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Find Your Perfect Future Home

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Ultimate Guide to Home Loans

Chapter 1

Intro to Mortgages and LMI

advantage

Chapter 2

Advantages & Disadvantages of LMI

question

Chapter 3

Interest only mortgages

CREDIT

Chapter 4

Re-draw / Offset / Line of Credit

comparison

Chapter 5

How to compare home loans?

money

Chapter 6

Renovation Financing

interest

Chapter 7

Ways to Reduce Your Interest Expense

Chapter 8

How to apply for a home loan?

chapter 1

Intro to Mortgages and LMI

LMI = Lenders Mortgage Insurance

Whether you’re buying a new home to live in, purchasing an investment property, or simply looking to refinance your existing mortgage to a better rate, taking out a mortgage will be one of the biggest and potentially life changing decisions you will make. Taking out the wrong type of loan, or not getting the best rate on your mortgage, can have a very significant impact on your quality of life.

 

At Credit Capital, we partner with a broad range of specialised mortgage providers so we can offer you a range of mortgage options that can be tailored and personalised to your individual circumstances and budget.

How much deposit do you have? Do you want a fixed or variable rate? Do you want re-draw facilities or off-set accounts attached? Regardless of the answers to these questions, and any other, with the broad range of lenders we access, we always get the best deal for your situation. We even have the ability to provide mortgages to people with bad credit.

 

With experience on our side, and the technology to process hundreds of applications each month, you can be certain your mortgage will be approved and settled in a timely and stress free manner. We understand that delays can not only be costly, but it could also mean you miss out on your dream home. We ensure this is never an issue and you never have to worry.

What is LMI?

LMI (Lenders Mortgage Insurance) is an insurance policy that protects the lender in the event the mortgage goes into default. It guarantees the lender will recover its loss in the event the property is repossessed and sold, and there is a shortfall repaying the loan. LMI is only required on high LVR loans, where the borrower has less deposit, therefore increasing the lender’s risk of not being able to recover their loss if the mortgage goes to default.

 

If you are able to provide 20% deposit towards the property purchase, that will usually mean you can avoid paying LMI. With today’s high property prices however, saving a 20% deposit can seem like an almost impossible task for many people. If you purchase a property for 500K, this will mean saving a deposit of 100k. LMI can therefore be very beneficial for home buyers as it gives applicants an opportunity to enter the market much sooner. Many people see LMI as another annoying expense to cover, however it can give you the opportunity to enter the market with as little as 5% deposit. On the same 500K property, this means only having to save a 25K deposit. If the market is hot and property values are increasing rapidly, paying LMI so that you can buy now can save you significantly in the long term. In the time it takes you to save the higher deposit, your property may have increased more than the cost of LMI. In many cases it makes economic sense to enter the market earlier, even if it means paying LMI, especially if you have the added expense of paying rent whilst you’re saving for your deposit.

Avoiding LMI with a Guarantor

If you don’t have 20% deposit, and you want to avoid paying LMI, there is another option. A guarantor can allow an applicant to take out a mortgage with a lower deposit without having to pay LMI.

 

The way it works is a guarantor provides a guarantee that they will cover the mortgage in the event that the applicant can not pay. A guarantor is usually the applicant’s parents, and they usually need to own their home outright, or have significant equity, and need to have the ability to make the payments if the applicant is unable.

 

This can be a great option for first home buyers wanting to enter the market, that don’t have significant deposit. It can be risky for the guarantor however as the full liability can fall back on them if things don’t go to plan. A guarantor must be certain they have the ability to pay the mortgage on top of their existing liabilities if they don’t want to potentially risk losing their own property.

chapter 2

Advantages & Disadvantages of Car Loans

Advantages

LMI will allow you to enter the market much sooner, as it gives you the option of purchasing with a much smaller deposit.

In many cases, it is very likely that your property will increase in value more than the cost of an LMI policy, over the time it will take you to save the additional deposit required to avoid paying LMI

The cost of LMI is not a one size fits all situation, it varies based on your personal circumstances and the amount of deposit being provided. If you have 5% or 10% deposit, you will have to pay LMI in both scenarios, however the LMI premium you pay if you have 10% deposit will be significantly less than if you only had 5% deposit.

Disadvantages

Although it is an insurance policy you pay for, it is only the lender that the policy protects.

Similiar to stamp duty, LMI is an additional cost that you may have to pay when purchasing that can’t be recovered and doesn’t add to the value of the property.

chapter 3

Interest Only Mortgages

What is an interest only mortgage?

Just as it sounds, an interest only mortgage is a home loan where you only pay interest, and don’t pay off any principal. The idea behind taking out an interest only mortgage is there is hope that the property will gain in value over the interest only period, therefore your equity will still increase even though you’re not paying off any principal. This is mostly beneficial for investors where the interest expense is also a tax deduction.

 

Care must be taken when considering taking out an interest only mortgage, as the interest free period usually only lasts for a few years, and then the mortgage will revert to interest + principal payments. In the next three years the Reserve Banks has estimated 200,000 home loans will roll over to principal-and-interest payments, bumping up mortgage repayments by about $7000 a year for the average borrower 

 

Should I get an interest only mortgage?

There are many things to consider when deciding if an interest only mortgage would be suitable to you. It used to be a very popular option for investors as the Australian property prices were surging at break neck speeds. It gave investors the opportunity to enter the market, and grow their property portfolio, with minimal payments. Many investors would refinance their mortgages at the end of the interest free period thus paying interest only in perpetuity. In 2015, interest only loans made up 40% of the country’s outstanding credit.

 

This was one of several factors that was fuelling Australia’s rapidly increasing property prices. Government regulators became concerned with the growing popularity of interest only mortgages so decided to limit them to no more than 30% of all loans. They also encouraged lenders to offer higher interest rates for interest only products, in same cases as much as 1% higher than principal and interest mortgages. This means if you’re paying an interest only mortgage, and plan to refinance to another interest only mortgage at the conclusion of the interest free period, you could either be paying a much higher interest rate than what you’re currently paying, or you might not be approved for an interest only mortgage at all. The increase in your mortgage repayment could force you into a position of having to sell your property. This is a scenario that many investors are currently experiencing. With many investors selling their properties, and lenders tightening up on their approval conditions, this is one of the factors that has caused a decline in housing prices in Australia due to an oversupply of properties on the market.

 

If you have hopes of entering the market at minimal cost, and paying interest only on a mortgage in the hope that your equity will increase with rising property values, you could end up losing.

 

Have peace of mind and plan ahead

There are many reasons why it may be beneficial to you to pay interest only in the short term, however don’t fall into the trap of believing you can continually refinance into another interest only product. Plan ahead so you have a clear idea of what you will do when the interest only period ends and how you are going to meet the additional payments.

chapter 4

Re-draw / Offset / Line of Credit

Redraw Facility

A re-draw facility will allow you to deposit spare disposable income into your mortgage account, with the option of redrawing funds in the future equal to the additional funds you've deposited on top of your minimum repayments. In the meantime, the additional payments you make will come off the principal amount owing on your mortgage thus reducing your interest expense, whilst still giving you access to your money. Lending policies vary however and there may be restrictions around how much money can be withdrawn and when. Redraw facilities are usually only available on variable rate loans, they do exist on some fixed rate loans but with very limited access. It is important to understand how a lender's redraw facilities work before taking it on. Depending what fees and restrictions are involved, and depending on how accessible you need your funds to be, it may not be a benefit to you.

Offset Account

Offset accounts operate like a savings account alongside your home loan. You deposit money and withdraw at your own free will with no restrictions. Instead of earning interest on your savings, you offset the interest being charged on your mortgage. For example: if you have a 300k mortgage with 20k in an offset account, you only pay interest on 280k on your mortgage. The downside of an offset account vs. a Redraw facility, is like any savings account, there are usually account keeping fees. With the ease of access to funds however, the added flexibility may still make this option beneficial to you. All lenders are different and have different terms and conditions with their offset accounts. It is important to discuss your needs with a broker so that you can e certain you are being matched with a product that meets your individual needs the best.

Line of Credit (LOC)

A Line of Credit, also known as a home equity loan, is a product that provides homeowners ease of access to the equity in their property as needed. It allows immediate access to cash without the need of any extra approvals. An LOC wil have a pre-approved limit that the mortgagee can withdraw up to at any time, providing minimum repayments, usually just interest, are made each month. LOCs can be very beneficial for property investors wanting to finance further property purchases, or renovations, by utilising their properties equity without applying for additional loans. It can also be useful for business owners for example, where they use an LOC in place of an overdraft or asset loan to make large equipment purchases at lower interest rates. If used smartly by owner-occupiers, it can also be used as a method of reducing total interest paid on a loan. If a mortgagee deposits their entire salary into the LOC, with everyday purchases being made from the LOC, providing the amount being deposited minus the expenditure is greater than what your minimum monthly mortgage payments would have been on principal and interest, then over the life of the loan less interest will be accrued as the principal will be paid off quicker. An LOC can be risky however, due to the lack of conditions attached and minimum repayments just being interest, if you're not financially disciplined it could spell disaster and mean you never end up paying down your principal. Like always, the best way to work out which options best meet your needs is by talking to a broker and discussing the pros and cons of each product.

chapter 5

How to Compare Home Loans?

More than just the bottom line

The main thing people tend to focus on when shopping around and comparing loans, is the interest rate. All lenders advertise their best rates online, so many people look at comparison sites, check which lender has the lowest rate, and then applies to them directly. Although an interest rate is a good indicator of the quality of the deal you’re getting, there is far more to it than that, and focusing on rate alone can restrict you and waste your time in some cases.

 

Just because a lender has a really low interest rate, doesn’t mean that is necessarily the best deal for you. All lenders have different terms and conditions, different lending criteria, and different fees and ways they structure their loans. The lender that has the best rate for you may not allow you the flexibility you desire, there’s also a chance your application may not qualify with that lender at all, thus applying to them unnecessarily reduces your credit score.

Questions to ask yourself

Before comparing any home loans, you need ask yourself some questions to gain an understanding of what you need in your mortgage. Do you require the option of paying out early with minimal or no fees? Do you want the option of making additional payments to reduce interest? Do you need access to equity in your home as cash? How readily available do you need to access that equity? Is an LOC, redraw, or offset account going to be most suitable?

 

Once you have an understanding of what you need it wil be easier to compare and determine which loans are best suited to you. Navigating the market, and comparing all loans yourself can be a difficult and time consuming process. The best way to compare a wide range of products with minimal time and effort is by talking to an experienced broker who can do all the leg work for you.

Fixed or Variable rate?

The question of whether to go for a fixed, or variable rate loan, is one that many people are unsure how to answer. There are pros and cons to each product and whether it is a benefit to you varies between each individual.

 

With interest rates being at an all time low, locking in a low interest on your mortgage to safe guard against any potential future fluctuations can seem like a very appealing option, however there are usually some strings attached with fixed rate mortgages. Fixed rate loans are locked in for a periodof time that is pre-arranged between you and your lender. You are usually locked into maximum repayments during this period, meaning you can’t make additional repayments, and early exit fees are much higher compared with variable rate loans. When a lender provides a fixed rate mortgage, the expect to earn a certain amount of interest over the fixed rate period, any variations to this will attain penalties.

Refinance in the foreseeable

A fixed rate loan can be very appealing from a budgeting perspective, as there is no uncertainty regarding what the mortgage payments will be during the fixed rate period. Variable rate loans however offer far more flexibility. The interest rate on a variable rate loan will rise and fall with market fluctuations, meaning there is an increased risk your interest rate will rise during your mortgage. The benefit is greater flexibility when it comes to making additional repayments and paying the loan out early.

 

If there is any chance you may be moving, or looking to refinance in the foreseeable future then a fixed rate mortgage might not be a suitable product. If you’re unsure which option is best for you, it is always a good idea to discuss your situation with a broker to get general advice on the various products available in the market.

chapter 6

Renovation Financing

Refinance to Renovate

Whether you’re looking to add value to your property, or simply looking to add your own personal touch, renovating is a popular decision at some stage in most home ownerships, however it can be very expensive and taking out further debt is usually required.

 

There are some options outside of utilising your own mortgage for renovation financing, but they are usually only useful for smaller projects.

 

  1. Pay cash – For most people, this requires receiving a substantial inherritance, or winning the lottery. Most people need to look at other options

 

  1. Credit Card – Interest rates on credit cards are significantly higher than mortgages, however, for small projects such as painting a few rooms, the interest accrued on the low debt amount could be lower than fees involved with refinancing your mortgage. Credit Cards also offer greater flexibility with repayment options.

 

  1. Personal loan – This can be useful if you’ve recently moved into a property requiring minor renovations. If you’re new to the mortgage market, without equity in other properties to utilise, sometimes refinancing isn’t an available option, therefore a personal loan is more useful. The main thing to consider however is interest rates are higher and loans are usualy capped to around 35K.



Mortgage refinance options for renovations

If you have good equity in your property, or if the proposed renovations will add significant value to your property, there will usually be refinance options available on your mortgage to fund the renovations. There are a few different ways of going about it though, depending on your budget and how much you need to fund the renovations:

 

  1. Line of Credit (LOC) – Explained in chapter 4 of this guide, a LOC can be an ideal way to fund renovations. When you apply, you can usually be approved for a credit limit up to a total of 80% of the value of your property. To work out how much cash this gives you access to, take 80% of the value of your home, deduct the outstanding balance on your mortgage, and the remainder is generally what is available to draw down from. You only pay interest on the drawn down funds, and you can repay extra, and withdraw further funds as you please.

 

  1. Construction Loan – For major structural works, this may be a more suitable option as the maximum value you can draw down is based on the expected value of the property after the renovations, not the current value of the property. When applying for a construction loan, council approval and a fixed price building contract are required up front. When approved, the funds aren’t paid all at once, they are released in stages in line with building progress and you only pay interest on the outstanding amount.

 

  1. Increasing your existing loan – If you have sufficient equity in your property, this is simply the process of applying to increase your mortgage liability and have the additional funds paid to you as cash. This can be more straight forward, however it does have downsides. You withdraw a flat amount, and you are paying interest on the full amount from day 1. This means if your renovation budget blows out (which is far from uncommon) you would need to apply a second time to withdraw further funds. If you under estimate your budget, you will be paying additional interest on unnecessary funds drawn down.

 

Talk to a broker

If you’re like most people, and you’re still unsure of the best method of paying for your renovations, talk to a broker today. The advantage of a broker is they have access to all solutions, and are able to assess your individual circumstances to give unbiased advice on what options will suit your needs best

chapter 7

Ways to Reduce Your Interest Expense

Prepare up front

For most people, a mortgage will be the greatest debt we encounter that will run for a significant portion of our lifetime. When you look at the total interest paid over the life of a mortgage, the figure can be quite scary. However, if you take some precautions, and are financially disciplined, there are some things you can do to significantly reduce the amount of interest you will pay.

 

If you take the time up front to prepare yourself as much as possible, there are many things that can be done from day1 to save yourself on interest. It may sound obvious, but the less you borrow, the less interest you will pay for the entirety of your loan. Taking the time to save that extra bit of deposit will reduce your principal significantly, especially if the extra deposit is the difference between paying LMI or not.

 

For example, if you take a $320,000 mortgage over 30 years @ 5% interest, your monthly repayment will be $1,710.70 however, if you save an additional 20k deposit and only borrow $300,000 then yourminimum repayment over 30 years drops to $1,603.78 if you pay the $1,710.70 regardless, then you will pay your mortgage off nearly 4 years early.

 

Although this will save you significantly on interest, the extra time taken to enter the market could mean the property you were looking at has increased in value more than what you would have saved, meaning this isn’t necessarily the best option.

Manage your debt

Being financially disciplined, and making small changes here and there, can add up to big savings over the life of your mortgage. Especially in the early stages of your mortgage, the majority of each payment goes to interest and it seems like principal barely reduces at all. Every reduction in the loan’s principal balance will reduce the interest expense for the life of the loan. If you can budget in other areas to increase your repayments, or commit a higher portion of your income to your mortgage repayments as your income increases throughout your career, you could pay your home off many years sooner saving you huge amounts on your interest expense.

 

Here are some examples of how additional repayments could almost halve the time it takes to pay off your mortgage:

 

If you borrow $450,000 over 30 years @ 5.34% your repayments will be $2,500/month

 

If you pay an extra $300/month i.e. $2,800 your mortgage will be paid off in just over 23 years

 

$3,000/month will pay the loan off nearly 10 years early and $3,500/month will nearly halve the mortgage time paying off the loan in just under 16 years.

 

Total cost of loan for the 30 years scenario with $2,500/month payments is $900,000 compared with $665,000 if you pay $3,500/month saving you a total of $235,000 in interest over the life of the loan.

 

An extra $1,000/month can seem like a lot, but when you break it down, that works out to just over $230/week which some people spend on a night out. Go through your expenses and scrutinise where you spend your money. We all like the little luxuries in life, but a few cut backs could mean owning your own home much sooner.

Refinance

It is a competitive market we are currently in, with interest rates at an all time low. The old trend of keeping the same home loan until it is paid off has gone, these days people refinance far more frequently and the average duration of a home loan in Australia now is only 4-5 years.

 

If you think you’re paying too much for your home loan, you possibly could be, and it is never a bad idea to check. Just be careful when you’re making your enquiries, you’re not attaining a high level of credit enquiries on your credit file as this will weaken your credit score significantly. Most times when you apply through a bank directly, they are unable to give you feedback on your application without performing a credit check, which is the point when an enquiry is listed on your credit file. The best way to shop around and see if there is a better deal for you in the market is to talk to a broker. A broker will be able to assess your circumstances, look at not only what interest your paying now, but also what features you require in your mortgage, and advise accurately of any better options in the market.

 

The trap you don’t want to fall into when shopping around refinance options is to focus solely on rate. The important thing to understand with refinancing is the costs involved. There are break costs for your existing mortgage, and set up costs for the new mortgage. Sometimes the added fees can be greater than the savings attained, meaning it is not a benefit to refinance. You also need to ensure that the new mortgage has all the features you require. It won’t necessarily be a benefit if you want to pay off your loan early, but the new loan you’re applying for has high exit charges or restrictive conditions regarding additional repayments.

chapter 8

How to apply for a home loan

1. Find out your budget

Before approaching any lenders or searching for properties, the most important thing for you to know is how much you can afford each month for your home. This includes not just the repayment for the mortgage, but also the other costs such as strata, council rates, etc. Budgeting only for the mortgage can be a costly mistake.

2. Prepare your goals

Your broker will be asking you questions regarding your medium, and long term financial goals. (eg Do you plan on paying off early? Do you want to grow your property portfolio?) It will help if you have a clear idea up front to assist the broker in matching you to the best suited product.

3. Prepare Documentation

When it comes to taking out finance, there is no such thing as too much documentation. We will always strive to make the process as smooth as possible with the minimum amount of documentation, however, the more prepared you are, the quicker we can make the process for you. Be prepared with IDs, residential and employment histories, payslips, or tax returns and profit and loss statements if you’re self-employed. Bank statements to show patterns of spending and saving, plus also evidence of your deposit will be required. The more prepared you are the more efficient we are.

4. Speak to a Professional and apply

Once you know the above, enquire online or call us directly and we can help you with the rest. If there’s anything above you need assistance with, not to worry, our devoted team can answer all your questions and find the deal that best suits your requirements. We can guide you along the way no matter how early, or late, in the process you are. We put your mind at ease and make finding the best deal easy from start to finish.

The Best Partner to Find
New House.

Nam libero tempore, cum soluta nobis est eligendi optio cumque
nihil impedit quo minus id quod maxime placeat facere possimus.

Get In Touch

The Best Partner to Find New House.

Nam libero tempore, cum soluta nobis est eligendi optio cumque
nihil impedit quo minus id quod maxime placeat facere possimus.

Get In Touch