Category Archives for "Home Loans"

Aug 14

What Writing $170m In Home Loans Taught Me About Choosing Banks

By Adelaide FHB | Blog , Home Loans

Which Bank is Right for You?

The million dollar question!

You’ve probably heard stories from family members or friends about which banks they really like (or which ones they don’t like), which may have caused you to form an opinion one way or another about some banks.

You might also not be aware just how many different banks, building societies, credit unions, non-bank lenders and other financial institutions are available in Australia.

Most people think about the Big 4 (ANZ, Westpac, NAB and Commonwealth) without giving too much thought to some of the smaller lenders out there.

So how can you possibly know which bank is the right one for you and your financial needs?

One of the biggest takeaways I’ve learned from years of writing loans is that while one bank and their products might be ideal for your friend’s needs, the same loan might be totally unsuitable for your financial goals. The key to choosing the right bank and loan products for your own personal needs is to take a few different factors into account first.

Loan Type

Before you make a decision about which bank is best for you, take some time to determine what type of loan you need.

  • Variable rate home loans
  • Fixed rate home loans
  • Self-employed loans
  • Investment loans
  • Low Doc loans
  • Credit impaired loans
  • Business/company loans

The list can go on. Remember, the type of home loan that worked really well for your mum and dad might be unsuited for your financial needs, so it’s important to consider your own circumstances before making a decision.

Lending Policies

Every bank has their own individual lending policies and rules about lending money. Some are focused on lending money to mums and dads who want to buy a residential property to live in, while others might be happier to help self-employed borrowers or offer business financing options.

However, the offerings from the big banks can be quite conservative. In some cases, their policies for lending money can be a bit stricter than some of the smaller banks. The major banks may also have tighter rules about how much money you’re able to borrow.

That’s where considering some of the smaller lenders could benefit you. Alternative lenders may have more flexible policies when it comes to self-employed borrowers. Others may be more lenient with casual or unusual employment circumstances.

Then there are lenders known as ‘non-conforming banks’. These banks are often happy to consider loan applications that other banks will turn away.

As an example, let’s look at a self-employed person who has only been operating a business for 6 months. Most banks will not deal with someone in this situation, but some of the non-conforming banks will consider your application.

Non-conforming banks generally require fewer income verification measures to lend you money. Unfortunately, those flexible policies often come at a price. In some cases, this could be a higher interest rate or extra loan fees, but if you want to get access to funds this may be a tolerable solution.

Non-conforming lenders are also happy to consider borrowers with bad credit. If your credit score has been impacted by an event in the past, you might automatically think you can’t get a home loan. However, a non-conforming lender is often the best option to place you into a loan.

What I have tried to illustrate is that there are loan options for all different types of clients. There is no one shoe that fits all.

So it could be crazy just to consider one bank when there are so many alternatives available. Before making a decision about which bank will be right for you, take some time to speak to a good mortgage broker. They’ll help you compare the options available and make it easier for you to narrow down your options and choose the right loan for your financial needs.

Happy house hunting!

Rick Nieuwenhoven

 

Aug 14

4 Ways To Save Thousands On Your First Mortgage

By Adelaide FHB | Blog , Home Loans

Common Mistakes When Choosing the Right Mortgage

Choosing the right mortgage structure is more important than many people realize. Not only can choosing the right mortgage type, the correct structure, and the right payment options could all cut years off your home loan. They could also save you thousands of dollars in interest and money back into your pocket.

Therefore choosing the right advisor to guide you with this decision making process is fundamentally important.

 

Common Mistakes That Add Up!

Here are some common mistakes people make when it comes to choosing the right mortgage.

Mistake #1

Too often the first mistake lots of people make is just applying for any old home loan to purchase the house they want without thinking about anything else. Let’s face it; you just want to buy that house.

Once you’ve acquired the house, your primary focus then shifts to moving in. By the time the dust has settled, it’s likely you’re not even thinking about the home loan anymore.

It could be 3 to 5 years when a fixed period is up for renewal or you have decided you want to redraw from some equity that you might eventually review your home loan.

Mistake #2

The second most common mistake people make is staying loyal to the bank you’re currently with. If you choose to deal directly with a bank, you might have a good understanding of the loan products and interest rates they offer, but you won’t be aware of what else might be available from other lenders.

Obviously, banks only sell their own products. However, each bank differs in their time cycles in terms of their ability to offer funds. Essentially this means some banks are able to offer better rates and products than others at varying times throughout the year, depending on their source of funding.

Staying loyal to your current bank without comparing other options available could mean you won’t have access to the right loan type, most competitive interest rate, or service. Imagine if you applied for a home loan with your current bank and their ability to access funds was limited at that time. If your application was declined, would you still shop around for another lender, or would you just give up on getting a mortgage?

Your willingness to shop around and see what other lenders have to offer could be the difference between buying a home and not!

Mistake #3

Once you have decided you want a home loan, it’s wise to decide on the right payment type to suit your needs. Many investors automatically request that their investment loans are set to interest only in an effort to maximize tax deductions. There are also plenty of owner occupied borrowers who want to make interest only payments on their home mortgage too.

However, since APRA’s changes in 2017 interest only loans are becoming more difficult to access. In many cases borrowers now need lower loan to value ratios and higher servicing in order to qualify for interest only loans.

As a result, more and more people are being switched to principal and interest payment options.

With an interest only payment option, you only pay interest charges that have accumulated on your outstanding loan balance each month. You don’t actually pay anything off the loan amount at all.

By comparison, a principal and interest repayment is broken into two components. The first component covers the interest charges due and the second portion pays down your loan balance a little.

Keep in mind that if you stay on interest only repayments for a few years and then decide you want to switch to principal and interest repayments, your monthly payment amounts could end up being a lot higher than you anticipated.

For example, let’s say you have a 30 year home loan and you’ve stayed on interest only payments for the past 10 years. Your mortgage balance would be exactly the same as it was when you first borrowed the money, as you’ve only being paying the interest costs all that time.

When you do decide to switch over to principal and interest payments to start paying down the loan, the repayments need to be calculated over the next 20 years – not 30 years. The result is that the principal component of each payment you make will need to be much larger in order to pay off your loan balance in the remaining time left on the loan term.

Mistake #4

Another mistake a lot of home owners make when choosing a mortgage is not thinking about how their mortgage type could affect their long term goals. If your primary goal is to pay down your home loan as quickly as possible, choosing the right loan type and payment structure can be an important decision.

In order to make a real impact you have a few options available. You either need to make extra repayments to help reduce your mortgage balance a little faster, increase your payment frequency from monthly to weekly or fortnightly, or link an offset account to your home loan account to help reduce the amount of interest you pay each month.

Interestingly in the first 5 years of a home loan, the principal reduction can be negligible.  If your goal is to try and pay down your home loan as quickly as possible, it’s important to be sure you buy in a price range you can easily afford so you’ll be able to make extra repayments without breaking your budget.

Before you decide on a type of home loan, take a bit of time to look at the loan features and work out whether you might need them over the next 30 years. As an example, you might want to think about whether you’ll need to access your home loan redraw facility. Some banks may charge a fee to redraw your own money from your home loan.

An offset account is different to a redraw facility. With a redraw facility, you can sometimes withdraw any extra repayments you’ve made that were sitting in your home loan account.

By comparison an offset account is just the same as a regular transaction account, with the addition of being linked directly to your mortgage. You can have your salary paid into it and arrange for direct debit payments to come out of it. You can also leave your savings in the account, which actively helps to reduce how much interest you pay on your home loan.

Far too many people shop around for the cheapest possible interest rate and don’t tend to look much further into what their loan type could mean in terms of achieving their goals. Before you make a decision about which home loan you apply for, take the time to discuss the options available with a good mortgage broker.

Aug 14

How To Reduce The Interest Paid On Your First Mortgage

By Adelaide FHB | Blog , Home Loans

Lots of people come to our seminars and business to learn more about loans and interest. One of the most common questions we get asked is “how is interest calculated?”

How Interest On Home Loans Works

It’s an important question to ask, because when you understand the nature of the interest calculation and how it really works it’s easier to work out how you can use it to pay off your mortgage as quickly as possible.

When the banks lend you money, they know they’re getting the original loan amount back. However, they make their money charging interest on the amount you owe. It makes sense.

Unfortunately interest isn’t calculated using the simple interest method. For example, $100,000 at 5%p.a. in simple interest would mean you’d pay $5,000 over a year in interest charges.

By comparison, banks use a compounding interest calculation when working out how much interest to charge on your mortgage. This means the banks calculate the interest due on your outstanding balance at the end of each day and add that amount to the loan, therefore our loan is incrementally increasing each day and then interest is being calculated again.

For the purpose of this example, we’ll say you owe $100,000 and you’re paying 5%p.a. in interest. Your monthly payments over a 30 year loan term are $536.82.

After just one week you’ve already accumulated $95.92 in interest charges. The interest charge will keep adding up on your outstanding balance at the end of every day.

And you haven’t even made a mortgage payment yet to reduce your balance.

At the end of the month, the bank adds up all those interest charges and then they show you one single interest figure on your bank statement. Then you finally make your normal monthly repayment, which drops the balance down a little bit before the whole interest calculation process begins all over again.

So what do can you do to reduce this effect and cut down the amount of interest you pay?

Increase Payment Frequency

One of the easiest ways to reduce the compounding effect is to increase your payment frequency. If you’re currently making monthly payments on your home loan, think about changing your payment frequency to fortnightly or even weekly.

By making your repayments more frequently you reduce your outstanding balance a little more each week. The bank is only able to charge interest on the amount you owe, so the interest charged is also reduced.

Extra Payments

Another way to reduce the amount of interest you pay on your home loan is to make additional payments off your mortgage balance.

For example, you might decide to pay an extra $20 each week on top of your normal repayment amount. The extra payment is paid straight off your loan balance, which means you’ve reduced the amount of interest the bank is able to charge you.

Even if you’re already making voluntary additional repayments off your mortgage, always remember that you can deposit any extra cash you have at any time throughout the year too.

You might get a nice tax refund or a bonus at work, so think about paying some of that money off your mortgage. You’re still reducing your balance, which goes a long way towards reducing your interest charges in the long run.

Offset Account

Another option for reducing the interest you pay on your home loan is to link an offset account to your mortgage. An offset account is just like a regular transaction account or savings account, but it’s linked directly to your mortgage.

When the bank calculates how much interest to charge you, they look at your current mortgage balance and then they deduct the amount of savings you have sitting in your offset account.

For example, if your mortgage balance is $100,000 and you have $10,000 in your offset account, the bank only charges interest on $90,000. The result is that you pay less interest.

Hence as I always say, getting a loan is the first victory but how you structure the loan will win the financial war. Don’t make a rash decision in selecting the right loan type to suit your needs. Instead, make sure you understand how it will work and that it best suits your money personality type.