YIB FAQ – LIWELL Pty Ltd

FAQ

What is LMI (Lender’s Mortgage Insurance)?

LMI is an acronym for lenders mortgage insurance. Mortgage insurance protects the lender if you default on your repayments in the future. Whether your lender will require you to take out mortgage insurance depends on their lending policies. As a general rule, the higher the LVR, the more likely it is you will be required to take out LMI to offset the lender’s increased risk.
The policies of different lenders vary, but many will require you to take out mortgage insurance if your loan-to-value ratio exceeds 80%. The premium for this mortgage insurance is then an additional cost for you as the home loan borrower.
What is LVR ( Loan to Value Ratio)?

Loan to Valuation Ratio (LVR) is the percentage of the total value of the property or asset that you’ve borrowed.
To work out your LVR, take the amount you plan to borrow or your current loan amount and divide it by the price of your asset. This figure is your LVR.

For example:
• If you want to buy a home valued at $600,000 and you have a deposit of $120,000, you would need to borrow $480,000.
• The loan-to-value ratio would be 80% here (i.e. $480,000 divided by $600,000)
What is Genuine saving?
When you’re applying for home loan, and want to borrow more 80% of the property’s purchase price, you’ll be asked to provide information about your ‘genuine savings’.

This is a term used to describe funds that borrowers have saved gradually by themselves.

When assessing a mortgage application, a lender will want to see that you have diligently saved money over time in order to evaluate whether you have the capacity to make your monthly repayments.

Every lender has its own definition and requirements for genuine savings, which will depend on the amount that you borrow, and some may not even require it at all.

As a general rule, lenders will accept as genuine savings any funds that amount to 5% or more of the purchase price.

These include:

Savings held or accumulated over at least three months

Term deposits held for at least three months

Shares or managed funds held for at least three months

Cash gift held for at least three months

Inheritance funds held for at least three months

In certain circumstances, rental payments may be used to demonstrate your money management skills. This usually requires rental history of at least 6 months.

On the flip side, the following will not be considered genuine savings:

Monetary gifts

Inheritance

An ATO Tax refund

Bonuses from work

Profit from the sale of an asset other than a property, such as a vehicle

First Home Owners Grant (FHOG)

Amounts borrowed, such as a personal loan

Short-term cash savings

The reason why they are not accepted by lenders is that they do not demonstrate good saving habits.

If you do not have genuine savings, there are alternative solutions available to you so you can break into the market.
What’s the difference between fixed and variable interest rates?
With a fixed rate loan, the interest rate on your loan does not change over the life of your loan. With a Variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. Because your interest rate can go up, your monthly payment can also go up. The longer the term of the loan, the more risky a variable rate loan can be for a borrower, because there is more time for rates to increase.

Sample of a fixed rate:

If variable interest rates go up, fixed rates don’t. Your repayments won’t change and you’ll be paying less interest than a person with a variable rate. For example, imagine if you had a home loan of $500,000 at a fixed rate of 3%, and that variable interest rates increased to 4%. You’ll be charged up to $5,000 less interest over the course of a year.

You can budget with more confidence knowing that your home loan repayments won’t change until the fixed term expires. This can be especially useful at certain times of your life (e.g. when starting a family).

Sample of a variable rate:

If variable interest rates go down, fixed rates don’t. You’ll be paying less interest than a person on the fixed rate.

Variable rate home loans typically have more features than a fixed rate loan (e.g. the ability to make extra repayments, a redraw facility, an offset account or a line of credit). These may be useful features for you to have if your circumstances change.

It’s easier to switch variable rates loans if you find a better deal, and there are usually less switching fees.

They usually have lower fees overall than a fixed rate loan.
What is a guarantor home loan?

Guarantor home loans are a great option for borrowers who do not have the deposit required to purchase a home, or may enable you to avoid paying lenders mortgage insurance (LMI). Depending on your situation, you may be able to borrow up to 105% of the property’s value.

Whether you need a guarantor for your orwn loan or you’ve been asked to be a guarantor for someone else on their loan, you need to understand what’s involved. We go through all the key points below.

A guarantor provides additional security to a lender for a loan. For example, a guarantor on a home loan may be asked to provide the equity in their own home as additional security for another borrower’s loan (usually for an immediate family member).

his additional security is typically a requirement for the lender to approve a loan application when a borrower has either poor credit history or insufficient deposit to meet the lender’s maximum loan to value ratio (LVR).

The guarantor is legally liable for the loan (or a specified amount) if the borrower fails to make their repayments. This includes any additional loan fees, charges and interest. Guarantors don’t have the right to any property or other assets bought with the loan funds.
What should I consider when selecting a home loan?
The home loan market is competitive and lenders typically offer a variety of home loan types to cater for different needs. The interest rate on a home loan is obviously an important consideration, but it shouldn’t be your only one, nor should you look at it in isolation from other loan features.

For example:

If a loan has a very low advertised interest rate, it’s possible that it will have higher associated fees. This is where it’s important to consider the comparison interest rate (which lenders are legally required to display beside any advertised rate).

On the other hand, a loan with a higher interest rate or associated fees may have a lot of flexible features attached to it. These features may (or may not) be beneficial for your situation, either now or in the future.

It’s important to consider a home loan as a package of features and to choose the one that is most appropriate for your circumstances. Ideally, a home loan needs to be flexible because your situation may change over the long term.

For example, some lenders may offer any or all the following features that may be beneficial for you:

Portability. This allows you to transfer your loan from one property to another if you move before you pay off your mortgage.

The ability to make extra repayments.

A redraw facility. This allows you to withdraw any additional payments you make at a later stage if you need to.

The ability to split the loan between fixed and variable rates of interest.
What is negative gearing?

‘Gearing’ means borrowing to invest in an asset; negative gearing means the cost of owning said asset exceeds any profits you make. So, if you make an annual loss on the ownership of a rental property, negative gearing can come into the equation.

If you purchase an investment property and rent it out to tenants, there’s a chance you may not make an immediate profit. This may happen if the rental income you receive doesn’t fully cover the repayments on your investment loan, or the property needs repairs/incurs other expenses that take away from the profit you’ve earned.

By negatively gearing your property, you can somewhat offset the net loss you make. Essentially, you can use the loss on your rental property as a tax deduction from your salary/wages or other taxable income.

A sample:

Let’s say you purchased a rental property for $500,000, and you take out a $400,000 mortgage to do so, you would need to make monthly repayments of $1,630.85, or $19,570.20.

Let’s say your tenants are paying $325 per week. You pay property management fees of 5%, reducing your weekly rental income to $308.75. extra cost with a $1,500 bill.

You also needed to pay council rates, for example $2,000 over the year, and $350 for waste utility charges. You hold landlord insurance, which might cost you up to $4,000 over the year. Overall, your rental income for the year may be $8,205.

This means that your property is negatively geared by $11,365.20. So, instead of writing off this loss, it can become a tax deduction from your salary/other income. For example, if you had an annual salary of $70,000, you’d only need to pay tax on $58,634.80.
Why use a mortgage broker to help you?

Mortgage broker is flexible. We have a lot of experience helping borrowers to gain different lenders (bank, non-bank lender or funder) approvals for their home loans. We will take the time to understand your situation and help you build a strong application. Just as important is our detailed knowledge of the lenders in the market. We can advise you on the right lender for your circumstances to maximize your chances of having your home loan application approved.