terms are typically 25 or 30 years. 

The Honeymoon Rate 
Also known as an introductory rate, these loans feature a low fixed interest for the first year. After that, it reverts to a variable rate. It’s a good idea when interest rates are rising fast, but can work against you if the interest rates fall during that first year. Most banks expect that you will keep these mortgages for 3 to 4 years and will charge penalties for not doing so. 

Fixed Rate 
The interest rate, and the payments, can be locked in for a period of 10 years or less. Once that time is done, it will revert to a variable rate. This is another good option in times of rising interest rates, but can work against you should the rates begin to fall. 

100% Offset Accounts 

These are essentially savings accounts that can be attached to your variable or introductory rate mortgages. This account works to help you reduce the amount of interest you pay every month. 

All in One Loans 
Your home loan and transaction account are combined. Payments are made directly from the account, allowing you to keep the funds available to you for as long as possible. Interest rates may be higher, or you may have to pay a monthly fee for these loans. 

Line of Credit 
You can take a line of credit against the equity you have built up in your home. There is no set term, and it’s good to have the money available in case you need to make repairs. However, it is easy to spend that equity and these loans should only be used with great care. 

Know the Types of Titles

Torrens Title 
Traditional single family homes typically have a Torrens title clearly naming who the owner of the property is. 

Strata Title 
Townhomes and condos are popular because owners do not have to do as much maintenance. Strata titles define the individual unit by the airspace it occupies, and a strata corporation is named to handle the common areas shared with your neighbours. 

Community Title 
Buying in a community with its’ own pools, parks and playgrounds provides you with plenty of entertainment for the kids. It also means that you might have a community title. Your home will be owned by you, but the community title is necessary to cover those shared areas. 

Company Title 
When buying a condo, townhome, or apartment you should check to see if a Company title is in place. Rather than an individual owning any one unit, all units are owned by the company and buyers purchase shares in the company. Company titles are set up so that all owners in the company can have some impact on any potential sales of other units. This means that the neighbours could prevent you from buying the apartment, or selling it later. Most lenders are leery of these properties, and might require a larger down payment from you. 

Advantages of a Non Bank Lender

  • Oftentimes, you can get a lower interest rate by going through a non traditional lender 
  • They may provide you with better customer service, including faster application times. 
  • People with credit problems, unusual properties, or specialized loans are more likely to be approved with these lenders. 
  • They will make loans with higher LVR’s, allowing you to put less money down. 
  • Self-employed people do not have to produce as much paperwork. 

Disadvantages of a Non Bank Lender

  • Upfront fees and loan maintenance fees might be higher, offsetting savings from lower interest rates. 
  • The chances of your loan being sold are higher with non bank lenders. 
  • There is a higher risk of the institution going out of business, wiping out any benefit from superior customer service. 
  • They might be slow to pass on dropping interest rates to their customers, in some cases the decreases won’t be passed on at all. Increases to the interest rate, however, are passed on as soon as they occur. 
  • They are quicker to repossess if you fall behind. 

Competition is always a good thing. Lower rates and better terms result when banks and non bank lenders are competing for your business. Before signing any mortgage, however, you should understand how the process works, know the terms, and know exactly what to expect out of your new mortgage.