FAQs

Each individual and business has a credit file. This is basically a record of all credit facilities that you or the business have entered. For example, if you have a home loan, credit card and have entered a contract for your mobile phone, these will all appear on your credit file.

Your credit file also has a score attached, which for individuals is a total score out of 1200. The higher the score, the more desirable you are to finance companies as it demonstrates good conduct and credit worthiness.

Your credit file also includes information about your conduct in relation to those credit facilities. Whether you have been paying on time and whether you have defaulted on any of those facilities or even been bankrupt at any stage over the past 5 years.

There are many factors that affect your credit file and this is often the first thing that is looked at by a lender when assessing your suitability for finance. A credit file with blemishes including things like payment defaults, can result in you or your business being unable to secure finance from a majority of lenders.

Speak to your broker about understanding this more and what your options are if you have an issue with a low credit score.

A pre-approval, sometimes referred to as a conditional approval, can be obtained from a lender prior to you having found the right property to purchase. This can be very useful while you’re still shopping around and attending open as it gives you a level of certainty about how much you can borrow, you can place offers with confidence.

Something to note about pre-approvals is that they are not all created equal. Many lenders do not actually assess your file in it’s entirety when granting a pre-approval. It is important that you discuss this with your broker as there are options available for what is known as a ‘fully assessed pre-approval, which provides much more certainty.

People are often confused about what Lenders Mortgage Insurance is. Often it is believed that LMI protects the borrower somehow, but this is not the case. LMI is an insurance premium that the borrow pays but protects the lender.

Whether LMI is payable on a loan is determined by lender policy but as a rule of thumb, any borrower that is borrowing more than 80% of the property value, or has less than a 20% deposit, will be required to pay LMI.

The LMI amount or premium is based on a number of factors but is mainly driven by the loan amount. This higher to loan amount, the higher the premium. Here’s a link to one of the available LMI calculators to help you get a picture of the cost:

https://www.genworth.com.au/lenders/lmi-tools/lmi-premium-estimator/

You may have heard the term negative gearing being thrown around, especially if you were a spectator in the debate during the 2019 federal election. Basically, negative gearing is a way of saying that an investment property that you hold is costing you more to hold than the income (rent) that you earn from that property. Hence negative.

Now, you might ask, what’s the point of holding an asset when it costs you more than the income it generates? Well there are lots of reasons for this including the fact that the asset appreciates in value, so on a cash basis you may be worse off each year, but on a capital growth basis you may be well ahead. Also, and this is one of the main factors that makes negative gearing palatable, there are tax benefits to holding negatively geared property. Basically, you can claim the loss as a deduction on your tax return and get some money back from the Australian Tax Office (ATO) or pay a reduced amount of tax to the ATO.

Negative gearing is something that should be discussed with your accountant and with your broker to ensure that it’s the right approach for you. This is determined by several factors, mainly your household cashflow and budget.

When refinance, a good broker will run you through all of the fees that you will incur (because there are potentially several fees involved in refinancing) and then compare that cost against what you will save by entering into a new/different loan product from another lender.

Here is a breakdown of the fees. Remember these vary from lender to lender so they are not actuals, rather a range from low to high and are approximate.

• Break fee

Break fees apply too fixed interest rate loans and may be charged if you refinance to another lender during the fixed rate period. This fee varies and is calculated based on whether the lender incurs an economic loss by releasing you to another lender. These calculations get quite complex and it is wise to discuss them with your current lender to understand what the fee is likely to be if you choose to refinance during the fixed rate period.

• Application Fee

Application fees vary across lenders and they also vary across loan products within the same lender. These can range from $0 right through to $1,000, although fees at the top end of that range are not very common.

• Annual Fees

Depending on the loan product, some lenders may charge an annual fee. These are quite common or products that come with additional features such as offset account, waived credit card fees, ability to make additional repayments into the loan and other features. These annual fees are usually between $300 and $400.

• Lenders Mortgage Insurance (LMI)

LMI is generally charged if you are borrowing more than 80% of the value of the property. Please see our LMI FAQ for more on LMI. Generally speaking, if you are refinancing you would seek to avoid having to pay LMI. And remember, if you’ve already paid LMI before, perhaps when purchasing the property, then you would incur it again as it is not transferable from one lender to another.

However, there are instances where it may be in your best interest to do so. An example of this may be that you previously only qualified for an expensive loan product e.g. for a poor credit rating and you may now qualify for a much cheaper product.

An experienced mortgage broker can advise you on this so please make sure you seek expert advice before going down this road.

A redraw facility is a loan feature that allows you to draw funds back out of the loan account that have been paid in advance. Let’s say, for example, that you have been disciplined and making payments over and above your monthly minimum and start to build up a balance of cash available in your loan account. A redraw facility will allow you to pull these funds out of the loan account if you need access to them.

Some redraw facilities come with certain limitations and fees for example minimum redraw amounts and fees charged for drawing on the available funds, which means not all redraw facilities are created equal – some are better than others.

An offset account is a transactional account that is linked to your home loan account. Any funds that you hold in this account offsets the interest that you pay on the loan. For example, if your current loan balance is $500,000 and you hold $50,000 in your offset account, you will only pay interest on the $450,000 rather than the full $500,000.

An offset account is a great way to help reduce the interest charged over the life of the loan and assists you in paying off the loan sooner.

Something to note with offset accounts is that they often come at a cost. This is either via an annual fee, often referred to as a package fee, or via a slightly higher interest rate. So, unless you hold enough cash in your offset account to offset this additional cost, it may not be worth having one. Your mortgage broker can advise you on this.

A typical repayment on a home loan is made up of two parts (a) the principal amount (your loan balance) and (b) the interest component (what you are being charged for the loan).

An interest only loan therefore is a loan where you only pay the interest component for an agreed period. This means that your loan balance, or principal component, does not reduce during this period.

Interest only loans are typically used for investment purposes where there are tax benefits associated with that property. However, there are some instances where an interest only loan might be the right option for your principal place of residence. For example, you may need to temporarily reduce your mortgage repayments whilst on parental leave or to pay for educational costs.

A Line of Credit is a loan that typically does not have to be repaid within a certain timeframe and is given at a set limit. The borrower can then utilise these funds as they need and pay them back once they can. The interest charged on the facility is calculated only on the portion of the loan that is drawn and for a period until it is paid back.

For example, Bob has an investment property, which is paid off in full and his valued at $600,000. He obtains a Line of Credit facility for $200,000 secured against this property. The line of credit appears in his online banking just like a normal transaction account does and shows available funds of $200,000. Bob then decides he’d like to renovate another investment property that he owns and then sell this property at a profit. He utilises $100,000 of the line of credit for this project and the funds are paid back after the property is sold in 3 months’ time. He therefore pays interest on $100,000 for a period of 3 months.

A split loan or split mortgage is a loan feature that allows you to split your home loan into multiple loan accounts, usually with differing rates. A common example of this could be where you have a partially fixed rate and a partially variable rate home loan.

Another example would be to have your loan split into owner-occupied and investment portions. You might have an existing loan on your owner-occupied home at one rate and you might then use some of the additional equity to pay a deposit on an investment property, which is charged at an investment rate.

There is not necessarily a right or wrong answer to this question. Some may say “rates are so low right now, you’d be a fool not to fix!” whereas others may say “if you fix, you don’t have any of the flexibility and product features that come with a variable rate loan”. These statements might both be correct, but the answer is always found by looking at your individual circumstances. There is never a one size fits all.

This is an excellent question to ask your mortgage broker. Many people only what to know what is the maximum that they can borrow, rather than thinking about what they should borrow.

This is where you need to work on understanding your risk appetite and whether there are any foreseeable changes coming up in your life that may result in you not being able to meet your commitments.

For example, are you planning on having a child? Is your child starting private schooling in a year’s time? Are you thinking about a career change? All of these things need to be thoroughly discussed and thought about with your mortgage broker in order to make sure you don’t find yourself in a situation where you’ve borrowed at your maximum level, only to find that you cannot afford to make the repayments over the long term. Remember, most mortgages are for a 25 to 30-year period.

What you can borrow (your borrowing capacity) will vary from lender to lender. This is because there are several inputs that go into calculating your borrowing capacity.

Each individual lender has their own method for calculating borrowing capacity, each with their nuances, but the main thing to know here is that what you earn and what you spend (or are projected to earn and spend) are the 2 main things that determine how much you can borrow.

It is important to note and remember that liabilities such as credit cards, personal loans, car loans and things like Afterpay or Zip Pay, have a big impact on what you can borrow. Therefore, it’s important to speak to professionals like us to understand whether your future goals are being impacted by discretionary or unnecessary credit facilities.

Loan to Value Ratio. This is calculated using the following formula:

Eligibility and general information for the FHOG in your state can be found here:

http://www.firsthome.gov.au/

We have access to lenders who can provide loans that require only a 5% deposit on the property being purchased. It is important to remember however that in most instances, lenders charge what is known as Lenders Mortgage Insurance (LMI) to those who borrow more than 80% of the property value. Please read our FAQ regarding LMI for more information.

Typically for all our residential lending including home loans, investment loans, refinance, first home buyers etc. we do not charge a fee to the client. In these cases, we are paid a commission from the lender and this commission is disclosed to our clients as per compliance requirements.

In some instances, including development finance and other services, we do charge a fee directly to the client. This is typically in scenarios where substantial work is required to prepare the loan application for submission or if a commission is not paid directly to us by the lender for the finance being sought.

We also offer other services on a consultancy basis for which we charge a fee. Any and all fees are quoted to the client either verbally or in writing and the subsequent tax invoice upon acceptance of the fee by the client is issued in writing.