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Have a question about a Home Loan? We have the answers!

A variable interest rate (sometimes also called an “adjustable” or “floating” rate) is an interest rate on a loan that fluctuates (up or down) over time because it is based on an underlying cost of funds to the lender which may change periodically.

A fixed interest rate loan is a loan where the interest rate doesn’t fluctuate during the fixed rate period of the loan. This allows the borrower to accurately predict their future payments. Fixed rates are generally available for a term of 1 to 5 years. Some lenders may now offer up to 10 years fixed rates.

After a fixed rate term has finished the loan usually converts to a variable rate for the remainder of the loan term. The borrower may also choose to fix for a further term.

Generally speaking, if interest rates are relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate. On the other hand, if interest rates are on the decline, then it would be better to have a variable rate loan.

Often there is greatly flexibility on a variable rate loan with access to offset or redraw features.

Often banks are able to raise long-term funding at a lower cost than short-term funding.

 

Adjustable-rate loans are generally considered riskier than fixed-rate loans because they are unpredictable. You might start out with a low rate on an adjustable-rate loan, but a rise in interest rates over time could greatly increase the cost of your loan.

Borrowers can usually switch from a variable interest rate to a fixed rate with their existing lender, which avoids any penalties. Costs may apply.

Yes, it may be possible to leave your fixed rate mortgage early however most lenders will apply an early repayment charge or a break cost. If you’re still in the Early Repayment Charge period on your mortgage, a lender might charge fees even if you only want to change the amount you are borrowing.

Where an existing borrower has access to savings after they have purchased a property or accumulate a surplus each month (“excess funds”), these excess funds may be used to reduce the total interest cost on their home loan.

This can be achieved by being able to deposit excess funds or make additional regular repayments onto a home loan which can be accessed later (Redraw).

Another option is to place excess funds into a separate savings account with their lender where the lender will reduce the amount of interest charged on the loan by the same amount being held in the savings account (Offset).

Having a loan with Redraw or Offset does not reduce the regular loan repayments you are required to make.

Having funds available for Redraw or held in an Offset account will reduce your interest cost and reduce your loan term. 

Some borrowers like to see clearly their savings held separately to their loan so an Offset account is better suited. An offset account is often used for a particular savings purpose (maybe a new car, holiday or renovations) so having the savings separate to the loan account is preferred.

Each lender will have separate policies on whether offset or redraw availability incurs an additional cost. Often these features may be included at no cost however the interest rate may be higher. Often loans described as “basic loans” by lenders will not include features such as offset and be made available at a lower interest rate.

Offset accounts are often more accessible (online, debit card, ATM or branch) whereas accessing funds held in a loan with Redraw may require a few more steps. Some lenders may limit the size and number of withdrawals from loans with Redraw. Fees may apply in both cases.

Yes. Some lenders will allow more than one Offset account however most will only allow one.

From time to time, both Federal and State Governments across Australia provide schemes and initiatives to make acquiring or building a home easier to achieve.

The First Home Owner Grant (FHOG) is a State based scheme funded and administered by States and Territories to assist home buyers purchase their first home. Details of FHOG are available at http://www.firsthome.gov.au.

These schemes may change from time-to-time and may be available for only a limited period. Below is a list of the current Government and State schemes and incentives:

The Australian Government website https://moneysmart.gov.au/ has useful resources and tools to manage money, plan for future, grow wealth, and reduce debt, including:

  • buying a house;
  • investor toolkit;
  • paying off mortgage sooner;
  • switching a home loan;
  • budget planner;
  • superannuation calculator;
  • financial advice;
  • saving for an emergency fund.

A construction loan gives you access to money progressively as you complete different stages of the construction, in line with your fixed price building contract. In most cases it is based on Interest Only payments until the completion of the project, at which stage the loan will revert to a Principal and Interest Loan.

There are usually 6 stages of a build:

Deposit: Builders normally require a 5-10% deposit, to be paid upon signing of the building contract. At this stage you should have the construction loan approved by a lender.

Slab stage: Normally 10% of funds are required to measure and pour the slab.

Frame stage:  is where the exterior frame, walls, support structures, insulation and gutters are put in place. This is usually 20% of the funds.

Lock-Up stage: Will see the remaining windows, doors and external walls and roofing is completed where you can actually lock up your property. Approximately 20% of funds are required.

Fixtures/Fit out: Internal fixtures and fittings are installed such as benchtops, internal cupboards, power points, painting and all electrical and plumbing fixtures and painting occurs. Approximately 25% is required at this stage.

Completion: The final stage involves fencing and site clean up and usually requires around 10-15%

As each stage of the build is completed the builder will provide you with an invoice. This will align with your progress payments schedule within the building contract. The lender may complete a valuation to ensure the work has been completed prior to paying the invoice. As the progress payments are made the loan amount will increase and interest on the loan becomes payable.  

A bridging loan is a short-term loan (usually 3-12 months) designed to allow borrowers to fund the purchase or construction of a new property prior to having completed the sale of their existing property.

Generally, no additional repayments are required whilst the client holds both properties and interest on the bridging loan accumulates until the property is sold. However, some lenders may require an ongoing interest payment to be made.

The interest rate is usually 2% – 3% higher than the standard variable rate.

Here’s an example:

  • Existing loan of $300,000 with security property sold for $950,000 with 3 months settlement
  • Purchase new home for $1,000,000 settling in 30 days
  • Peak Debt is $1,325,000 ($1,300,000 + est. 3 months interest)
  • End Debt of $425,000 ($1,325,000 less net sale proceeds of $900,000)

    On sale of the existing property the Bridging Loan will be reduced to $425,000 and converted to P & I over the agreed loan term (usually 25 to 30 years).

At time of application this scenario would be assessed by the lender at the End Debt i.e. $425,000 over P & I term. The benefit to the borrower is they do not need to evidence serviceability at the Peak Debt.

Solicitors and conveyancers are different, and it’s important to have the right one on your team, to avoid paying too much while still getting the advice you need. 

Buying property is one of the biggest financial decisions most of us will make in our lifetime – it’s something you want to get right.  

Every Australian state and territory has different laws, forms, regulations, and taxes associated with purchasing property, so having either a solicitor or a conveyancer will help the whole process run smoothly.  

Conveyancers 

Although there is a licensing process for conveyancers, they do not have to be legal professionals so are cheaper to hire. However, they can only provide information relating to property, so if you have additional legal questions, you might have to search elsewhere.  

For a straightforward property purchase, a conveyancer can do the job. Their main responsibilities include giving advice and information about the sale of property, preparing documentation and conducting any settlement processes.  

Conveyancers must cease to act for a person as soon as the matter moves beyond conveyancing, when this happens, they must refer you to a solicitor for advice. 

Solicitors 

While conveyancers are limited to advising on your property purchase, solicitors can provide you with a wide range of legal advice in addition to your conveyancing needs, and may be necessary if your property transaction isn’t straightforward. 

If there are other matters that affect the transaction like family law, asset protection, asset structuring, tax law or estate planning, you will need a solicitor’s advice. 

Solicitors are more expensive, but the investment may be worthwhile if you anticipate any legal issues – having this established relationship with a solicitor means you won’t have to scramble for one later. 

Stamp duty, also referred to as ‘transfer duty’, is revenue levied by states on transactions relating to the transfer of land or property. It is paid upfront and needs to be budgeted for, in addition to your loan deposit.  

The amount of stamp duty you are required to pay differs in each state, however there are three universal factors, along with the value of the property, that determine how much stamp duty you will pay. Contributing factors include: 

  1. Whether or not the property is a primary residence or investment property. 
  2. Whether or not you’re a first home buyer.
  3. If you are purchasing an established home, a new home or vacant land. 

There are several stamp duty calculators available online that take the guesswork out of budgeting for a property. Factoring in this additional cost can’t be overlooked when you’re considering your capacity to repay a loan.  

However, in a bid by state governments to stimulate home ownership and growth, there are a range of tax concessions available to reduce stamp duty.  

Again, exact amounts differ across each state, but those likely to benefit the most are first home buyers and those opting to buy a new home.  

When taking out a mortgage, many people forget to consider the fees and expenses that come on top of the purchase price of the property.  

Here are some of the extra costs that you’ll need to consider when you take out a home loan. 

Home loan application fees 

Most lenders charge a home loan application fee. The fee will depend on the loan you are applying for and the lender.  

Home loan application fees cover: 

  • loan contracts  
  • property title checks 
  • credit checks 
  • attending a settlement. 

Mortgage fees and costs  

  • Mortgage establishment fees – lenders generally charge a mortgage establishment fee, which is a fee for setting up a mortgage. 
  • Property valuation fee – a third party chosen by the lender, is appointed to determine the value of your land and improvements. 
  • Mortgage registration – your mortgage deed needs to be registered with the government. Some State Governments charge stamp duty to register your mortgage. 
  • Lenders Mortgage Insurance – if you don’t have 20% of the purchase price or the value of the property, the lender will require you to pay for a lenders mortgage insurance policy that covers their risk in the event you default on your repayments. 

Property fees and costs 

  • Building, pest and electrical inspection fees – it’s wise to have your property inspected for any structural or electrical problems and for pests.  
  • Registration of transfer fee – the new owner of the property needs to be registered at the land titles office. 
  • Legal fees – you generally need to pay a solicitor or settlement agent to handle the transfer of ownership of the property on your behalf. 
  • Home and contents insurance – most homeowners insure their home and contents against a range of threats, such as burglary, fire, storm, etc. Lenders insist that your property is insured while you have a mortgage. 
  • Life and income protection insurance – borrowers should consider protecting their incomes and themselves while they have a mortgage. 
  • Utility costs – connecting electricity, gas and telephone can attract a fee. 
  • Council rates – your local council charges rates to cover garbage collection and a host of other services. 
  • Water rates – the water corporation charges rates for the supply and upkeep of water to your property. 
  • Strata / body corporate fees – if you buy an apartment or strata titled property, body corporate fees are charged, and some fees can be significant, particularly if the building is in need of a major work, or if there are lifts, pools and other communal facilities. 
  • Maintenance costs – don’t forget to make provision for regular maintenance on your home, even if you decide not to undertake significant renovation. 

 

Buying a property is more complex than most other purchases you’ll ever make. Here are the different parties who may be involved in your home-buying process and how you can leverage their valuable experience and knowledge.. 

Finance broker  

Brokers act as a liaison between you and the lender. They will find out about your finances and your property goals, and search for and negotiate a loan product that matches your needs. Not only will they do the legwork and ensure your loan is processed as smoothly as possible, but they are there to guide you throughout the entire process. 

Real estate agent  

Unless you’re working with a private vendor, meeting a real estate agent is inevitable when it comes to purchasing a property.  

Hired by the vendor, or seller, the real estate agent’s role is to advise the vendor on preparing the property for sale, market and communicate about the property, and negotiate with potential buyers. 

Insurance companies  

A property purchase is a high-value purchase and long-term financial commitment making risk management vital. Insurance, including mortgage protection and property insurance, will help you avoid being hit with a major financial burden should anything not go according to plan. Many finance brokers can deal with insurance as well or will recommend an insurance broker who can. 

Conveyancer 

The legal aspect of a property purchase is taken care of by a licensed and qualified conveyancer. If they are a solicitor, they can also provide legal advice.  

Their role is to prepare the documents to ensure that transfer of ownership of the property has met the legal requirements in your state or territory. 

Property valuer  

Knowing the value of a property is essential in a loan application, so a valuer can play a huge role in the property buying process. A lender will often engage an impartial valuer to ensure that the buyer and the lender will know what loan amount may be warranted. The value is based on the property and location, as well as the current market. 

Pest and building inspectors  

Without the services of pest and building inspectors, a homebuyer’s worst nightmare – finding out the property they have bought requires costly renovations or pest treatment – may come true. Organising a pre-purchase inspection is essential.  

If the property requires structural, wiring or repair work, these inspections can stop you from making a costly mistake or, if the property is still your dream home but just needs a little work, can provide a valuable bargaining chip.

Lenders  

If you need to borrow money to make your purchase, you will need a lender, whether it’s a major bank, a second-tier or non-major, or a specialist lender for more difficult funding proposals