A comprehensive guide to the basics of home loans

What is the meaning of LMI?

Lenders Mortgage Insurance.
It is a cost borne by you, you will either have to pay it prior to settlement or have it capitalised (added into) your loan (subject to lender approval).
LMI covers the lender (not you) in the event of loss due to default on a mortgage loan

Does LMI provide me with sickness or accident cover?

No.
For this type of cover, we suggest discussing your situation with a licensed insurance broker.
Typically, the most appropriate products when considering finance will be life insurance, total and permanent disability, trauma and income protection cover. Your insurance broker will be able to arrange appropriate cover for you.

When is LMI required by the banks?

Most banks require LMI for all loans with an LVR of 80% and above.

If my LVR is less than 95% for an owner occupied home loan, can I capitalise my LMI premium?

Typically, YES
However, for LVRs above 95% the answer is generally NO, but there are a few banks that will capitalise LMI at that LVR
It is also worth considering the large cost of LMI with such a high LVR (and lack of benefit attached to this cost).
Naritas is skilled in finding ways for you to avoid the dead weight loss attached to paying LMI.

How can I provide Naritas verification of my PAYG income?

3 current payslips
group certificates
tax returns
letter from employer showing (YTD) earnings, hourly rate of pay and any allowances, penalties and overtime

Do all lenders accept Child Support as acceptable income?

What is needed for child support income to be classed as acceptable income?

Family court order
Child support agency advice showing the payment recovered as well as bank statements showing the regular receipt of the said amount

What portion of rental income will lenders usually accept in the income calculations?

Usually 70-80%

Why do lenders not consider 100% of my rental income?

To allow for the following factors:

maintenance expenses
managing agent’s fees
vacancy risks

How does a lender define a self-employment applicant?

Contributes most if not all capital
Manages the business in a personalised way
Has the principal decision making function
Had direct control over work, fees, hours, etc…

What do I need to supply to Naritas to verify my “self employed” income:

Full tax returns/financials for both the business and the applicant personally for the last 2-3 years.
For those on commission 2 years history showing regular and sufficient income

Based upon my calculations, I should be able to afford my loan at the current interest rates, however, I spoke with the bank and they believed it was unlikely that I could afford the loan I was after. Why?

All lenders use qualifying rates. These rates are well above the current interest rate i.e. they are the applicable interest rate plus a margin.
This is determined by the individual lender and is usually around 1-2.5% higher than the standard rate.
They use them to weed out ‘risky’ loans. Unless there are significant extenuating circumstances to suggest otherwise, it is in your interest as well as the lender’s to avoid a situation where your loan’s affordability is so hair-line.
The bank also uses Uncommitted Monthly Income calculations to determine whether you have the surplus cash flow to service the loan costs.
Naritas can provide you expert advice to do with achieving your borrowing requirements in light of these factors.

How do I calculate my LVR? Is the LVR calculated on the purchase price or the valuation price?

LVR = Total amount of loan required (i.e. purchase price plus approx 10-15% costs minus your contribution towards the costs e.g. deposit) divided by the value of the property e.
LVR is calculated on whichever is the lower of the two figures.
E.g. PP = $500,000, Costs = $75,000, Contribution = $200,000. Current Valuation = $480,000
THEN LVR = 375,000/480,000 = 78.125%

What is the maximum loan term for a residential mortgage?

Typically 30 years but now 40 years with some lenders

What is the maximum LVR for a residential owner occupy home loan?

A residential mortgage loan is the most common type of loan that we will deal with

Loan purposes:

Purchase existing residential owner/occupied property – max LVR 95%
Construction of a residential owner/occupied property max LVR 95%
Refinance a current residential mortgage – LVR 90%
Debt consolidation – LVR usually 85%

What is the maximum LVR for a residential investment loan?

Generally 90% but occasionally up to 95%

We wish to purchase a new home prior to the settlement of our existing home. What type of finance do we need?

You will probably require Bridging Finance. The loan term for bridging finance is usually no more than 12 months. It is usually a stipulation of the loan approval that there is enough equity in the 2 properties to cover capitalised interest for at least six months.

How frequently will I have to make loan repayments?

Typically, lenders will allow the option of weekly, fortnightly, or monthly payments. Lenders may remove some repayment options from discount products.

What is a deposit bond?

Deposit bonds are a financial guarantee in the form of a bond that allows an upfront deposit to be made on the purchase of a property without having to use existing funds/cash. A deposit bond is similar to a form of insurance and is issued by an insurance company. Your client may not wish to outlay cash if funds are tied up in any existing property already or in other investments.

Why use a deposit bond?

A deposit bond may act as an alternative to cashing in existing investments or applying for bridging finance
A deposit bond can allow payment of the full amount of the purchase price at settlement.
Bond’s are readily accepted by vendors
Allows the bidder to not have the need to provide cash deposit

To determine the ability for a client to receive our assistance, we will ask you the following questions:

Why are you enquiring?
Where did you hear about us?
What is the purpose of the loan – purchase or refinance?
Property details – how much will it cost? (conversely we can determine this for you)
Are you currently employed?
Are you a first home buyers
Do you have at least 5% deposit been that has been saved over 6 months?
Income details and expense details
Liability details such as home loan, credit card, total debts and repayment figures
Determination of LVR
Determination of approx costs – capitalised or not?
Defaults or late payments?
What supporting documents you have on hand and will need to obtain for us to create your application

If a first home buyer did not have 5% genuine savings, what other option other than a bank would they have to fund their home?

Non-conforming lenders
Approaching a lender who might be offering a seasonal product that allows a way around this, such as St George’s family pledge loan.

When is it best to make an application to a non-conforming lender?

Naritas regularly handles clients with situations that the banks are not willing to consider. It is easy to find oneself in a situation where various factors have culminated leading a blemished credit record. It’s nothing to be ashamed of; ironically, some of Sydney’s wealthiest areas see the highest percentage of non-conforming loans processed as a percentage of total funds. We recommend that a client use a non-conforming lender if they have any of the following issues:

Poor employment history
Bad credit history
No savings record
Pure asset lends
More than 5 debts to be consolidated

Who are the largest non-conforming lenders?

Liberty
Bluestone
Pepper
GE Mortgages

I’m not sure of the value of my property. What can we do to get a figure?

Get a free valuation from a local real estate agent
Check auction results in the local area for similar properties

Go to domain.com.au for and request a property report

What determines lenders Interest Rates?

Interest rates are determined by the RBA
The RBA is influenced by market conditions
Individual banks will apply their own rate on top of that

When is a mark made on my Baycorp Advantage file?

A default can only be used once an account has fallen over 60 days in arrears. This notice stays on file for 5 years. Only members of Baycorp Advantage (formerly the CRAA) can access this information. It cannot be removed unless it proved to have been issued incorrectly.

A summons/writ is a legal document issued by the Ministry of Justice. It can be issued and served for any reason ranging from non payment of loan to dispute on contractual arrangements. If you wish to have this removed, a notice of defence must be lodged with the courts. Once stamped (registered), fax this to Baycorp to have the summons reference removed. Alternatively, you can arrange to clear the debt, once stamped this mark will be removed.

A judgement default is listed if the dispute cannot be resolved. It occurs when a court hearing takes place and the magistrates makes a ruling in favour of the plaintiff.

Rest assured that Naritas will provide you with the expert advice required to construct an application and mitigate negatives attached to a Baycorp file that contains black marks. We are able to arrange finance for people who have up to 12 negative marks included on their file.

What does the credit check allow the lender to know?

Correct name
Date of birth
Address and length of time at that address
Employer and approximate length of time there
If you are involved in any businesses
Current credit providers
Any defaults listed, paid or unpaid
Any other enquiries for finance applications recently applied for

What is the difference between a tax return and a tax assessment?

Assessment = official record of earning from ATO
Return = fuller picture of income and expenses

What are the 3 core mortgage lending products that lenders offer?

1. Standard Variable Rate (SVR)

As the name implies, provides a loan that has a variable interest rate. This means that the interest rate fluctuates with the changing market. Variable rate loans range from the basic ‘no frills’ variety to fully optioned professional packages.

Sub categories:

Intro/Honey-moon rate loans
Lenders often offer incentives to attract new borrowers with this type of product. The discounted rate may be up to 1% for not usually more than 12 months. It is important for you to discuss the appropriateness of the product to your needs with your broker. Your broker is equipped with all the latest market data to help you make an informed decision and help you avoid any hidden costs that can be associated with honeymoon loans

Mortgage offset
It is a standard variable loan linked to a standard cheque/savings account. If it is a 100% offset account then the funds in the savings account directly offset the interest payable on the outstanding balance. This type of loan can work much the same way as a line of credit and this product has some distinct advantages to certain types of borrowers.

2. Fixed Rate loans

This type of loan allows the borrower to fix the rate of interest for typically between 1 and 5 years. A number of fees and charges are associated with this type of facility; your broker will discuss them with you when customising your loan structure. As a rule, you will pay a premium above the SVR to fix, however, there are many reasons to consider fixing, all of which your broker will address with you.

3. Line of Credit

The minimum repayment is interest payable on the outstanding. This type of loan is similar to a bank overdraft secured against a property. The LOC allows many interesting opportunities for the client to utilise their salary and smart budgeting to pay off a property as quickly as possible. The LOC usually carries a marginally higher interest rate than the other products offered by the same lender, but this extra cost is a direct result of the ability of the client to minimise loan period through the products banking facilities.

Interest Only
This is type of facility is used mainly for investment purposes such as purchasing a rental property. This type of facility works well in conjunction with a tax minimisation strategy developed by your tax agent or accountant. For a fee, Naritas can provide you with detailed reports suggesting how that we believe you can best structure your finances so that your tax agent/accountant can arrange your tax return to minimise your tax bill. We regularly work in conjunction with our client’s accountants to develop a strategy that is 100% customised to your specific situation.

Interest in advance
Also typically used for investment purposes. It allows a borrower to pay up to12 month’s interest in advance this allows the borrower to claim the interest charges normally paid over the upcoming year in the immediate tax period.

Bridging Finance
This is a short term-term finance provided usually when a client is transferring from one home to another and the new home is settling prior to the settlement of the current home. The contract is usually written as a standard variable loan and is reviewed after 12 months. The repayments are usually interest only and are frequently capitalised (added to the loan value as opposed paid out of the borrower’s income on a monthly basis). Bridging finance is typically time critical, your Naritas broker is experienced with giving clients a smooth transition.

Lo-doc loans
Lo-doc loans allow the borrower to gain finance with minimal supporting documents to verify their ability to repay the loan. The facility is very popular with self-employed applicants, although some lenders to provide lo-doc loans to PAYG applicants who want to self-certify their income. In light of recent ATO audits on Lo-doc loans, it’s important for you to discuss the appropriateness of this product to your situation with your Naritas broker.

How does the interest free period of my Credit Card work?

Most banks offer credit cards as a part of their total lending packages. There a number of home loan products that will include fee free credit cards in the package. Most credit cards will have an interest free period for up to 40 or 55 days.

Interest calculations commence of the first day of the billing cycle. Say for example if the billing cycle of the credit card begins on the 7th day of each month, then it would be most advantageous for you to do any large purchases on that day so that you can take full advantage of the interest free period.

The cycle will then continue onto the 6th day of the next month. At this stage, the lender issues a statement giving them (x) amount of days to pay the account before incurring interest. With a forty day interest free period, then the account is likely to be due for payment 9 days after the end of the month, hence giving them the 31 days of the month plus 9 days (total 40) to pay the account.

The usual operation of a credit card is that the interest free period is applicable to purchases not to cash advances. Cash advances incur interest charges immediately.

Am I eligible for the $7,000 First Home Owners Grant?

Below is the criteria taken from NSW FHOG Application form

Applicants must:

Fully complete the application form and lodge with all relevant supporting documentation
Be a natural person, at least 16 years of age (i.e. not applying as a company or trust)
Be an Australian citizen or permanent resident or be applying with a person who is
Be buying or building a home for which the contract was signed on or after 1 July 2000 or building a home as an owner-builder where building commenced on or after 1 July 2000
Ensure each person holding a relevant interest in the property is an applicant
Ensure an applicant will occupy the home as their principal place of residence for a continuous period of 6 months commencing within 12 months of completion of the eligible transaction
Lodge an application within 12 months of completion of the eligible transaction
Applicants and their spouse (including a de facto partner) must:
- Not have previously received a First Home Owner Grant in any State or Territory of Australia
- Not have owned a residential property anywhere in Australia prior to 1 July 2000
- Not have owned and occupied a residential property anywhere in Australia after 1 July 2000