Note: There are only two major LMI providers in Australia. LMI agreements with each of them vary only very slightly from one lender to another but the conditions each provider requires do vary somewhat. So if you are knocked back by the LMI with one lender you may have a chance with another lender that uses the other provider.  As brokers, we are aware of which insurers each lender on our panel uses and so may be able to assist you decide which LMI provider, and so which lenders would consider your application most favourably.

The fee for Lenders' Mortgage Insurance is paid by the borrower as a once only fee at loan settlement and varies depending on the value of the property being purchased and the size of the borrower's deposit. This is a graduated scale increasing on both property value and percentage borrowed so you might pay 0.7% for an 83% LVR on a $300,000 value ie:$2100 whereas you could pay 2% or more on a 95% LVR at $500,000 ie:$10,000. LMI is more difficult to obtain and more expensive for loans of $500,000.

The insurers place various conditions on applications and among these are length of employment, income tests and deposit conditions. For example if your deposit is from the sale of a house, you will be expected to show evidence of this. If it is from savings, you will again be expected to establish that you have saved that amount (or at least 3% or 5% of loan amount depending on insurer) over a minimum three months. They also restrict maximum lending (LVR) into various locations. For example, regional centres are typically 90 to 95%, while smaller centres may be 85%, and inner city may be 65%. It is important to keep the LMI policy in mind, as this almost always over-rides the individual lender's policy. - Return to top

TYPES OF INTEREST RATES

Loans come in a variety of guises. However the loan types shouldn't be confused with the Interest type.  Interest types are;

• principal and interest (P&I) - here your loan payment covers the interest charge plus some of the original loan amount.  Thus reducing the loan balance over the life of the loan;  
• interest only (IO)  - whereby you agree to pay only the interest charge for a specified period, typically 5 years.  Most loans (except most lines of credit) revert to P&I after some period,
• variable home loans - whereby the interest rate charged moves up and down in line with certain indicators, typically the Reserve Bank Cash Rate.  So if the Cash Rate increases .25% then you can expect your home loan rate to increase by approximately the same amount .25% (though from time to time lenders do take changes in rates to disguise their own increase in margins - or highlight their reduction in margins.).  Some rates are based on other indicators and you should understand the implications of this;
• fixed rate loans - which lock you into a given rate for a specified period, typically between 1 & 5 years - though if you want longer periods (up to ten years) we can arrange them for you.  So even if the variable rate increases by 5% you are protected and pay the rate you agreed at the outset until the end of the fixed rate period.  However you are locked in, even if the variable rate decreases by 5% and in these situations it can be very expensive to 'break' your fixed loan.

So it is possible to have a mixture of the above eg: Fixed for 3 years with  Interest Only or 25 years variable with Principal & Interest and almost any combination even part fixed and part variable (sometime referred to as a split). - Return to top

TYPES OF LOANS

Competition in the market place has not only seen lower margins for lenders, but a greater diversity of features and additional benefits being offered to attract your business.  Superficially this would appear to be beneficial for you the borrower.  However the features, discounted rates and variations in fee structures often simply make it much more difficult to do direct comparisons between products.

Claims such "pay your loan off quicker" are common place and often they are quite incorrect, especially if you are paying higher interest rates or ongoing fees to obtain the so-called benefit.  For example, on a $100,000 home loan a $300 annual fee (typical to most professional packages) is  the equivalent of .30% in additional interest rate.  So a 6.70% rate with a $300 annual fee is actually 7.0% on a $100,000 loan.

A line of credit (LOC) is essentially a perpetual interest only loan - although by its very nature there is nothing to restrict you reducing the principal at any time either by lump sum or just monthly salary deposits. Thus if you have a line of credit for $300,000 on which you owe $250,000, you only pay interest on the $250,000 you have drawn. When linked to a cheque and credit card facility and with salary crediting, your line of credit provides the same kind of flexibility as an offset account. 

In fact it is generally more flexible. Provided that the line of credit allows you to capitalise interest, you don't even have to make repayments. Instead, when interest is charged to your account it is added to the balance of your loan. Thus for instance using the example above, if you need to pay $1,500 for interest on the $250,000, instead of being required to pay that amount into the loan, at the time that you would otherwise be required to pay interest, your balance simply becomes $251,500 for you to pay back when you like. But of course if your credit limit is $300,000 and you've already borrowed to that limit, the lender is going to want to see some payments into your account to service the interest.

As you can see, lines of credit are one of the most convenient forms of credit. They are also as effective and simpler than offset accounts. Often lenders will tell you that an offset account will save you thousands off your loan – because you're not charged interest on money you don’t need to borrow. But precisely the same thing is possible – usually more simply – using a line of credit. 

Remember some people have trouble not spending money when its there.  If that sounds like you, its best that you avoid a line of credit and submit yourself to the discipline of having to make regular payments of a size you have previously planned to make.  Also keep in mind that if the borrowing on your line of credit is for investment purposes, interest on it will, in the normal course of events be tax deductible. In this case, you should be wary of attaching your credit card to the line of credit as some of the borrowing will then no longer be for investment purposes.  This will complicate the calculation of your tax deductions for interest as some of the loan will remain investment related, but some will be related to personal expenditure. Where there's a mix of investment and non-investment borrowing it's usually preferable to have separate accounts for each kind of borrowing. 

An 'offset' account is a sophisticated way of 'fine tuning' your lending requirements to your earnings and your daily spending. In addition to your home loan, you have a transaction account with the same financial institution. You deposit your income into the transaction account and use it for all your daily expenses, usually through a linked card or cheque account. Any money in this account is offset against the amount owing on your home loan and you only pay interest on the outstanding balance. So say, for example, that you have a home loan of $250,000 and you have a balance of $10,000 in your transaction account, you only pay interest on $240,000. Interest is calculated on a daily basis. 

Offset accounts come in many guises and you should be wary of 'partial offsets' as opposed to 100% offsets. Partial as it's name implies, means that you don't get the full interest benefit and in some circumstances the benefit is less than what you would gain from a standard interest bearing transaction account. Even a 100% offset account can be a trap if it comes at a higher interest rate than what is otherwise available to you. See our first newsletter. 

Particularly where the expenditure on your offset account is personal and it is offset against an investment loan, there are specific taxation implications upon which we recommend you seek professional advice.

All-in-one accounts are usually a single home loan account that allows direct salary deposits and some withdrawal functions - these are often limited to a few ATM or transfers per month and a linked credit card account. The potential savings are similar to the above however be aware that some accounts are so limited you may need a standard transaction account - and fees if applicable must be taken into account when comparing products.

There are some basic loans being offered that provide free unlimited redraw and unlimited principal reductions. So theoretically you could pay your salary into the loan account and withdraw as you require the funds or by using your credit card for monthly expenses then make an end of month payment into your credit card. So a loan like this can act very much like an all-in-one account, although you have to consider possible credit card and transaction account costs.

Finally, remember that many of these accounts require you to exercise discipline in their use, if your long term ambition is to repay your loan principal. - Return to top

•  Payslips must be most recent and where multiple are required they must be consecutive.  They must clearly show your employers name, your name and preferably annual salary or YTD figure that allows an accurate annual figure to be calculated.  If your pay slip does not comply please provide alternative documents (check specifics)  normally a signed letter from employer on letterhead.
•  Statements unless otherwise stated must be original printed (not internet) statements and must be complete document (all pages) showing account numbers, balance, limit and transactions for the period specified.  Lender's will require an explanation where credit card or overdraft accounts exceed authorised limit.
• If the lender does not allow in branch identification then we require copies of identity documents that must be correctly certified and clearly show certifiers details, document number and date of issue.  If you are a non-resident or Aussie expat then Australian consular staff are almost always the best certification option - check the lender's ( or state office of revenue) requirements closely.  Always scan or fax photo documents in photo mode, the image must be clear.  It sometimes help to enlarge x 2 the image.    If your name has changed through marriage or divorce please provide a marriage certificate or other verification.  In some cases a statutory declaration will suffice.

Important Stages

Indicative, Pre-Approval or In-principal
An Indicative or Pre-Approval or Homeseeker Loan is not a full approval.  In some cases the lender has not even checked the acceptability of your employment or income.   Also note that if your circumstances change such as  employment, your deposit reduces, you enter into a car or personal loan etc, any of these could jeopardise your loan approval.  Likewise the interest rate and product quoted at pre-approval may very well change.  Fixed rates are not guaranteed unless you have taken the rate-lock option usually costing  0.15% of the loan amount.

Conditional Approvals
These are normally issued once the lender has viewed the full application and supporting documents.  These are usually subject to a suitable valuation report or other specified requirements.  If you fail to provide the required information the loan process will not proceed from that point.  The lender's valuation is one of  the final hurdles, you do not have a loan until the valuation meets the minimum required or you sufficient funds to cover the shortfall. If your approval is subject to LMI then the mortgage insurer will not assess the application until after the valuation.  They can (and often do) impose additional conditions or may even reject the loan, in which case that rejection will apply to all lenders who use that insurer - this can be very serious. We will have done everything we can to ensure that won't happen, however it is vital that you recognise that your approval in complete only when it is 'unconditional'.

The cooling off period.  This varies from state to state and is stipulated in your contract. Extensions to the period can be negotiated and are very common.  Never waive your cooling off option without discussing with us and your solicitor.  Lenders make no commitment and many often fail to provide an approval within the cooling off period (some lenders are currently taking 15 days just to arrange a valuation).  If you have an in-principal approval in place prior to entering into the contract your chances are greatly improved.  Once the cooling off period expires you must either proceed or withdraw from the deal - it would be very inadvisable to continue with a contract without finance approval - the legal implications are very serious and extend far beyond just losing your deposit.

Settlement Process
The normal settlement period seems like weeks away, please do not become complacent by that.  At some times lenders can be overloaded either with applications or system failure and this can result in extended delays - maybe weeks.  At these times a single incorrect piece of information from you which if it were to happen at a critical stage can result in delayed settlement with the potential for penalty costs against you.  As many as 10% of settlements are delayed and lenders will rarely accept responsibility for any costs you incur as a result of these delays.

The mortgage documents are a contract and as such you should seek legal advice on the contract and it's terms. The MFAA strongly advises mortgage brokers not to provide any advice in regards to the mortgage documents. Where possible we will check the documents prior to them being sent to you however many lenders will not allow this and will send them direct to you. Please ensure that the name/s appearing on the contract of sale is exactly the same as the name used for the applicants for the loan eg: William Stuart Smith is NOT the same as William S Smith. When you receive your letter of offer check the details again for accuracy of names and addresses, loan type and interest charges.  The mortgage documents will be issued on the the basis of the offer,  having documents re-issued can waste several valuable days.   If your loan should be Interest Only - this must be correct prior to settlement as it is not a simple (cheap) matter to change after settlement.

Travel / Inaccessibility
If you plan to be away or otherwise unavailable during the process you should reconsider either the process or the travel. While we will do everything we can to ensure that everything fits with your plans, however last minute, unforeseen hiccups do occur and we accept no responsibility for any delays or costs that may be incurred as a result of your being away from your normal residence/work place.

Finally
We will be in regular contact with you through the process with updates and notifications of progress. We fully understand your anxiety and at times your frustrations after all we all have home loans ourselves. We are also dealing day in and day out with other people going through the same process and at times our lenders can be less than cooperative and so we share your frustrations.  We are regularly monitoring (at least daily), checking and where necessary escalating your application. If at times we appear hesitant to call the lender that will be because from our recent experience we know that call may mean a 60 minute delay on hold only to be told what we already know. Unlike the bank staff who we have to deal with, our sole concern is the timely settlement of your loan - after all that's when we get paid.