Frequently Asked Questions
Why should I use a broker for my home loan?
A finance broker (also called a mortgage broker) works with a number of lenders. When you discuss your lending requirements with one of the VERIDEX Finance Broking Finance Managers it’s as though you’re speaking with a number of financial institutions at the same time. Our goal is to ensure you receive quality information and guidance so you can choose the most appropriate lender for your finance requirements.
Which bank is the best?
This is a common question that depends entirely upon your financial position and what kind of loan you require. Most lenders offer a variety of facilities and products to choose from and their differences depend upon the lender, their target client and their outlook for the future. It should always be remembered that the bank with the lowest interest rate isn’t necessarily the ‘best’ lender to choose.
What does a settlement agent do?
A settlement agent assists in settling the purchase/sale of real estate property. Their role in the process is to ensure the property is correctly transferred from ownership of the seller to the buyer.
How much deposit do I need?
All property purchases will require the purchaser to provide a deposit in the form of equity or cash. Many lenders require as little as 5% of the purchase price to be put forward as a deposit.
What fees are charged when I get a home loan?
Lenders charge certain fees to establish a home loan. They can include an application fee, settlement attendance fee, valuation fee, legal fees amongst others. Many lenders will waive or reduce these fees in circumstances where the amount borrowed exceeds a minimum level.
What’s a Deferred Establishment Fee?
A Deferred Establishment Fee (DEF) is charged by many lenders if a loan is repaid within a predetermined time frame. Often this fee is a flat dollar amount or a percentage of the original loan amount.
What’s a Discharge Fee?
A Discharge Fee is charged by almost all lenders when a mortgage is discharged. This means that a loan is paid out and the security held by the bank is released.
What’s an Economic Cost?
An Economic Cost is a cost charged by the lender when a fixed rate loan is repaid prior to the completion of the fixed rate period. The cost is representative of the cost or penalty that is incurred by the lender by having their principle returned before the end of the fixed rate period.
What is a Comparison Rate?
A Comparison Rate is an attempt to show the true cost of a loan. The Comparison Rate is calculated by including the interest rate for the loan and many fees or charges associated with establishing the loan.
How does a Construction Loan work?
A construction loan funds the building of a dwelling in installments. A builder will request part payment at certain milestones throughout construction. A lender will pay an installment to the builder once they receive a builder’s invoice and that invoice is authorized by the borrower. Throughout a normal construction loan there can be between 3 and 5 installments.
What is equity?
Equity is simply the difference between the value of a property and the amount owed on the same property. The equity of a property may be used in place of a cash deposit to purchase further properties. It may also be ‘cashed out’.
Definitions
First Home Owner’s Grant
Often abbreviated to ‘FHOG’. It is a joint initiative between State and Federal Governments designed to assist first home buyers in purchasing their home. In it’s basic form the FHOG consists of a cash grant of $7,000 (WA) and a reduction or even exemption from Stamp Duty. The Stamp Duty reduction or exemption differs from State to State and is based on the purchase price of the property.
Fixed Rate
The term ‘fixed rate’ refers to the interest rate applied to your home loan. The fact it is fixed means the interest rate applied to calculate your repayments does not change. In Australia most lenders will offer you the choice of fixing your interest rate for between 1 and 5 years. Some lenders offer longer fixed rate terms. A fixed rate offers protection against fluctuating repayments based on changing interest rates.
Variable Rate
The term ‘variable rate’ refers to the ability of the lender to alter the interest rate applied to your home loan. Historically, lenders have only altered interest rates in response to changes to the Official Cash Rate by the Reserve Bank of Australia. There is no law that enforces such a response and lenders are able to change the variable rate applied to a home loan at their own discretion.
Principle & Interest Repayments
The majority of home loans are repaid through regular ‘principle and interest’ repayments. This means the monthly repayment consists of 2 parts – 1 of principle and 1 of interest. The principle portion is directed towards the capital borrowed from the lender. The interest portion is the cost incurred throughout the month for borrowing the money based on the interest rate charged.
Interest Only Repayments
Most investment loans are established as interest only loans. This means your monthly loan payments consist only of interest charged on the capital borrowed. There is no regular repayment of the capital.
Uniform Consumer Credit Code
This Code is often referred to as the UCCC. It is a Federal Law that offers various protections to borrowers who are borrowing money to purchase their owner occupied house. These protections are predominantly concerned with the treatment of borrowers who are financially distressed. They outline strict processes that must be followed by lenders when recouping late payments.
Loan to Value Ratio
This term is often referred to as LVR. It represents the proportion of debt against the value of the underlying security. For example, if your home loan is $250,000 and the value of your house is $500,000 then the LVR is calculated by dividing the loan by the value. In this case the answer is 0.5 which means the loans represents 50% of the value of your house. This ratio is important to lenders as they never want to lend more than can be recouped through the sale of the property.
Lender’s Mortgage Insurance
Referred to as LMI. This type of insurance is obtained by lenders when a small deposit is put forward by borrowers. Banks almost always obtain LMI when they lend greater than 80% of the value of the security property. This insurance policy is designed to protect the lender and NOT the borrower. It is a once off cost that is passed onto the borrower.
Low Doc Loans
A low doc loan can be used by borrowers who are self-employed when they need to borrow less than 80% of the value of the underlying security property. The term ‘low doc’ relates to the reduced documentation required by lenders to prove the borrower’s income. A traditional ‘full doc’ loan requires the past 2 years tax returns and financial statements from the borrower to prove income. A ‘low doc’ loan usually requires a single page declaration from the borrower stating their income.
Non-Conforming Loans
This term relatest to a range of circumstances surrounding a lending scenario that makes it unattractive to a mainstream lender. That is, the loan does not conform to the lender’s requirements. Examples of a loan that does not conform could include the type of security property being used, the employment situation of the borrower or the financil history of the borrower. There is a small group of lenders specialising in accommodating this sector of the market. They are commonly referred to as ‘non-conforming lenders’.
Pre-Approval
Borrowers can often obtain ‘pre-approval’ for their loan before locating the property they would like to purchase. This involves presenting a full application to the lender with the exception of the details of the security property. Pre-approvals are quite popular amongst borrowers as it gives them comfort in knowing that a lender will provide them with the finance they are after.
Redraw Facility
A redraw facility allows borrowers to withdraw additional payments they have made to their loan. The additional payments must be over and above the minimum repayment required by the lender.