Thinking of getting a loan to purchase a property? Prepare to be introduced to some difficult terminology and financial concepts that may leave your head spinning!
Luckily we’ve compiled a list of the top ten things you need to be familiar with when you start looking for finance. Read on to find out more…
1. What is LMI?
LMI is an acronym for Lenders Mortgage Insurance. If you are borrowing over 80% of the value of a property then your lender will probably require that your loan is insured due to the increased risk. This insurance protects the lender, not you.
If you were to default on the loan and your lender was to lose money then they can claim on their LMI policy to recover their loss. The two main LMI providers in Australia are Genworth Financial and QBE LMI (formerly PMI).
The insurance premium for LMI is calculated using a sliding scale depending on the loan amount, lender and percentage of the property value that you are borrowing.
The lender will pass this premium on to you as a once off fee when your loan is advanced.
LMI for low doc loans
For low doc loans the LMI is often charged if you borrow over 60% of the property value.
Some lenders will pay your low doc LMI premium for you and will charge you a higher interest rate to compensate.
Did you know that the LMI premium can vary significantly depending on which lender you use?
Often people do not check the cost of LMI when shopping for a loan and think that the lender with the cheapest rate is best when in actual fact they could end up paying several thousand dollars more!
We always check to make sure that the lender you are using has a competitive LMI premium AND interest rate for your home loan.
Or alternatively, use our online LMI premium calculator to find an exact premium for your situation.
2. What does LVR mean?
LVR is an acronym for Loan to Valuation Ratio. This is a term used by lenders to describe the percentage of the property value you are borrowing.
It is calculated by dividing the loan amount by the value of the property or the purchase price, whichever is the lesser. For example if your home was worth $1,000,000 and you decided to borrow $500,000 then your loan would have an LVR of 50%.
The LVR is used as part of the loan assessment process to determine the risk to the lender and also to determine if your loan will require Lenders Mortgage Insurance (LMI) or not.
As a general rule, lenders are more flexible with their approval guidelines if your loan has an LVR below 80%.
Use our LVR Calculator to find out your LVR.
3. Do I need a deposit?
First home buyers can often borrow close to 100% at normal home loan rates without having to pay a large deposit.
This is because the first home owners grant can often cover the cost of the Lenders Mortgage Insurance (LMI) premium and other costs associated with buying a property such as conveyancer’s fees. Please read our 95% LVR mortgage page for more information.
If you have a mortgage guarantor who will let you use their house as additional security for the loan then you can often borrow as much as 110% of the purchase price without paying any LMI at all!
Often lenders are happy to take a second mortgage as security for a guarantee so it may be ok if your guarantor already has a loan on their property.
For those of you that already own a property there are loans that will allow you to use the equity in your current property as security for your new loan, allowing you to borrow the full amount you need to buy more real estate without the aid of a guarantor.
Wondering whether you will qualify for a home loan? Speak to us on 1300 889 743 or enquire online and we’ll get back to you to discuss your situation.
4. Do I need a loan pre approval?
Strictly speaking you do not have to get your loan preapproved before signing a contract to buy a home.
However in our opinion you would be taking a huge risk by committing to buy a property without knowing if you can qualify for a loan!
If your loan is preapproved then you can shop around for a house, comfortable in the knowledge that you will have little trouble obtaining finance.
Most good properties sell quickly, no matter what the market conditions are like.
If several buyers are all after the same property it is usually the one that has their loan approved that can sign the contract first and secure the property.
Any buyers that are not preapproved often have to wait for their lender to give them an approval before they can go ahead and buy. Depending on the lender this may take some time so may mean that you lose the perfect home!
In states such as WA or QLD there is normally a finance clause which allows you to make an offer on a property and sign a contract and still have the option to back out if you cannot get approval for your mortgage.
However in Victoria & NSW it is quite common for properties to sell at an auction, in which case having a preapproval in place is essential.
Getting a preapproval is very simple. Just talk to us on 1300 889 743 and we will guide you though the entire process.
5. What is the process of buying a home?
Budget
The first step of buying a home is to work out a budget and maximum amount you are prepared to spend. This also includes talking to us and applying for a home loan preapproval, there isn’t much point buying a home if you don’t know if your home loan will be approved!
You should also look for a conveyancer or solicitor to help guide you through the legal procedures of buying a home.
Research
The next step is to research the area you are interested in, speak to local agents and find a suitable property. When you find a property that you are interested in you can then make an offer. Depending on which state you are in and if the property is being sold at auction the exact process can vary somewhat.
Sometimes you will have a cooling off period or a finance clause allowing you time to arrange a pest inspection, building inspection, strata inspection (for units or townhouses) and obtain your final loan approval.
Your deposit
Once you have completed your due diligence and your loan is formally approved you can commit to buy by giving the selling agent your deposit. This is usually 10% of the purchase price however you may be able to negotiate a smaller deposit or provide a deposit bond instead.
Normally there are six weeks between when you sign the contract and when the property changes hands. During this time your conveyancer or solicitor will liaise with your lender, your mortgage broker and the vendor’s (seller’s) conveyancer or solicitor to make sure everything is ready for the contract deadline.
Move in
On the afternoon of the day of settlement you can pick up the keys to the house from the agent and move in! Your lender will have advanced the funds and will usually send you a letter to inform you when the first repayment is due and also to confirm how the repayments are being made.
Relax
Congratulations! You can now sit back and relax in your new home.
6. What is the difference between a conveyancer, solicitor & a settlement agent?
Solicitors are specialists who can give legal advice and prepare legal documents.
This can include conveyancing which is the process of transferring a property’s ownership from one person to another.
Conveyancers are specialised clerks that work only with conveyancing. Conveyancers may or may not have a legal background or legal training.
Most states require that conveyancers hold a license, have the appropriate qualifications and that they are adequately insured.
In Western Australia settlement agents are used in place of a solicitor or conveyancer. Settlement agents are specialised administration staff that handle the transfer process, they do not usually get involved in the offer and acceptance contract between the buyer and seller which is instead handled by the real estate agent.
There isn’t too big a difference between a solicitor and a conveyancer except that a solicitor is qualified to give legal advice whereas a conveyancer may be a little cheaper and is specialised in property transactions.
7. What is settlement?
Settlement is the term given to the moment when the purchase is settled or resolved. This is when the difference between the deposit already paid and the agreed purchase price is paid and the title is transferred to the new buyer.
In other words this is when you become the owner of your new home. In most cases the actual settlement is a meeting between the vendor’s conveyancer, the vendor’s lender, the purchaser’s conveyancer & the purchaser’s lender.
At this meeting, the purchaser’s lender will advance the loan to the vendor or to the vendor’s lender if the vendor had a loan on the property which needs to be repaid.
The vendor or vendor’s lender will then give the title for the property to the new lender as security for their loan.
8. How do I know if I will get the First Home Owners Grant (FHOG)?
The First Home Owners Grant (FHOG) scheme is a federal government initiative however it is managed by the state governments.
Some states have their own additional benefits such as an extra bonus grant or an exemption from stamp duty. You should refer to the governments First Home Buyer Website for a link to your state governments first home benefits info page.
On the website there will be a contact number, fact sheet or eligibility guide which can assist you further.
As a general rule of thumb you must be a natural person (not a company), buying your first home and you must be a permanent resident, Australian or NZ citizen.
If your spouse or de-facto have already owned a home then you may be ineligible for the grant. Contact your state government for the full eligibility criteria.
To find out whether you will get approved for a home loan, speak to our mortgage brokers on 1300 889 743 or enquire online. We can help first home buyers finance the home of their dreams! Call us today.
9. Why do people refinance?
People refinance their home loans for a variety of reasons. Refinancing is the process of repaying your old home loan with a new home loan, usually from a different lender.
An internal refinance is the term used if you are repaying your old loan with a new loan from the same lender.
A mortgage broker can help you with both an internal and external refinance.
Refinancing to save money is the main reason why people choose to refinance. If your lender is no longer competitive then you have little alternative but to move on.
The difference between lenders can be stark and it quite common for our customers to save thousands of dollarsjust by changing home loans.
Other customers of ours refinance to consolidate debt. This is the process of paying off multiple debts such as your home loan, credit card, personal loan and HECs / HELP debt all into one home loan.
The more expensive unsecured loans are paid out by your new loan which means that overall you will have a lower rate and longer loan term.
This reduces the size of the repayments and reduces the amount of interest you pay.
There are many other reasons to refinance. These may include refinancing because your current lender can’t approve a loan increase, refinancing to release equity or refinancing because your current lender doesn’t give you a good level of service.
Looking to refinance? Call us on 1300 889 743 or enquire online today and we’ll make sure that you get the best rate around!
10. Why won’t my bank match the offer from the lender you are suggesting?
Most lenders tend to offer you the world when you first apply for your home loan but then stop giving you a high level of service and good interest rate discounts when you have been with them for a few years.
Banks know that if you have your home loan, bank account and credit card all with the one bank then you are unlikely to go to through the hassle of changing all your accounts.
Because of this they often refuse to give you the same discount that they are giving new customers, even if you threaten to leave! The banks use the term “old money” for a current customer and “new money” for a new customer.
We review our customers loans annually to make sure they are given the new money discounts or else we recommend a new lender that will give them a better deal.
Apply for a loan today!
Think you understand the basics of getting a home loan? If you don’t, no worries! That’s why were here to help. We’ll take you through the process from start to finish and deal with your loan application, so you don’t have to!
Take the stress out of applying and call us today on 1300 889 743 or enquire online and we will contact you to see which banks you qualify with.