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What should I ask a lender when I apply for a home loan?

What should I ask a lender when I apply for a home loan?

According to a recent survey, eighty-four per cent of Aussies who are yet to buy a property say they need to know more about financial products such as home loans, rates and deposits. With this in mind, it’s important to ask the right questions before you start filling out application forms.

The bi-annual Know Your Numbers survey from UBank found that a significant percentage of surveyed Australians have little or no knowledge of some of the terms and jargon used in the mortgage and finance industry. If this includes yourself, here are some of the questions you may want to consider asking before you apply for a mortgage:

What is the loan to value ratio (LVR)?

Just over half for those surveyed admitted to having little to no knowledge about loan to value ratios (LVR). This industry term refers to the maximum size of the loan compared to the value of the property being purchased.

A home loan’s maximum LVR often relates back to the minimum deposit the lender will require. For example, a mortgage with an LVR of 80 per cent requires a deposit of at least 20 per cent. Similarly, a 90 or 95 per cent LVR home loan would need a deposit of 10 or 5 per cent respectively.

Knowing a lender’s required LVR can help give you a better idea of how much money you may need to save to qualify for one of their home loans. Of course, if your deposit is less than 20 per cent, you may still need to pay for LMI.

How much Lender’s Mortgage Insurance (LMI) will I need to pay?

UBank found that 41 per cent of those surveyed had little to no knowledge of LMI. Lender’s Mortgage Insurance is an insurance policy that covers the lender (not the borrower) against the risk of the borrower defaulting on their mortgage repayments. LMI is typically required whenever a borrower has a deposit of less than 20 per cent, and most lenders pass the cost of LMI on to the borrower – the lower your deposit, the more you may have to pay.

If you have a deposit of less than 20 per cent, you may need to account for extra upfront costs when budgeting for your home loan. You can use an LMI Calculator to estimate how much you may need to pay, and work out the most cost-effective way to manage your application.

Keep in mind that there are a few ways to minimise or eliminate your LMI charges. A few lenders offer to waive the LMI charge for borrowers with a deposit of at least 15 per cent. Grants such as the First Home Owner Grant (FHOG) can help boost the size of your deposit, and government programs like the First Home Loan Deposit Scheme (FHLDS) may allow you to get a home loan with a small deposit and pay no LMI. You could also look into a guarantor home loan, where your parents guarantee your mortgage with the value of their own home, so LMI won’t be required.  

Do you offer an offset account?

Around 38 per cent of those surveyed said they had little or no knowledge of offset accounts. These are savings or transaction bank accounts that are linked to your home loan. Specifically, the money you deposit in your offset account is taken into account when the bank calculates interest charges on your home loan, to help shrink your interest charges.

For example, if you had a $300,000 home loan, and $50,000 saved in your offset account, you’d be charged interest as if you only owed $250,000 on your mortgage.

Offset accounts are popular home loan features, as they allow you to effectively put more money towards your mortgage to save on interest, while still allowing easy access to these funds when you need them.

Just keep in mind that some lenders charge an extra fee for access to an offset account, and a home loan with an offset account may charge a higher interest rate and/or fees than a more basic “no-frills” home loan. Consider calculating the potential benefits of an offset account compared to the costs to estimate its overall value to you.

What’s up with your comparison rate?

The UBank survey found that only one in four (24%) participants said they know a lot about comparison rates, with just one in ten (10%) saying they have a perfect understanding. If you fall outside this number, the comparison rate is an indication of the overall cost of a home loan, including not just the interest charges, but the cost of everyday fees and charges too.

Mortgage lenders are required to display a comparison rate alongside their advertised interest rates, as sometimes a low-rate loan that charges high fees can ultimately cost you more than a mortgage with a higher interest rate. If two home loans have similar advertised rates, the option with the higher comparison rate is more likely to cost more in total.  

Keep in mind that not all fees and charges are included in the comparison rate, so it’s still important to look closely at the terms and conditions of each mortgage offer. Also, remember that the comparison rate is only a general indicator of a home loan’s cost – to maintain consistency, all comparison rates are calculated assuming a $150,000 loan on a 25 year term, which is unlikely to accurately reflect many typical mortgages today.

Will you be able to help me refinance in the future?

Only three in ten (31%) Aussies were found by UBank to know a lot about refinancing, with 12% saying they have a perfect understanding. For the unfamiliar, refinancing refers to switching one home loan for another, often from a different bank or lender.

Borrowers often refinance in order to get a lower interest rate, but also to get access to features and benefits that better suit their needs, or to switch to a lender whose customer service they prefer. Some borrowers also refinance with the goal of paying off their property faster, or to access equity from their property to help pay for other projects, or to consolidate other debts into their home loan.

It’s often worth keeping in mind that even if you aren’t eligible for your preferred mortgage when you first buy a property, you may be able to refinance your loan further down the track, once you’ve built up some equity in your property and improved your financial position.

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Fact Checked -

This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

How can I apply for a first home buyers loan with Commonwealth Bank?

Getting a home loan requires planning and research. If you are considering a home loan with the Commonwealth Bank, you can find the information you need in the buying your first home section of the bank’s website.

You can see the steps you should take before applying for the loan and use the calculators to work out how much you can borrow, what your monthly repayments would be and the upfront costs you’d likely pay.

You can also book a time with a Commonwealth first home loan specialist by calling 13 2221.

CommBank publishes a property report that may help you understand the real estate market. The bank has also created a CommBank Property App that you can use to search for property.  The link to download this app is available on the same webpage.

If you are eligible for the First Home Loan Deposit Scheme, CommBank will help you process your application. The scheme helps first home buyers to purchase a home with a low deposit. You can read details about this scheme here and speak with a CommBank home lending specialist to understand your options.

How do I save for a mortgage when renting?

Saving for a deposit to secure a mortgage when renting is challenging but it can be done with time and patience. If you’re on a single income it can be even more difficult but this shouldn’t discourage you from buying your own home.

To save for a deposit, plan out a monthly budget and put it in a prominent position so it acts as a daily reminder of your ultimate goal. In your budget, set aside an amount of money each week to go into a savings account so you can start building up the ‘0’s’ in your account.  There are a range of online savings accounts that offer reasonable interest, although some will only off you high rates for the first few months so be wary of this.

If you aren’t able to save a large deposit, you can consider ways of entering the market that require small or no deposits. This can include getting a parent to act as guarantor for your home loan or entering the market with an interest only loan.

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.

Am I guaranteed to be approved for all the loans I’m shown?

No. While we will do our best to show a list of loans that may suit your needs, if you choose to apply to refinance, it is up to the lender to approve or disapprove your loan based on your individual circumstances, after you have submitted all your paperwork.

This can sometimes take up to 30 days, so it is important to find out exactly what the criteria is for the loan, and what you need in terms of paperwork. RateCity does not make any suggestions taking into account your personal and individual needs.

How does a mortgage calculator work?

A mortgage calculator is an extremely helpful tool when planning to take out a home loan and working out the costs. Although each mortgage calculator you come across may be slightly different, most will help you estimate how much your repayments will be. The calculator will often also show you the difference in repayments if you repay weekly, monthly or fortnightly. 

To calculate these figures, you’ll be asked to enter a few details. These include the amount you plan to borrow, whether you’re an owner-occupier or an investor, the proposed interest rate and the home loan term. It will also often show you the total interest you’ll be charged and the total amount you’ll repay over the life of the loan.  

Understanding how the mortgage calculator works, helps you to use it to see how different loan amounts, interest rates and terms affect your repayments. This can then help you choose a home loan that you can repay comfortably and save on interest costs. The mortgage calculator lets you compare the benefits and costs of home loans from different lenders to help you make a more informed choice. Use a mortgage calculator to help identify which home loan is most suitable for your requirements and financial situation.

How can I pay off my home loan faster?

The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.

Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.

How can I negotiate a better home loan rate?

Negotiating with your bank can seem like a daunting task but if you have been a loyal customer with plenty of equity built up then you hold more power than you think. It’s highly likely your current lender won’t want to let your business go without a fight so if you do your research and find out what other banks are offering new customers you might be able to negotiate a reduction in interest rate, or a reduction in fees with your existing lender.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

Does the family tax benefit count as income?

The family tax benefits are one of several government support payments that are not considered taxable income. Other such payments include child care subsidies, economic support payments, rent assistance, and carer allowances. If you file a tax return, you typically don’t need to mention such income on the return. However, some home loan lenders may accept family tax benefits as an income source when reviewing your home loan application. You’ll still need to meet other lending requirements, such as having a sufficiently high credit score and enough savings for a deposit before the loan will be approved.

Aussies receiving family tax benefits usually have an adjusted taxable income of no more than $55,626 a year. Alternatively, one spouse can be receiving income support payments from the government to be eligible. Most importantly, they need to have children dependent on them for care at least 35 per cent of the time. Children between the ages of 16 and 19 should be either full-time secondary students or have a somewhat comparable study load unless the government exempts them from these study requirements. 

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

How much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

What is a valuation and valuation fee?

A valuation is an assessment of what your home is worth, calculated by a professional valuer. A valuation report is typically required whenever a property is bought, sold or refinanced. The valuation fee is paid to cover the cost of preparing a valuation report.

When should I switch home loans?

The answer to this question is dependent on your personal circumstances – there is no best time for refinancing that will apply to everyone.

If you want a lower interest rate but are happy with the other aspects of your loan it may be worth calling your lender to see if you can negotiate a better deal. If you have some equity up your sleeve – at least 20 per cent – and have done your homework to see what other lenders are offering new customers, pick up the phone to your bank and negotiate. If they aren’t prepared to offer you lower rate or fees, then you’ve already done the research, so consider switching.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Why do I need to enter my current mortgage information?

We use your current mortgage details to calculate the potential savings if you were to change lenders, and also to help us point you to loans that may meet your needs.

For example – if you live in the house you own, we’ll make sure we show you the owner-occupier rates, which are typically cheaper than investor rates. Or if you have less than 20% equity in your property, then we won’t show you the deals that require a greater amount of equity.

What is a honeymoon rate and honeymoon period?

Also known as the ‘introductory rate’ or ‘bait rate’, a honeymoon rate is a special low interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to one year. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term, the loan reverts to the standard variable rate.