Why use a Mortgage Broker

Mortgage brokers guide their clients through the loan process. The broker has vast and intimate knowledge of the lenders requirements and the basis upon which an approval is made. They are in a good position to compare and recommend suitable loan products from different lenders that will meet a clients’ financial needs.

Once a decision is made as to the lender and product, the broker submits the loan application then follows and assists the progress of the application. On approval the broker managers the process and after settlement becomes the contact point for the life of the loan.

A broker can save time, effort and money in selecting a suitable home or commercial loan.

 

In early 2010, the National Consumer Credit Protection Act, (NCCP) was established to protect borrowers and ensure ethical and professional standards in the finance industry. Protection for consumers is enhanced under the NCCP placing responsible lending obligations and minimum education requirements on mortgage brokers. This is to ensure that the credit contract is ‘not unsuitable’ for the consumer.

All Alpha Mortgage Manager brokers are authorised Credit Representatives as required by ASIC.

Do you charge a fee?

No fee is charged to the client for our services.

We are paid by the Lender when we successfully settle a loan at no extra cost to the borrower.

Banks and Lenders

We are accredited to lodge loans and consult with all major banks, a number of secondary banks, building societies, credit unions and private lenders.

Principal lenders include:

 

Types of Loan Approvals

Conditional Approval

When the loan is Conditionally Approved it will be approved once some outstanding conditions are satisfied (eg verification of information, supply of additional information or valuation). When these conditions are met the Lender issues the Pre-Approval or the Unconditional Approval.

Pre Approval / Approval in Principle

This form of approval is used when the client has not located a property. Once a property is located and it is suitable to the lender as security, an unconditional approval can be given.

There is no cost to apply for a pre approval and it has the advantage of establishing the client’s credentials as a serious buyer and may give the intending purchaser a leverage to negotiate.

Unconditional / Formal Approval

The Lender is satisfied that all the conditions have been met and the Lender is content to proceed with the loan. This is the stage when the client is in a position with the agreement of the conveyancer or solicitor to enter into a binding contract to buy or build.

Conveyancers and Solicitors

Conveyancers and Solicitors are qualified to deal with the most complex conveyancing transactions and can prevent the risks associated with conveyancing. If they make a mistake you should be compensated by their insurance. Ensure that you seek their services early in the buying process and especially before committing to any purchase.

Over the years we have worked closely with a number of solicitors and conveyancers and are always  pleased to recommend those we have found professional to deal with.

Loan to Value Ratio

The Loan to Value Ratio known as the LVR is the term used to describe the debt level held against the value of security property/ies, expressed as a percentage.

Lenders will set their policy based on LVRs for certain loan types and purposes.

As an example, a loan of $285,000 and using a property valued at $ 300 000 as security the LVR = $285,000/ $300,000 X 100 =  95%.

Lenders Mortgage Insurance (LMI)

Lenders take on a higher risk when the loan amount is a high proportion of the security, in other words the LVR (see Loan Value Ratio) is high, generally over 80%. For these higher risk loans, unless the bank is insured against the borrower’s default, banking regulation restricts the total amount the bank can lend. Overcoming this restriction is the reason for LMI.

LMI is usually charged on loans over 80% LVR, without LMI borrowers would not be able to borrow over this percentage.

LMI is paid by the borrower and insures the lender against loss, it is  important to note that LMI does not cover the borrower. If the borrower is in default and the lender repossess and sells the property for less than the outstanding amount and costs, the LMI insurer will take action against the borrower to recover that loss.

The LMI fee progressively increase as the LVR and the Loan Amount increases.

In most cases LMI can be added to the loan (capitalised). Borrowers may avoid paying LMI if they are able to have someone guarantee a part of the loan (see Family Guarantee).

Acceptable Borrowers

Employment History

All Lenders and Mortgage Insurers require stability of employment. Ideally they would prefer to see an applicant in the same position or industry for a period of at least twelve months. Even so there a number of banks that will accept and approve loans for applicants that are on probation, just completed a course, having transferable skills and especially where the deposit is a large percentage of the purchase price, a great deal depends on the circumstances.

Credit History

Most lenders on the receipt of a loan application will obtain a report on the applicant’s credit history from a consumer credit information provider. The report that covers the past 5 years, details all previous credit applications (loans, credit cards, phones etc) and if there have been any irregularities in repayments.

The lender will then assign a credit score to the applicant having regard to the number of applications for credit, the number of overdue debts and any failure to repay (defaults). The score will determine whether or not the lender will offer the applicant a loan.

Brokers can advise clients on their credit scores, what is their likelihood is of obtaining a loan, which lenders credit score and how to improve their score. Anyone can order a free copy of their file from www.mycreditfile.com.au.

Savings

Where the LVR (see Loan to Value Ratio) is > 85%, most lenders will require confirmation that at least 5% of the purchase price has been saved/held by the applicant over three months.

Gifts

A person may provide extra funds (but not a loan) to assist the borrower purchase a property. In this case the lender will require evidence, usually a letter and sometimes a statutory declaration , stating that they are giving a non refundable gift.

Serviceability

In most circumstances, Lenders will require that the applicant’s income is sufficient to repay the loan, this is known as serviceability. Each lender takes into account different factors and the broker is in an ideal position to recommend those lenders which a particular client can demonstrate serviceability.

Family Guarantee

The Family Guarantee, also known as the Family Pledge, allows a family member, typically a parent, to guarantee a specific amount of another family member’s home loan.

This guarantee is supported by a mortgage over the parent’s property (guarantee) and allows borrowing up to 100% of the purchase price plus costs. The guarantee is typically limited by the Lender to a maximum of 20% of the purchase price plus costs. The loan can be  split, one part being 80% of the new purchase and secured by the new purchase property, the other part being the remaining funds needed and secured by the guarantor’s property.

With a guarantee there is no need for LMI, (see Lenders Mortgage Insurance), so the savings can be substantial.

If the borrower defaults then the primary security will be  sold by the bank. If the borrower cannot pay  the shortfall, if any, then this amount will be required to be paid by the guarantor but only up to a maximum as specified under the limited guarantee.

Deposit Bond

A Deposit Bond is bought by a purchaser from an Insurance Company and is a substitute for the cash deposit. It is predominately used in those situations where the purchaser has insufficient funds, prefers not to use their own funds or for an off the plan purchase.

If the purchaser fails to complete the purchase of the property, the vendor will receive the value of the Bond from the insurer and the insurer then in turn seeks reimbursement for the guarantee from the purchaser.

Stamp Duty

Every State requires stamp duty to be paid on the transfer of dutiable property. All lenders will require that the stamp duty be paid on or before settlement.

Please contact our office for the applicable stamp duty for all states.

 For NSW there is a calculator on the New South Wales Office of State Revenue website www.osr.nsw.gov.au.

Home Buyer Benefits

Benefits vary between Australian states and change from time to time.

For NSW, concessions/grants are only available to new home buyers.

As a general guide concessions/grants are:

1. First Home Buyers of Newly Constructed Homes

• For purchaseses up to $750,000: a $10,000 grant.

2. First Home - New Home Stamp Duty Exemption/Concession

• Stamp Duty exemption for purchases up to $550,000 and for land up to $350,000.

• Concession (reduced duty) where the purchase is between $550,000 and $650,000 and for land between $350,000 and $450,000.

3. NSW New Home Grant Scheme: Any Other Purchasers of Newly Constructed Houses except First Home Buyers.

• A $5,000 grant to any entity for purchases up to $650,000 and for vacant land up to $450,000.

 

For a full list of conditions contact the applicable state government office where the property is situated. In New South Wales visit the Office of State Revenue.

Valuation

The lender may seek to check the value of the property for mortgage purposes. The valuation may range from a desktop valuation (comparing the value to other recent sales on their databases in the local neighbourhood) to a full valuation by a licensed valuer which includes an internal inspection of the property.

Sometimes the lender's assessment of the property’s value is less than a client believes. The valuation is made for mortgage purposes and not an assessment for a sale by the owner.

The valuation of the property is important to the lender as it affects the LVR (see Loan to Valuation Ratio) calculation. This will impact on the maximum  amount the lender is prepared to lend on that property.

Buying by Private Treaty

With private treaty the seller sets the selling price and a buyer is in a position to negotiate the terms and conditions of the contract. After exchange (see Exchanging on a Property) there is typically a cooling-off period (usually 5 business days). This gives the buyer the chance to withdraw from the purchase within that period. The time may be extended by mutual agreement. If the purchaser withdraws the vendor may retain a fee (usually 0.25%). In some instances the vendor may stipulate no cooling off period.

Before signing any document, advice should be sought from a solicitor or conveyancer.

Cooling Off

Generally, any contracts for residential property not sold by auction have a cooling-off period of five business days. Vendors sometimes stipulate that the cooling off period clause be removed from the contract, where the purchaser (or their solicitor or agent) gives the vendor (or their solicitor or agent) a 66W certificate before or upon exchange.

Where the purchaser, during the cooling off period, cancels the contract the deposit less 0.25% is returned to the purchaser.

Buying at Auction

Prior to the auction, the intending purchaser should have a solicitor/conveyancer check the contract and auction conditions and possibly arrange pest and building inspections.

Most importantly, the buyer should set a maximum bidding limit and remember there is no cooling off period with auction sales.

Exchanging on a Property

There are two identical contracts produced for the sale of land, one that the vendor signs and one that the purchaser signs.

Exchange is when the signed contracts are swapped, and usually stipulated that the deposit is paid on or before exchange. Except in particular circumstances (such as exercising their right during the cooling off period), the purchaser is legally bound to purchase the property, if the purchaser does not proceed there are substantial penalties including the loss of the deposit. If the deposit is not paid then the vendor may immediately terminate the contract.

Property Settlement

Approximately a month before settlement the solicitors/conveyancers contact the lenders in the conveyancing transaction to advise them of the sale and to prepare for the upcoming settlement.

If there is a mortgage on the property, settlement takes place at the offices of the vendor’s lender,  the vendor’s lender will hand over the original Certificate of Title and the Discharge of Mortgage and in return the purchaser’s lender will hand over the bank cheques to complete the purchase. Settlement is generally 42 days after the exchange.

When all the documents and monies have been handed over, settlement is complete. The purchaser will be informed by the solicitor or conveyancer and the keys to the property will be released by the agent. The lender for the purchaser will see to the registration of both the transfer to the purchaser and the mortgage.

Types of Loan

Principal and Interest (P&I)

For this type of loan, repayments are based on paying back the loan over the term, (generally 25 or 30 years). Each repayment pays the interest and part of the principal and at the end of the term the loan is paid out completely. Repayments may change if the interest rate changes but the term remains the same. Repayments can generally be made weekly, fortnightly or monthly.

Interest Only (I/O)

Payments only cover the interest that is calculated daily and charged monthly in arrears, payments are made monthly. The Principal remains unchanged. For Variable Rate loans the borrower may at any time pay back some or the entire Principal however for Fixed Rate loans the amount of Principal that can be repaid is limited. These loans are popular with investors where the borrower seeks a possible tax advantage in not reducing the principal. The Interest-Only period can generally be up to 10 years.

Variable Rate

The interest rate on these loans can change at any time. Changes to the interest rates are determined by the lender and are usually in line with changing economic and market conditions. Variable rate loans can be either Principal and Interest or Interest Only. These loans provide flexibility and are the most popular. When taking out a variable loan it is important to  be confident that repayment obligations can be met if the interest rate rises.

Fixed Rate

The interest rate on these loans is fixed for a set period. The interest rate on these loans is fixed for a set period. On expiry of the period, the loan can be fixed again, otherwise it reverts to a variable interest rate. Fixed rate loans are for clients who prefer certainty. Fixed rate loans are for clients who prefer certainty. If a fixed rate loan is repaid before the end of the term, break costs or economic losses may be payable and it is calculated having regard to the time left to the expiry of the period and current interest rates, in some cases the amount can be substantial. Fixed rate loans can be either Principal and Interest or Interest Only.

Split  Loans

These loans allow a borrower to divide the loan amount into a number of sub-loans. Each sub-loan may be used for a different purpose or used to divide a loan into fixed interest rate and variable interest rate sub-loans.

Lines of Credit

These loans allow for easy access to funds up to a set limit and can only be variable rate loans. Like interest only loans, payments are monthly in arrears, calculated by adding the daily interest for each day of that month. The borrower may at any time pay back some or the entire principal. Depending on the lender’s policy, monthly interest can be added to the loan (capitalised) if the loan remains within the limit.

Loan Products

Basic or No-Frills Loans

Have a low interest rate with reduced number of features and generally no ongoing fees.

Professional Packages

An annual fee is charged that entitles the client to a number of concessions, including interest rate discounts, extra product features and the waiver of some bank fees.

Honeymoon or Introductory Rate Loans

Low rate for an initial period, honeymoon, that then reverts back to a standard rate.

Construction Loans

Payments are advanced progressively when significant stages (usually 6) are completed. Interest Only payments are required on the funds drawn until completion, then the loan is converted to Principal and Interest.

Bridging Finance

This is a short term facility for borrowers who seek to purchase before they have sold their existing home.

Non Conforming and Low Documentation (Low Doc) Loans

A non conforming loan is a loan that does not conform to a lenders typical loan underwriting criteria.

A Low Doc loan is when the lender requires less stringent documentation to evidence income.

These loans have higher fees and interest rates reflecting the higher apparent risk. In most cases the LVR (see Loan to Value Ratio) is lower than a Full Documentation Loan.

Reverse Mortgage

Reverse mortgages or equity release is available to retirees who own their own home and require funds.

Offset Account

This is generally an optional feature where funds in a savings account fully or partially offset the balance of the loan account reducing the interest payable on the loan.

As lenders have different provisions, it is important to be aware of any special conditions by studying the lenders product disclosure or fact sheet.

Switching

Switching refers to altering the loan with the existing lender. Examples are, changing from a Variable Interest Rate to a Fixed Interest Rate, changing from Principal and Interest Repayments to Interest-Only Repayments or changing to another product type.

Substitution of Security

This allows the borrower to substitute the current security with a new property without the need to repay the existing loan.

Refinancing

Reducing the interest expense is the most common reason for refinancing.
Also some homeowners request that their loan is extended back out to 30 years which reduces the monthly repayment amount.

Debt consolidation is another reason for refinancing. A personal loan and credit card debt maybe combined with the home loan that has a lower interest rate so that the monthly repayments will be reduced.

For a fixed rate loan, before a decision is made to refinance, an enquiry as to the break or economic loss costs should be obtained from the current lender. As those costs can be considerable this enquiry could avoid a costly mistake (See Fixed Rate Loans).

Negative Gearing

In general terms, if the cost of owning an investment property (interest repayments, maintenance, agent’s fees etc) is more than the rental income, then this loss is tax deductible against other taxable personal income  and in so doing tax liability is reduced.

Tax advice should be sought from a specialist before purchasing an investment for negative gearing purposes.

Holding Deposit

Usually 0.25% of the purchase price it is a sign of good faith and it is forfeited if you do not proceed. The property is not held exclusively for you and the vendor may sell to another, if the vendor does then the holding deposit is refunded.

The Loan Process

Regulatory Disclosures

Collect Information and Documents

Discuss Loan Options and Choose an Appropriate Loan

Preliminary Assessment and Disclosure

Submit Application

Conditional Approval / Approval in Principle

Satisfy Conditions (eg Valuation , LMI Approval)

Unconditional / Formal Approval

Exchange Contracts (settlement usually 6 weeks after exchange)

Issue of Loan Documents

Signing and Returning of Loan Documents

Settlement Arranged

Alpha Mortgage is the First Point of Contact for this Loan and any Future Loans