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Posted in Choosing the Right Loan on 18 Jun 2018
Placing your money in the bank is a good way to save. It’s easy to open accounts, it’s relatively easy to change banks based on who offers the most competitive interest rate, and with mobile and online banking we have constant access to our money when we need it.
Going through a bank as the lender for your home loan, however, isn’t always the best option, and some shady banks will take advantage of first time home loan borrowers’ ignorance and eagerness.
With the following skills, you will be able to arm yourself with the knowledge necessary to seek out a home loan that is not only manageable, but will get you the results that will work best for you.
There are a multitude of options to consider when taking out a home loan. But before you can go about making any decisions, it is important to educate yourself.
If you have made it this far, then you have already done an amazing job. Life has a funny way of draining our finances from us in the most unpleasant of ways. So, the fact that you have gotten to the point where you have reached a point where a home loan is a viable option for you, then congratulations!
But all that hard work will quickly be reduced to nothing if you get into a home loan agreement without fully understanding what’s going on, what you’re being charged for or why.
The first step anyone needs to take at this point is to check their credit rating. A credit score is the most important indicator to a potential lender of how much risk it is going to be lending money to the prospective borrower. A good, high credit score will often fetch lower interest rates, whereas a low credit score can land you with significantly higher interest. Not only that, but a credit score can affect how much you are able to borrow from your lender.
If, when you get your credit score you find that it isn’t as high as you would like it to be, there are a number of ways to significantly lower your score in a short amount of time. Generally, about 3 months is all it takes to lower your credit score to an “acceptable” level.
First off is paying your bills on time. This shows that you are a responsible individual when it comes to financial decisions, and that you plan for the future and for expenses that you know are coming up.
Second, don’t apply for additional credit. There are a few reasons for this.
First, opening up new cards lowers your credit age. Your credit age is equal to 15% of your credit score, and with multiple credit accounts open, this percentage decreases with each new account.
Also, when opening a new credit account, an inquiry is placed on your credit report for each new account opened. Even if you’re not approved, or later decide to not accept the card, there will still be a record on your account showing that and inquiry has checked your credit report for an application you made. These inquiries account for 10% of your credit score, and the more of them you have, the less that 10% is worth. It can also increase your credit utilisation, which is possibly the biggest concern where your credit score is concerned – with a whopping 30% of your credit score being concerned without how much of your available credit you’re using.
The third best way to lower your credit score is to pay any outstanding loans or debts you may have. These are similar to bills, except debts and loans isn’t paying money for a service, it’s paying back money you owe. It’s the difference between buying a television and renting it.
Paying back outstanding debt or loans shows that you’re not only responsible, but trustworthy, whereas unpaid debt and loans show that you borrow and use money you don’t have – and then don’t repay it. It makes you a risk, and banks do not like risk.
The simplest way to lower your credit rating is to simply not use your credit card. Some people require credit accounts for various reasons, but we don’t always have to use them. Keeping your credit card balance low shows responsibility and a frugal nature, which banks and loaners find attractive.
Holding onto accounts that have records of good, consistent repayments will also lower your credit score. If you have been successfully making repayments on other loans from one particular account, it won’t do your credit score any favours to switch to another account. Stick with the account that has tangible evidence that you are a responsible, reliable borrower.
A diverse credit with money spread across different asset classes (investment property, stock, etc.) can increase your credit rating, as well as a good debt-to-credit ratio.
There is a plethora of loan options to choose from, and it’s always a good idea to know your options before seeking out a home loan. Currently the options include:
These loans are based around the current cash rates, and the constant flux of which in turn affects the home loan interest rates. The effect of this is that repayments are changing to reflect the interest rates. One month you could have an insanely cheap repayment rate, the next month you could incur huge expense as a result of your interest.
Why would anyone go with such a gamble? The answer is fairly simple really. Because Variable Rate Loans are so inconsistent, it means that there is room to pay off loans and lower their home loan interest rates further. Variable Rate Loans usually come with extra payment and redraw facilities, as well as an offset account. This type of loan is generally attractive to experienced buyers, or people with a steady income and savings.
Popular among people with regular incomes, a Fixed Rate Loan locks in an interest rate for a 1-5-year period.
The benefit of this is that it means there is little trouble thinking about whether the loans can afford to be paid, or when to pay it. However, the interest rate on a fixed rate loan is generally higher than that of a Variable Rate Loan and also doesn’t have the extra repayment or redraw facilities. If you decide you want these facilities at a later date, switching from one loan type to another could incur an additional fee.
Guarantor Loans are a highly risky endeavour, for reasons that are much more personal than financial. Guarantor Loans are for people wanting to borrow more than 80% of the property fee, but not to pay the LMI (Lender’s Mortgage Insurance) fee.
LMI is a one-time upfront payment for a percentage of the property cost, designed to protect the lender should you not make your repayments. What percentage will depend on who you borrow from.
With a Guarantor Loan, rather that pay LMI, the 80%+ loan is acquired by putting up the property of a friend or family member as the collateral for the loan. While this has huge benefits, in that it gets you a sizeable loan without the additional LMI fee, the personal risk is huge, as the bank will go after the property of your guarantor.
It is important to have a long, hard discussion with your potential guarantor before seeking out this kind of loan.
These loans are most commonly given out to freelancers, business owners, and self-employed people who don’t have the regular papers that would be necessary for a home loan. Usually with Low Doc (Low Documentation) Loans, all that is required to secure a loan is a bank statement or BAS (Business Activity Statement). Despite the ease it takes to secure these loans, a Low Doc Loan will usually carry higher home loan interest rates and fees compared to other loan types.
Sometimes also called “Home Equity Loans”, Line of Credit Loans allow borrowers to utilise their mortgage to pay for other commodities or activities, like renovations or a car.
Impulsive borrowers will generally suffer under these kinds of loans, as they extend the length of their loan term, having accidentally borrowed more than they are capable of affording and being able to pay back.
These loans are for people with bad credit history and/or have been unemployed for an extended time period, and still want to borrow more than 80% of a property’s value.
These loans are similar to Low Doc Loans in that they do not use standard loan application data, however Low Doc Loans are normally given to people with good credit history that aren’t looking to borrow 80% of their property’s overall value.
These loans are a solid choice for people with bad credit history or who might not have the financial means to enter the housing market. However, they carry extremely elevated interest rates, so it’s important to plan thoroughly before seeking out a Non-Conforming Loan.
It is important to do your homework. Banks won’t do it for you, and while there is a huge time investment in comparing banks and their home loan interest rates, features, benefits, loan availability, testimonies, etc., the truth is it doesn’t have to be that hard.
Mortgage brokers can be a huge asset to you. A mortgage broker is, putting it mildly, a translator between you and the lender. The first thing they will do is work with you to assess your financial affairs, then build an image of your general credit worth. Once that’s done, they can help you determine what kind of loan would be best for you.
After that, they offer you a variety of home loan options from the various lenders they work with to find a deal that works well for you. They can then even lodge the application for the loan on your behalf, as well as other paperwork!
The service that mortgage brokers offer is phenomenal, making what would normally be a very complex and important financial decision and making it workable by working with you.
However, some people find that because mortgage brokers work on behalf of lenders, they may not get the full picture of what is available on the market. Generally, people who work in the financial industry will do the right thing, but there’s no harm in getting a second opinion if you think your broker might be showing you a limited number of options.
Also, the qualifications and experience that one broker has can be phenomenally different to the qualifications and experience of another broker. It’s a good idea to shop around and ask these vital questions to any broker you might consider hiring:
1) How many lenders do they deal with? This way you make sure you get value for money, and your broker will be able to draw from a number of sources to get their comparison.
2) What are their fees and commissions? This isn’t a rude question in the slightest. If a broker gets a better commission from one source then another, it is possible that they send business to that source, regardless of whether or not it’s the right fit for their client. This isn’t a bad thing, but this is a good question to avoid bias.
3) What will your refinancing costs be? Refinancing costs are separate to the payment that the broker receivers, and more importantly you’re the one being charged for them. It is important to weigh up all your costs and account for them.
4) Are they a member of the MFAA? The Mortgage and Finance Association of Australia (MFAA) offers accreditations to Australian mortgage brokers and has them adhere to a code of conduct encouraging ethical practices.
If you’re interested in pursuing a home loan, Guardian National Mortgage can help. Simply contact us using our contact page or call us on 1300 LOAN STAR or email at