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4 tips to finding the right home loan

Adrian Sheahan
22 February 2016

By Adrian Sheahan 

1. Key buyer considerations in a home loan

Firstly, borrowers need to ask themselves what the loan is for – is it to purchase a property, refinance an existing loan, or access the equity in their home, either for personal or investment reasons? – the answer to these questions will largely dictate the kind of product they will need.

Other considerations will include, 

How long is the loan required?  For example, if the purpose is the purchase of an investment property that is to be sold in five years with the intent of realising a capital gain, interest only repayments are likely to be the most suitable repayment structure; 

What kind of ‘bells and whistles’ are needed. Does the loan need full transaction capabilities or is a simple set and forget style loan more suitable? and 

Are the loan funds for several different purposes?  If so, borrowers should be looking for a loan with multiple portions under the one approved limit. Simple structures like this can make tax time much less stressful and ongoing management simple

2. What do lenders look for in a mortgage application? 

Essentially the lenders will look at three core items.

  • Does the applicant have the capacity (ie income) to repay the debt and continue to meet their other loan commitments and living expenses?  Under this question, lenders will consider factors including income sources, employment stability and any existing debts;  
  • Is the property being offered as security for the loan acceptable.  Specifically, is the value sufficient to meet the lenders policies and is the location and type of property acceptable.  In simple terms, they look for properties that the applicant (or in need the lender) can sell easily and quickly if required and of course properties that will have enough value to cover any outstanding debt; and  
  • Is the applicant credit worthy? Do they have any previous credit issues and are their existing loan repayment records satisfactory?  They will also consider common sense factors such as employment stability,  employment history and is the asset/liability position reflective of their age, income and circumstances; and  

The lender of course looks at other factors in the application, but these will be the initial focus.

3. What are common borrower mistakes? 

The most common mistakes or misconceptions are usually based upon either how much the applicants calculate they can borrow and/or how much equity or contribution they need to make to a purchase or refinance. In the first case, applicants generally overestimate how much they can borrow based upon their current income.  

The recent introduction of additional regulatory requirements has placed lenders under more stringent obligations when calculating an applicant’s ability to repay a loan.  In response, lenders have tightened their policies surrounding how they assess an applicant’s income (for example they may discount rental income or exclude overtime income) and they are more closely scrutinising applicants’ living expenses.  All of these changes have negatively impacted how much an applicant can borrow.

Many applicants are unaware that when lenders calculate how much the loan repayments will be, they add a loading, or stress rate to the interest rate that will be applied to the loan. So even though the actual loan interest rate may be 4.39%, the assessments may be calculated using a rate of 7.50%.   The reason this is done is to allow for rate fluctuations because if interest rates rise they need to be confident you can still meet repayments.  Given that rates have been at historically low levels for some time, this isn’t front of mind for most applicants.

The other significant area of confusion is how much an applicant needs to contribute to a purchase or how much equity they need to have in their property if they are using it as security for the loan.  This has a significant impact on the loan interest rate and fees. 

Lenders generally prefer the loan amount to be no more than 80% of the security provided for the loan, as it represents a lower risk. To attract loans that meet this criteria, they will offer discounts on the interest rate for loans fall below 80% of the security value.  If the loan amount is greater than 80% of the security value additional costs will also apply such as Lenders Mortgage Insurance, which adds significant cost to the borrowers.

To compound this issue, when purchasing a property, many applicants don’t understand that to meet this 80% figure, they not only need to contribute 20% of the property value, but also the additional costs of the purchase such as stamp duty, solicitors costs etc.

For these reasons, I can’t recommend strongly enough the need to consult with a mortgage professional before you go to auction or enter into a contract to buy a property.

4. What should investors look for when using a mortgage broker? 

When looking for a mortgage professional, they should have the following attributes: 

  • An ability to listen.  This is critical to fully understand your circumstances and both your short and long-term needs.  Without that understanding, they cannot determine the best mix of rate structures, loan splits and product features for your circumstances;  
  • Have access to several lenders and products and be able to consider a number of options so you get the loan that best suits your circumstances.  The most suitable loan is not always the product with the lowest rate. Structure is critical;  
  • Be able to clearly explain your options, the costs and the steps to achieving your goals; and  
  • An understanding of how different strategies can impact your tax situation and be able to suggest tax efficient options for you. 

Above all, they must be professional.  You need to be able to contact them, have them return your calls, meet their commitments to you and importantly, be able to provide you with back up service when your loan is settled.  Financial circumstances are constantly changing so you need someone who you can work with both now and into the future to make sure your loan is the right one for you.

 

 


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