Home loan offset calculator

If you haven’t refinanced recently, you may find that you have to jump through a few extra hoops when obtaining finance. Likewise, if you’re trying to get a home loan for the first time, it’s useful to know what can improve your chances of getting that all important loan.

So we’ve compiled a list of ways you can turn yourself into a more appealing borrower…

1. Refinance before changing jobs

When obtaining finance, the length of time you have been with your current employer can help determine if you’re eligible. As a general rule of thumb, when lenders mortgage insurance is involved then at least six months with the same employer is sufficient, but this will vary depending upon an individual lender’s conditions.

A good idea, then, is to stall any thoughts of that job move until after obtaining finance has been sorted. Incidentally, if you’re thinking of going self-employed in the near future, consider a mortgage that won’t need changing in the near term, as it will be difficult to refinance during the first couple of years you are in business.

2. Repay other debts before obtaining finance

It’s best to get into the habit of repaying credit cards, store cards, and overdrafts anyway – it’ll save you money – but having less of this kind of debt will also increase your chances of obtaining finance.

Lenders take into account the amount of outstanding debt you have, and the monthly payments you make, when assessing whether you can afford a new home loan. Worryingly, some lenders may even assess affordability using the potential amount of debt you could have, assuming that you have maximum balances on all your cards and overdrafts, instead of the balances you do have.

If you don’t use a certain credit card or overdraft, why not close it? Also, try to put all expensive debts onto the cheapest card you have (applying for a new 0% balance transfer credit card will impact your credit score – so leave doing this until the new mortgage has completed) and close the rest instead of repaying several and having lots of opportunities to spend.

3. Check your credit report

It’s important to check your credit report before applying for a mortgage as there may be items that have been repaid but appear outstanding, or even fraudulent applications made in your name. Getting this all dealt with prior to applying for a mortgage, before any money is lost, is a simple thing you can do to improve your chances of obtaining finance.

4. If you already have a mortgage, overpay

If you’ve got some money collecting little more than dust in a savings account, consider making extra repayments on your current mortgage instead.

If you have a particularly high loan-to-value (LVR) – the amount of mortgage in relation to the value of your property the higher the mortgage rate is likely to be, and it could also make refinancing more difficult. So, by paying extra you’re reducing the amount of mortgage you have and lowering the level of risk that a lender has to take on, and both of these could work in your favour when a lender is assessing the application.

As an added bonus, by paying extra and reducing the LVR you’ll be able to repay the mortgage quicker and will have access to cheaper deals, thereby helping you repay your mortgage more efficiently and cost-effectively.

5. Buying for the first time? Can your parents help?

The explosion of property prices has had a severe impact on how big mortgages are in relation to wages, and securing that big mortgage could be even harder.

But while you may be able to afford the monthly repayments, another side-effect of high property prices is that it’s really tough saving a deposit, even just 5 or 10%. So enlisting the help of financially-supportive parents can really make the difference, and there are several ways they can help:

• They could help by giving or lending you part of the deposit. Borrowing money from family can sometimes cause trouble though, so be sure to agree repayments that all parties are happy with. Borrowing from family will usually work out cheaper than borrowing elsewhere, and of course, it doesn’t appear on your credit report.
• They could act as a guarantor on your mortgage. This means that they guarantee that the mortgage payments will be made, so they become fully liable as well (although in some instances this liability may be limited to a certain percentage of the mortgage amount). Guarantors normally have to be able to cover their own bills and your mortgage payment.
• A number of providers offer schemes for families to help get first-time buyers on the property ladder – do your research or ask us what the options are.
• Your parents could borrow to help fund your deposit. The least preferable option, but an option nonetheless, they could take out an unsecured loan. However, this should be thought through very carefully as your parents will be out of pocket, and you may not be able to pay them back in the near term, or at all. You could set up an arrangement whereby you pay this loan as well, but remember that you’ll have your mortgage and bills to cover, so you need to consider if this is really affordable for all parties.

With any sort of arrangement where somebody takes a financial interest in your mortgage, we would strongly recommend seeking financial and legal advice.

6. Keep your house in order

When going through the application process, your property’s value will be assessed. If you need to borrow at a high LTV this will almost definitely mean a valuer physically coming round to inspect the property.

It’s the same as if you were trying to sell your house – it needs to look its best to command the highest price. So make sure the outside of your property is well maintained and that the interior is also. For the purposes of a basic mortgage valuation, they are looking at saleability of the property. The higher the value of the property, the more likely you are to secure a lower mortgage rate.

7. When obtaining finance enlist the services of an experienced Finance Broker

As opposed to going directly to a lender, making use of a good Finance Broker can improve your chances of getting a mortgage.

At Blue Key Finance we will search the market and will have knowledge of lending conditions particular to each lender, which, as well as your personal financial situation, they will take account of before making any recommendations to you.

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Investment property home loans differ from your traditional owner occupied home loans in two main ways;

1. The interest that is paid on them is tax deductible
2. Investors are not usually focused on paying off the investment loan, whereas home owners are.

With those two factors in mind the perfect structure for investment property home loans has one more variable and that is if there is any existing personal debt on the family home and then determining the appropriate amount to unlock equity.

With this scenario, I am making the assumption that there is a home loan but that there is equity available in the home.

Important to unlock equity

OK, so let’s set some parameters for my example;

The Smith’s own a home in Endeavour Hills, a suburb of Melbourne. The property is valued at $700,000. The Smith’s current outstanding home loan balance is $200,000. The original loan was for $500,000 and they are fortunate that their loan allows them to redraw funds at no cost and they also have the ability to “split” the loan.

For the purpose of this exercise we are going to assume the Smith’s have substantial incomes and will have no problems borrowing up to an additional one million dollars. Furthermore, we are assuming that the Smith’s have an excellent credit history.

The Smith’s have been researching units in the Endeavour Hills area and have found a new 3 bedroom unit for sale with a tenant already occupying the unit on a 12 month lease.

The negotiated price for the unit is $500,000 and the rental payments are $500 per week (5.2% gross rental yield). The purchasing costs will be $30,000 which includes things like stamp duty, legal fees, bank costs etc. The total cost to buy this unit will therefore be $530,000.

Here is the scenario we would put to the Smith’s existing bank. This arrangement or structure will give the Smith’s the following benefits;

• Flexibility to make further investments when they are ready to.
• Maximum tax benefits.
• Assisting in the ongoing reduction of their home loan.

Firstly, we will ask the bank to create a “split” in their existing home loan. What this means is that because the original loan was for $500,000, and currently has a balance owing of $200,000, the Smith’s have an available redraw of $300,000.

We will ask the bank to create a split for $130,000. This figure will cover the costs to buy as mentioned above, as well as the 20% deposit that the bank requires to avoid lender’s mortgage insurance.

So now the Smith’s will have a home loan with total available funds of $300,000 that has been split two ways.

• The original home loan is now “split number 1” of $370,000 and remains as a loan for their home, i.e. Personal use and not tax deductible. This loan will continue to be paid on a principle and interest basis.
• The new “split number 2” of $130,000 is specifically for investment purposes and as such the interest charged will be tax deductible. This loan will be paid as interest only.

The Smith’s will receive two sets of statements which makes it easy for both them and their accountant to calculate the tax deductible interest components.

Secondly, we will apply to their existing bank, or if they are not competitive, another bank, for a new stand alone investment loan for $400,000.

I use this type of structure for my clients as I believe it offers the best overall package at a minimal set up cost. I am always trying to keep your existing relationship in place with your current bank as this means less costs for you.

There are however two exceptions;

1. You don’t want to stay. That’s fine with me; after all it is your home loan and not mine.
2. Your existing banking arrangements are non-competitive. There are costs involved in refinancing, and sometimes those costs can be so high that even staying with a non-competitive bank (for the time being) will still be the best option. I can only advise on that depending on your personal circumstances.

Here is what we achieved for the Smith’s and their investment property home loans structure;

1. They have used $130,000 of the equity that they have in their home to leverage into their first investment property. This then allows a standalone $400,000 interest only investment loan secured against the investment property, thereby, helping to avoid the high cost of lender’s mortgage insurance. A great move towards their financial future.
2. They still have available equity in their home to use as leverage for future investments.
3. They have maximised the tax deductibility of the funds that they have borrowed.

As you’ve seen from the above example, borrowers can obtain an investment loan for 100%, plus costs in many instances, when prepared to use the equity in their own home as either:

• Supporting or collateral security, or
• To raise additional funds to put towards the investment property purchase.

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A guarantor loan is most commonly used by first home buyers to enable them to enter the property market by utilising their parents as a guarantor (for security purposes only) which will also enable them to avoid the high lender’s mortgage insurance (LMI) premium which can be up to as high as $27,000 depending on the purchase price and loan size.

Some parents today are thinking about how they can help their children break into the property market, without having to dip into their own savings or liquidating their own assets. The ability to borrow up to 100% (and sometimes up to 110%) is the big attraction of guarantor loans. Guarantor loans are now the only product that allows a borrower with no deposit or little deposit to buy a home and as a result, their popularity has increased. This popularity increase is also as a result of the major banks reducing their maximum LVR’s to ‘95% inclusive of LMI’ and in some case to just ‘90% inclusive of LMI’ and tightening their credit criteria.

Benefits of a guarantor loan

• Purchase the property you want rather than having to settle for a cheaper alternative
• Still be entitled to normal interest rates and the normal suite of home loan products
• All the guarantor to nominate a specific amount that their guarantee is limited to rather than guarantee the entire loan amount
• Reduce or avoid Lender’s Mortgage Insurance (LMI) because your parents will put up additional security via a limited guarantee amount secured against their property, enough to bring your ‘loan to value ratio’ (LVR) down to at least 80%
• Your parents won’t need to hand over cash to you, nor will they need to make repayments on their limited guarantee amount while they’re acting as guarantor
• Any time after settlement, the guarantor can ask to be released from the guarantee (provided the borrower is not in default), however, if in your own right your LVR is above 80% then  you will have to pay the required mortgage insurance premium at the date of discharge
• The earliest your parents can discharge their responsibility is when you can achieve a ‘95% LVR inclusive of LMI’  in your own right (i.e. your loan balance divided by the valuation of your property).

Example of a guarantor providing security support only:

Mr A is seeking to borrow $500,000 to purchase a property also valued at $500,000 (as he only has enough deposit to be able to cover the Government’s stamp duty, bank application fee and Conveyancing costs). The LVR for this example is 100%, which is outside of acceptable ‘loan to value ratio’ caps for any Bank. In order to help Mr A obtain his loan, Mr A’s parents have agreed to allow the Bank to take a mortgage over their property in order to provide a limited guarantee.

The limited guarantee amount required by the guarantor to help Mr Avoid LMI would be for $125,000. In this instance, $500,000 / $625,000 = 80%.

If the guarantor decides to put up a limited guarantee amount of less than $125,000, this would simply mean LMI is still required but at a significant discounted amount. Mr A’s home loan repayments will still be based on a $500,000 home loan amount.

Things you need to know upfront about a guarantor loan

• With guarantees, if down the track you default on your home loan, the Bank can then demand repayments be made from your parents until you get back up on your feet again. The guarantor is liable for the amount specified in the limited guarantee.
• The guarantor must be interviewed by us separately without the borrower present.
• Guarantor packs (after the borrower’s loan has been formally approved) will be posted by the Bank directly to the Guarantor and must be returned directly by the Guarantor to the Bank.
• If your parents own their home outright, then the Bank will want to take possession of their title and will only return it once your parents discharges their responsibility as guarantor.
• Your parents may only have to act as guarantor for less than a few years. We say this because as the value of your home increases and you pay down your loan, your parents should be able to withdraw their support. This frees up your parents to consider other options for the use of their property’s equity – such as for their own investment plans. Your parents can remove the guarantee once you owe less than 95% of the property value & if you meet the LMI and bank lending criteria at the time. However, it is better to remove the guarantee when the loan has been paid down to 80% of the property value, as this will avoid the need for you to pay LMI.
• Offering a guarantee may limit your parents future borrowing potential.
• As long as your parents combined limited guarantee amount and their existing mortgage amount is less than 80% on their own property’s value then a guarantor option is still a viable option.
• Most lenders require guarantors to seek legal advice prior to settlement of the loan. We also recommend the guarantor sit down with their Financial Planner to understand how becoming a guarantor may impact on their own financial situation now and while acting as guarantor. It’s important the Guarantor does this before you buy your home, only because if they decide to be guarantor initially and then decide not to proceed after formal approval, then you may be left unable to complete the purchase.
• All lenders allow immediate family to be a guarantor, apart from your parents this can include an aunt, uncle, grandparents, adult children, and a spousal partner.
• An alternative to guarantor loans is for your parents to give you a gift as a deposit. In most cases a gift of 10% of the purchase price is enough to allow you to qualify for a loan on your own. This option is suitable for parents who are in a strong financial position or who are not comfortable providing a guarantee secured by a property that they own. Bear in mind though, the gifted funds have to be in your own account for at least 3 months prior to buying your home.
• Any legal action taken under the guarantee will be in terms of section 28.14 of the Code of Banking Practice which states: “The Bank will not, under a guarantee, enforce a judgement against you unless:
  • 1. The have obtained judgement against the borrower for payment of the guaranteed liability which has been unsatisfied for 30 days after they have made written demand for payment of the judgement debt; or
  • They have made reasonable attempts to locate the borrower without success; or
  • The borrower is insolvent

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Refinancing can save you money on your repayments by lowering your interest rate

The interest rate on your mortgage is tied directly to how much you pay on your mortgage each month – lower rates usually mean lower repayments. When refinancing, you may be able to get a lower rate because of changes in the market conditions, your personal situation has improved over time, or because your credit score has improved. A lower interest rate also may allow you to build equity in your home quickly.

You can often get a better interest rate by switching lenders.

For example, compare the monthly repayments (for principle and interest) on a 30 year loan term of $400,000 at 4.20% and 5.20%.

Refinancing can adjust the length of your mortgage

Increase the term of your mortgage: You may want a mortgage with a longer term to reduce the amount you pay each month. However, this will also increase the length of time you will make mortgage repayments and the total amount that you end up paying towards interest.

Decrease the term of your mortgage: Shorter term mortgages – for example, a 15 year mortgage instead of a 30 year mortgages will allow to pay off your loan sooner, further reducing your total interest costs. The trade-off is that your monthly repayments usually are higher because you are paying more off the principle each month.

For example, compare the total interest costs for a loan of $200,000 at 6.00% for 30 years with a loan at 5.50% for 15 years.

Tip: Refinancing is not the only way to decrease the term of your mortgage. By paying a little extra on principle each month, you will pay off the loan sooner and reduce the term of your loan. For example, adding $50 each month to your principle repayment on the 30 year loan above reduces the term by 3 years and saves you more than $27,000 in interest costs.

Changing from a variable rate mortgage to a fix rate mortgage

If you have a variable rate mortgage, your monthly repayments will changes as the interest rate changes. With this kind of mortgage, your repayments could increase or decrease.

You may find yourself uncomfortable with the prospect that your mortgage repayments could go up. In this case, you may want to consider switching to a fixed rate mortgage to give yourself some peace of mind by having a steady interest rate and monthly repayment. You also might prefer a fixed rate mortgage if you think interest rates will be increasing in the future.

Refinancing to get cash out from the equity built up in your home

Home equity is the dollar-value between the balance you owe on your mortgage and the value of your property. When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment (this is called a ‘cash out’ refinancing). In order to refinance to access your equity, you will need to have your home valued to determine its current value.

Property investment is currently one of the most popular ways of building wealth for your future. Whilst saving the deposit to purchase a second property may be difficult for many, rapid rises in property values in recent years have provided an opportunity to refinance in order to access some of the equity in your home to use a a deposit instead.

Accessing your equity will increase the amount you owe on your original property and increase your mortgage repayments. However, if you use the equity to make a property investment, you will have the opportunity to capitalise on home loan value increases on two properties over time and this has the potential to help you increase your wealth in the long run.

Other uses for a lump sum in cash are literally endless – you could use your equity to buy your family a boat, a caravan, the overseas holiday you’ve always wanted, to renovate or extend your home, to consolidate debts, or even use it to invest in a business or shares.

Remember though, for every $10,000 of equity you access, will generally mean an extra $55 in principle and interest repayments on your mortgage each month.

Refinancing to consolidate debts

It may be worth considering accessing some of the equity in your home to pay off your more expensive debts. This could dramatically reduce the amount of interest you have to pay on your overall debts each month, offering you some financial relief and helping you to enjoy a more comfortable lifestyle.

It’s a far better idea to be in a position to save money each month rather than waste it on expensive credit card and personal loan interest repayments. By refinancing to consolidate your debts, you could possibly find yourself in a position to save money to make other investments or even pay off your home loan sooner.

Refinancing to renovate or extend your home

Renovating or extending your current home to meet the needs of your growing family or changing lifestyle is often a better option than purchasing an entirely new home. By renovating or extending, you will be able to create the home that exactly meets your needs and if you’re careful about the improvements you make, perhaps even increase its value at the same time, which in effect offsets the cost.

In conclusion

If you have plans or goals for your future then remember, your home loan can be used as a financial tool to help you reach them. We’re here to help you make the most out of your home loan, so please don’t hesitate to give us a call for a chat about what you want to achieve and how refinancing your home loan could help to get you where you want to be. We’re always happy to spend the time with you to help you make the right decisions to reach your financial goals, so please call us today

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