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Competition among lenders for a home loan remains steep but borrowers may still be missing out on great deals and important information that could save them thousands of dollars.
Most lenders will pitch one or two loan products to customers. But that’s a tiny fraction of the number of loans available in Australia. If you want to get a grasp of the wide variety of products out there, consider a mortgage broker.
A mortgage broker works for you, not the lender, and can help you tap this vast vein and find the loan that is best suited to your needs.
Talk to your broker about your financial circumstances and goals so they have as much information as possible to determine the best product solution for you.
If you are negative gearing an investment property, you will have a shortfall between your costs and rental earnings. You can fund this gap with a line of credit (LOC) product using equity in your home or another property.
Say you have a gap of about $500 each month for your investment property, including interest and other costs, such as repairs and rates. You could set up a LOC for $20,000 to fund these expenses for a period of time, which may give you a little more financial breathing room. How long the LOC holds up will depend on interest rate fluctuations and your rental costs.
Like interest on your primary investment loan, the interest on this LOC is tax deductible, providing its sole use is to cover your investment expenses.
One caveat: this strategy works providing there is capital growth in your investment property over the same period, otherwise you are eating into your capital gain.
You also need to have some fiscal discipline and not dip into the LOC for non-investment related expenses, such as holidays.
While lenders will be able to set this structure up quite easily, they are not likely to offer it up front as part of your investment loan. Talk to your broker and financial advisor about whether this strategy is a smart option for you.
While it’s true a poor financial record will probably make it harder for you to land a loan, the doors may not be closed. Lending criteria has tightened in the wake of the global financial crisis but there are still plenty of loans up for grabs for those with a blemished track record or little financial backing. Be prepared, however, to pay a higher interest rate than the standard offering. A broker will be able to help you find loans with less stringent criteria, often labelled non-conforming loans, and will help negotiate with the lender on your behalf. You should also do a budget to ensure you are able to make any repayments, lest you end up adding to your woes.
Lender’s Mortgage Insurance (LMI) is a one-off payment by the borrower when a loan exceeds 80 percent of the property’s value. It covers the lender’s risk if the borrower defaults, but does not cover any loss by the borrower.
LMI can be a painful hit to the hip pocket, often running to several thousands of dollars, especially after a home buyer has scraped together the minimum deposit.
One alternative to paying LMI if you have less than a 20 percent deposit is to secure a guarantor to cover the extra stretch.
A guarantor is usually a family member who is willing to put forward their property as security. One of the common myths that can scare family off is that the guarantor is then responsible for the entire loan. Not true. They only need to guarantee any amount beyond the 80 percent loan-to-value ratio (LVR). Although it’s a good idea for a guarantor to seek both financial and legal advice before committing.
The advantage of securing additional funding through a guarantor is that it simply gets tacked onto your loan so you can repay it over time, rather than forking out up front for LMI.
The key before you make any big decisions about home finance, is to have all the facts at your fingertips. Your broker will be able to compare the products and options that are out there and size up which arrangement will work for you and your circumstances.