Playing scrooge: beating banks at their own home loans game

Playing scrooge beating banks at their own home loans game

Australian home buyers are facing some of the strictest lending requirements in recent years, as financial institutions demand more genuine savings before securing a home loan. But are Australians getting a raw deal, or are these the necessary precautions that every lender must make?

May 27, 2010

Lenders scared to ease their chains
Due to the disasters of subprime lending and risky practices in the United States, lenders across the world have been afraid to relax their standards. And the Reserve Bank of Australia has said any excessive reductions could be “outright damaging to long-run affordability”.

The 100 percent loan-to-value ratio (LVR) home loan, where you can borrow the entire value of a property, is officially extinct on the market. But you can borrow up to 95 percent of the value of a property in most cases.

In fact, owner-occupied home loans have experienced a sharp drop in their LVR. From the March quarter of 2009 to this year’s March quarter, loans offering LVRs over 90 percent have fallen from around 27 percent of all loans in 2009 to 15 percent in 2010.

Over the same period, loans with LVRs between 80 and 90 percent have risen by about 4 percentage points (16 percent to 20 percent), as borrowers are forced to save more before they acquire a home loan.

And while many will mourn the appealing 100 percent loans, which require no initial savings for a deposit, should borrowers be relying on these loans anyway? These loans place a high amount of debt and risk on the borrowers’ shoulders. If the price of the property falls after the purchase, the borrower will experience negative equity where they will suddenly owe more money than their property is worth.

When mortgage lenders are feeling ungenerous when it comes to LVRs, it’s up to individuals to make sure they are making the most of the market. You might be surprised by the discounts that lenders are willing to negotiate – which might include high-LVR home loans.

Borrowing less can save you more
Say that Natasha wanted to purchase a property costing $300,000. If she took up a loan at 7.5 percent over 30 years, choosing to borrow only 80 percent ($240,000) as opposed to 100 percent will save her at least $151,000 over the life of the loan. And this doesn’t include the fact that borrowing a greater percentage of the value of the property is likely to cost more in charges by the lender, including higher rates and lenders mortgage insurance.

And if Natasha shopped around for a cheaper rate of 7 percent and borrowed $240,000, she could save another $29,000 from her total repayment amount. In total, healthier savings and a search for a better deal has helped her save more than $180,000.

If you care about making savings as much as obtaining your next home, compare home loans for the lowest rate, and consider borrowing less. Being a scrooge isn’t just a game for lenders because ordinary borrowers can come out on top.

 

 

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How will Real Time Ratings help me find a new home loan?

The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.

That’s where Real Time RatingsTM can help. Our system automatically filters out loans that don’t fit your requirements and ranks the remaining loans based on your individual loan requirements and preferences.

Best of all, the ratings are calculated in real time so you know you’re getting the most current information.

How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

Mortgage Calculator, Loan Amount

How much you intend to borrow. 

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What factors does Real Time Ratings consider?

Real Time RatingsTM uses a range of information to provide personalised results:

  • Your loan amount
  • Your borrowing status (whether you are an owner-occupier or an investor)
  • Your loan-to-value ratio (LVR)
  • Your personal preferences (such as whether you want an offset account or to be able to make extra repayments)
  • Product information (such as a loan’s interest rate, fees and LVR requirements)
  • Market changes (such as when new loans come on to the market)

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

Mortgage Calculator, Repayment Frequency

How often you wish to pay back your lender. 

What is appraised value?

An estimation of a property’s value before beginning the mortgage approval process. An appraiser (or valuer) is an expert who estimates the value of a property. The lender generally selects the appraiser or valuer before sanctioning the loan.

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

What is the ratings scale?

The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.

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How long you wish to take to pay off your loan.