Frequently asked questions about "Loans ..."

  1. What is the maximum amount I can borrow?
  2. Should I get a fixed rate or the variable rate loan?
  3. What is Lenders Mortgage Insurance (LMI)?
  4. What is a split loan?
  5. What is LVR?
  6. What is an Offset account?
  7. What is mortgage insurance and do I have to pay it?
  8. Can I redraw excess funds from the loan?
  9. What are the ongoing fees associated with the loan ?
  10. Can I switch between a fixed rate and a variable rate?
  11. What is a Comparison Rate?
  12. What is the difference between a fixed rate loan and a variable rate loan?

Answer

What is the maximum amount I can borrow?

Each bank calculates your maximum borrowing capacity differently using their own serviceability calculators. We run your figures over all the banks calculators and determine the amounts each bank is willing to offer you. We can also suggest ways to increase your borrowing amount if required. In general, the higher your income and the lower your other liabilities are, the more you can borrow.

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Should I get a fixed rate or the variable rate loan?

It depends on your circumstances and your outlook. Fixed rates are usually a little higher than variable rates so you have to weigh up the alternatives ie comparative cost of each option, the requirement you have for certainty in your repayments, what you believe rates will do in the future, and the question of how long to fix for. Fixed rates have the benefit of giving you full knowledge of what you repayments will be over the term you fix however they also have a number of disadvantages. These include

  1. there is limit to the amount of extra repayments that can be paid off the loan each year. Most lenders limit this to an extra $5K or $10K over your agreed repayments
  2. there may be significant break costs if you have to break the fixed rate period before its expiry date ie if you decide to refinance or sell the security property.
  3. the fixed rate is usually set at time of settlement - not at the time the rate is quoted to you at the beginning of the arrangement of the loan. You can however "lock" the fixed rate upfront however there usually a charge for this and the amount is dependent on the lender you are using.

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What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) is one of the most popular ways to achieve the dream of home ownership sooner for borrowers that do not have a large deposit.

Lenders Mortgage Insurance (LMI) is one of the most popular ways to achieve the dream of home ownership sooner for borrowers that do not have a large deposit. Many lending institutions require borrowers to contribute a 20% deposit before they will agree to provide a loan. This is largely to protect against the risk associated with providing the borrower with the loan in the event that they default.

By using LMI, lenders are able to pass on this risk to a mortgage insurer such as Genworth, which in turn enables them to offer the same loan amount but with less of a deposit.

LMI should not be mistaken for Mortgage Protection Insurance, which covers your mortgage in the event of death, sickness, unemployment or disability. LMI protects lenders against a loss should a borrower default on their home loan.

If the security property is required to be sold as a result of the default, the net proceeds of the sale may not always cover the full balance outstanding on the loan. Should this be the case, the lender is entitled to make an insurance claim to Genworth for the reimbursement of any shortfall, calculated in accordance with the terms of the insurance policy.

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What is a split loan?

A split loan or combination loan brings together the benefits of variable and fixed interest rates into a single home loan. This can be an attractive feature for many borrowers as it allows you to customise the loan and reduce the effect of interest rate changes.

The loan can be split in many ways however 60% variable/ 40% fixed or 50/50 splits are the most common. If you need the security of a fixed rate home loan but want the flexibility of a variable rate loan, then a split loan may be the answer.

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What is LVR?

LVR stands for Loan to valuation Ratio.  This is the measure of the amount of the loan compared to the value of the property. For example, if you have borrowed $320,000 and your property is valued at $400,000, the LVR would be 80%

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What is an Offset account?

A 100% offset account is a separate savings account attached to your home loan. Your income is deposited into the transaction account and you would generally use it for all your daily expenses. The 100% offset account operates like a transaction account with cheque and ATM access.

The balance in the savings account is offset against that owing on your home loan and you only pay interest on the outstanding net balance. Over time, the savings in your offset account can help reduce the loan principal, allowing you to pay off your home loan sooner and build up equity in your property.

In this example the loan balance of $350,000 is offset by the balance of the offset account which is $5000. So in this scenario when the daily interest is calculated by the lender on the home loan the interest will be calculated based on a net balance of $345,000.

Advantages of a 100% offset account

• Savings interest is taxable, but because your offset account balance is used instead to reduce your home loan interest, no tax is payable. You are effectively reducing your tax bill

• The interest rate on your offset account is the same as that applied to your home loan account. This rate is much higher than what you could earn on most savings accounts. The interest rate moves with your loan account rate, ensuring you get maximum benefit from each dollar in your offset account

• The money in the offset account is deducted from the loan balance before interest is calculated. This effectively means that your savings are earning interest at the same interest rate as your home loan

• The offset account is much like a savings account. It offers ATM access and a cheque book

• Available on most mortgage lenders' standard variable and introductory rate mortgages

• Any extra money in your transaction account saves you interest on your home loan, thus shortening the term of the loan

Disadvantages of a 100% offset account

• You may have higher monthly fees attached to the account

• Some mortgage lenders may require you to hold a minimum balance in the account, for example, $2,000 for the offset effect to be calculated

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What is mortgage insurance and do I have to pay it?

Mortgage insurance covers the bank in case you default on your loan repayments. It does not cover you - the borrower. As a general rule, the banks require you to pay for this if the loan amount you are requesting is greater than 80% of the purchase price. The only way to avoid it is to borrow less than 80% or provide additional real estate security to bring the loan to value ratio (LVR) to below 80%.

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Can I redraw excess funds from the loan?

It depends on the actual loan. Most variable rate loans have this facility and the cost varies between $15 and $50 per redraw and the minimum amount is usually $2000. Some loans allow free redraw.

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What are the ongoing fees associated with the loan?

It depends on the actual loan. Most loans have a monthly service fee of around $8 to $10 however others have none. Usually the loans which have a monthly fee have a lower interest rate which can often make them worthwhile. There are also a number of premier package loans on offer by many of the main lenders which charge an ongoing yearly fee of between $295 and $350 and where the benefits are rate discounts and other advantages.

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Can I switch between a fixed rate and a variable rate?

Yes. You can change from a fixed rate to a variable rate, or vice versa, at any time. If you switch from a fixed rate loan, you may need to pay an Administration Fee and an Early Repayment Adjustment.

At the end of a fixed rate period your loan will automatically move to the variable rate (at no cost), or you can switch to another fixed period.

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What is a Comparison Rate?

A Comparison Rate expresses some of the costs of a loan into a single interest rate. The aim of the Comparison Rate is to help consumers make a more informed decision on the costs associated with a loan and help them to compare various loans and services offered by financial institutions and mortgage providers. The formula for calculating a comparison rate is regulated by the National Credit Code and all Australian financial institutions and mortgage providers are required to use the same formula.

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What is the difference between a fixed rate loan and a variable rate loan?

A fixed rate loan is where the interest rate remains the same for a period of time, and at the end of the term, the loan reverts to a variable rate.  A variable rate loan is where the interest rate generally goes up and down according to the fluctuations in market rates.