Home Loans are the most common form of property loans. They are offered to the purchasers of residential properties seeking finance, by most lending institutions in Australia.
Home loans are only available to finance the settlement of properties purchased for the intention of owner-occupation. If you are purchasing a residential property for investment purposes, and require finance, you need to seek an investment property loan.
Terminology Encountered When Seeking Home Loans in Melbourne
If you have not previously been in the market for a home loan, you will need to understand the following terminology, to successfully navigate through all the information which will be thrown at you.
1. Stamp Duty
Stamp Duty is a mandatory tax that the State and Territory Governments levy on home buyers, whenever they settle on the purchase a property. Each State and Territory in Australia has different rates of Stamp duty, with Victoria having the highest rate in the country
2. Loan to Value Ratio (LVR)
The Loan-to-Value Ratio (LVR) is the amount borrowed as a percentage of the value of the property purchased. For example, if you paid a $100,000 deposit on a $1,000,000 home, you’ll need to borrow $900,000 to finalise the purchase. Your deposit is 10% of $1,000,000, and if the loan were approved, your Loan-to-Value Ratio would be 90%.
3. Lender’s Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) is insurance that a lender takes out to insure itself against the risk of not recovering the outstanding loan balance if you, the borrower, are unable to meet your loan payments and the property is sold for less than the outstanding loan balance. The lender, will usually pass their cost of taking out this insurance to you, as a fee associated with approving your loan.
4. Offset Account
An offset account is an account attached to your home loan that is like a transaction or savings account. It offsets the balance in that account against the balance of your home loan account, and you are only charged interest on the difference each month.
Having an offset account, can help you to pay off your home loan early, and save thousands of dollars over the loan term. All you need to do is deposit all your weekly, fortnightly, or monthly earnings into your offset account.
As these accounts may attract higher fees, it’s important to do your sums, to make sure an offset account works well for you.
5. Pre-Approval on Home Loan in Melbourne
When looking for a suitable house to buy, you can apply to your preferred lender for a home loan ‘pre-approval’ (also known as a ‘conditional’ loan approval), so you know how much they may be prepared to allow you to borrow.
The amount arrived at will be based on your current income and the loan to value ratio not exceeding a specified percentage of the purchase price.
Remember well, that a pre-approval is not a guarantee that the loan will be forthcoming, so you need to avoid making unconditional offers to purchase any property.
Types of Home Loans
There are three types of home loans offered in the Australian market to fund the settlement of a residential property.
1. The first is a variable rate loan
A variable loan rate is just that, meaning your interest rate will fluctuate over the life of your mortgage, based on the current rate of interest offered by your mortgage provider. It may go up, it could go down, and it is influenced by Reserve Bank of Australia (RBA) decisions regarding the prevailing Cash Rate.
The cash rate is the interest rate charged on overnight loans between banks. The amount of interest a retail investor pays on a loan is equal to this rate plus a premium. This premium is the banks profit margin, typically ranging from 2.0 to 2.5%.
Variable interest rates at major banks will usually move in tandem with the RBA’s official cash rate target.
2. The second is a fixed rate loan
A fixed rate means your interest rates are set in concrete, regardless of changes in the market. These rates are generally only fixed for two to five years, after which they revert to the variable rate, for the remaining term of your mortgage.
Fixing your rate gives you a level of financial certainty where you know how much your mortgage repayments will cost you each month in the first few years of your loan. This can help you budget better, but you will not benefit from decreases in interest rates if they occur during the fixed period of your loan.
3. The third is a split loan
A split loan is where a portion of the loan is offered at a fixed rate for an initial period and the balance at a variable rate. The fixed rate portion will revert to variable rate at the end of the fixed period.
Fees applicable to most home loans
All home loans come with fees and charges of various types attached. These can vary between lending institutions, and this is the main reason you need to consider the comparison rate for each of the loans you may be considering, rather than just the interest rates on offer.
Fees you may encounter include;
1. Application Fee
This is a one-off fee charged by respective lenders to cover their cost of assessing your loan application.
2. Ongoing administration or loan servicing fees
These are charged monthly or annually and cover your lending institutions cost of administration of your loan account
3. Lenders Mortgage Insurance fee
Although this insurance provides protection to the lender should you default on your loan, lenders pass this cost onto successful borrowers who take out loans that exceed a loan to value ratio of 80%.
4. Settlement Fee
Many lenders charge a fee for providing necessary assistance to facilitate the settlement of your property purchase.
5. Discharge Fee
Once you have paid down your loan, lenders generally charge a discharge fee that you will need to pay before your property title is returned to you notated that the lender no longer holds an interest over your property.
6. Fixed rate break fee
Once you lock in a fixed rate for a specific period it can be a costly exercise to convert the loan to a variable loan, pay out the loan early, or refinance with another bank. This is because lending institutions often charge a fixed rate break fee which is design to recoup any profit they will lose because of the loan not operating for the full duration of the contracted fixed period.
7. Loan redraw fee
If can get ahead on your home loan repayments, a redraw facility lets you take back or ‘redraw’ those extra repayments to use as you wish at anytime in the future. Many lenders will charge you a redraw fee for the privilege of doing so. Some don’t.
How much can you borrow
Effectively, you can borrow as much as a lender is willing to lend to you. Borrowing to the maximum is however not the most prudent approach, especially in times of rising interest rates. Lenders have tightened up under Government pressure and have reduced the maximum lending ratio from 6 to 7 times annual earnings, to a more prudent 4 to 5 times.
You can use this Borrowing Power Calculator to determine approximately how much you can borrow to buy a home.
Managing your home loan in an environment where interest rates are rising
The Reserve Bank of Australia (RBA) recently increased its official cash rate, which is something that hasn’t happened since 2010. All recipients of home loans need to be aware that rates are likely to continue to rise for some time, and by some magnitude. Here are a few tips that you can follow to assist you to manage rising costs with your mortgage repayments.
1. Plan for Increases
A good way to prepare for future interest rate increases is to look at how increases will affect your future goals and current lifestyle. You can use our Home loans Repayment Calculator to make any necessary calculations.
2. Save a Good Deposit
Do your utmost to save a deposit equal to 20% of the amount you intend to pay for your new home. This will ensure you have a good level of equity in your home from day one and help you to avoid paying expensive lender’s mortgage insurance.
3. Be realistic with the amount you borrow
As life is full of uncertainties, it does not pay to over-extend yourself, when it comes to buying a property to live in. Interest rates or your circumstances could change a little or a lot, so be prudent and give yourself some breathing space.
4. Consider fixing your interest rate
Fixing your interest rate for several years, can insulate you from the impact of rates rising faster than you may have anticipated. It may cost you a higher interest rate initially but could save you a lot in the long run.
5. Change your repayment frequency
Instead of making a regular monthly repayment against your loan, pay half the monthly repayment amount on a fortnightly basis. This will result in the payment of the equivalent of an extra monthly repayment each year, and significantly reduce the term of your loan and the total interest paid over the life of the loan.
6. Don’t increase other forms of debt
Before committing to a home loan in Melbourne, you should aim to reduce other forms of debt as quickly as possible, and then commit to not increasing these debts whilst repaying your mortgage. This is especially important in times of rising interest rates as other forms of debt generally attract much higher interest rates than your mortgage.
7. Look beyond your own bank before committing to a mortgage
Whilst it may be easier to just take a mortgage offered by your own bank, this may prove a costly option, in more ways than one.
Always check the market for the best interest rate, lowest upfront and ongoing fees, and most advantageous terms and conditions.
Failure to do so, may cost you tens of thousands of dollars over the life of the typical home loan.
A mortgage broker can be your best friend in finding the best deal for you.
Using a Melbourne Mortgage Broker to locate the best deal
A Melbourne Mortgage Broker acts as a go-between property buyers and lending institutions in the processes involved in obtaining home loans.
Mortgage brokers operate in a regulated industry and are obligated to act in your best interests only, when recommending a suitable loan for you.
A good mortgage broker works with you to:
1. Clearly understand your lifestyle needs and future goals
2. Determine the amount you can realistically afford to borrow.
3. Explore the lending market to short-list suitable home loan offers
4. Explain terms and conditions associated with each short-listed loan and total costs
5. Complete the loan application and provide the required supporting evidence in correct form
6. Manage the application process through to final settlement.
An experienced broker can save you time, effort, and anguish throughout the lender selection, loan application, loan assessment, loan approval, and loan drawdown processes. As time is often of the essence, when a property settlement looms and finance needs to be secured, a good broker can make a real difference to the outcome achieved.
Most mortgage brokers do not charge for their services. This is because they are rewarded by the lending institution that they direct your loan application to after identifying the loan product and the lending institution that provides the best outcome for you, given your circumstances and specific requirements.
At Oz Lend, our experts will assist you with;
1. Finding the home loan that suits your current needs and future goals.
2. Minimizing the long-term cost of your home loan
3. Preparing and submitting your home loan application
At Oz Lend, finding the right home loan for clients, is our primary objective. We save you time and energy, by utilising our established relationships and years of experience in dealing with a lending panel of over 30 lenders, to streamline and fast track the loan application process.
Our extensive experience over many years will assist you in obtaining the right loan, at the right rate, and under the right terms and conditions. Connect with us today on 1300 438 669 and book a meeting with one of our authorised credit representatives to discuss your home loan requirements.