Three things you need to ask your partner before you apply for a home loan together

Before you apply for a home loan with your partner, there are a few discussions that you need to have that go a little beyond what you may know already.

You’ve found someone you want to spend your life with– the hard part is over, right? Wrong. You know each other well enough to know whether or not you each blow the budget every month, but you probably don’t know each other’s complete credit history. So, before you buy a property together, there are plenty of discussions you need to have. Here are three of them.

Have they defaulted on any payments?

They might be relatively debt free now, but has this always been the case? One bad mark on a credit file, such as a late car payment or a default on a credit card, will change the approach you need to take when applying for finance.

It doesn’t mean you can’t secure finance, but it may mean you need to apply to a specialist lender for a low documentation loan. Your broker can help you find the right lender and craft an application to avoid the heartbreak of continual rejection.

That savings balance, where has it come from?

If your partner has savings towards a deposit, that’s fantastic, but the balance is only one part of the equation that lenders consider.

If he or she has managed to build up those savings over a good period of time, making regular contributions, and managing their savings well, lenders will consider this a positive indication of an ability to make repayments regularly.

If, however, the savings are the result of a redundancy payout, a gift from family, or backing a good horse, they are still helpful as a deposit, but don’t indicate that ability to make repayments.

Again, this is not the end of the world. You’ll be in a better position than you would without that balance, but may need expert help to put your application in the best light.

If we do get into trouble, how would you want to handle it?

You must plan for every eventuality, even one you think is not likely. Having said that, this discussion isn’t so much about having a solid plan in place for the worst, as seeing how your partner would deal with difficulty.

If one of you lost your job, or you had unexpected bills that seemed overwhelming, would they try to struggle through, not wanting to talk about it with you or with your finance broker, and potentially default on the loan? Or would they tackle it head on by visiting your finance broker or lender with you to make a plan to get through it without defaulting?

How to buy a home when you’re self-employed

Self-employed borrowers often come up against the challenge of not being able to present a raft of payslips and tax returns to back up their loan applications, but this need not stop you buying your dream home.

Many lenders offer low-documentation (lo-doc) loans for self-employed borrowers who don’t have traditional payslips and employment records. This means that, rather than the usual documentation you prove your ability to service a loan using bank statements, declarations from your accountant and financial records.

Of course, as with any mortgage application, you must still prove that your income outstrips your spending and you can service the loan. Getting this right is more than presenting a lender with a few quick sums on the back of a napkin – it takes a solid six to 12 months of preparation.

Here are some tips to help:

·         Reduce debt
Pay down credit cards and personal loans and be sure to lower the credit limits as they are paid down, as lenders assess the total credit available to you as a potential debt level, not just the amount you owe.

·         Speak to a finance broker
A broker can discuss the how the structure of your business and your taxable income will impact your ability to borrow with you. Finance brokers also have access to specialist lenders that assess applications on a case-by-case basis and tailor their products to self-employed borrowers and contractors, while bank lenders do not.

·         Do your taxes
Make sure you do your taxes when you should, and always pay your tax assessments on time.

·         Save
Saving a deposit is obviously important and showing your ability to live within your means and save is as well. This is key to serviceability – you want to show at least a six-month history of high savings and low expenses.

Low-documentation loans do differ from standard loans in a few ways, apart from the application process. Lenders offset the extra risk they are taking by lending to a self-employed borrower or contractor by charging slightly higher interest rates and placing some extra rules on loan-to-value ratios (LVR) and insurance requirements.

Generally, you can expect an interest rate for a low-documentation loan to be one to two percentage points higher than for a full-documentation loan.

Most lenders will also insist on an LVR of no more than 80% – meaning that under no circumstances will they lend more than 80% of the property value, as assessed by the lender.

In cases where the loan amount is for more than 60% of the property’s value, some lenders also require self-employed borrowers to pay for lenders mortgage insurance.

Thinking of being a guarantor? Ask these three questions first

Entering the property market is no easy feat for a first homebuyer, and it’s common for parents to want to help first homebuyers either through gifting funds for the deposit, or by acting as guarantor on the loan.

Before taking the plunge however, it’s crucial to be aware of the implications involved. Here are three questions to ask yourself to see if a family guarantee is right for you.

1.   Am I financially fit to be a guarantor?

The first thing you should be certain of is whether you are in a financial position to pay off the loan if the borrower finds that they can no longer do so.

There can be many disruptions to an income, such as loss of employment or a serious accident, and some types of guarantor loans hold the guarantor legally accountable to ensure the mortgage is paid off.

Always get independent legal and financial advice if you’re considering being a guarantor to ensure your financial position is strong enough.

2.   Do the benefits outweigh the risks?

It’s no secret that it can take a long time to save for a deposit and by becoming a guarantor you offer the borrower the chance to enter the property market sooner, and in some case even avoid Lenders Mortgage Insurance.

However, any time you borrow money, or a bank places a mortgage over your property, there are things that need to be taken into account. For example, there are certain factors that can put you or your property at risk and your ability to borrow for yourself will also be reduced after offering collateral against someone else’s loan as a guarantor.

3.   Are there other ways I can help without being a guarantor?

If contributing to a deposit is an option, it allows you to provide a little help without needing to put yourself or your property at risk, but there are some extra hoops to jump through if a deposit includes gifted funds.

Gifted funds are not considered genuine savings by lenders. If the deposit is less than 20% of the property’s purchase price, the lender will most likely want to see five per cent of genuine savings from the borrower.

Can your profession save you on your home loan?

When it comes to saving on your mortgage, some of you may not have to look further than your job. If yours is a profession that classifies you as a ‘low risk’ borrower in the eyes of lenders, you may be entitled to special discounts.

Doctors, accountants, lawyers and teachers are commonly eligible for home loan discounts, or particular loan types without fees, based on their professions.

The benefits on offer differ depending on the lender and the industry, it’s also a constantly changing situation. An example of this is the slowing down of the mining industry in 2015, which saw mining engineers lose their ‘in demand’ status and their profession-based discounts.

How the perks work

Simply being in a certain profession won’t automatically save you on your home loan. To qualify you must apply with a lender that offers your profession a special discount and meet that lender’s criteria.

For example, doctors will often need to provide evidence of membership of a certain industry body such as the Australian Medical Association.

Because lenders don’t publish these better interest rates, to benefit from the discounts it’s best to have your broker by your side. Not only will they know which lenders to apply to, they will also assist you with pricing requests and negotiating the best possible interest rate.

Buying a property with family or friends

If you’re looking for a creative way to overcome being locked out of the property market by rising prices, buying a house with a group of family or friends may be a solution. It can also be a minefield though, so here’s how to avoid a blast.

While the excitement of banding together in such a life-changing moment can put everyone on a bit of a high, you need to plan for situations in which things might go wrong.

It’s essential you have all been completely upfront from the start about what you want to achieve by purchasing property together, as well as your personal expectations about timelines for purchasing the property, paying it off and selling it; and all of this must be documented in a co-ownership agreement.

Your finance broker can refer you to a solicitor or conveyancer with experience in working on co-ownership agreements, who can advise and create yours and make sure it’s suitable, providing the necessary legal protection for everyone involved.

The big question will be what structure your ownership takes. There are two options: joint tenants and tenants in common. Joint tenancy is the most common ownership structure in Australia, as it is how most family homes would be owned.

However, because friends are less likely to share assets and long-term debts than a couple, and less likely to will their assets to each other, the ‘tenants in common’ model would usually be more suitable for this situation.

Under this model, each person owns a specified share of the property’s value. These shares may be equal, but needn’t be.

So, if you are willing to contribute $500,000 to the price of a property, but your two friends are not quite at that stage and only comfortable contributing $250,000 each, you could own a 50% stake, while they each own a 25% stake. Keep in mind that each stake is in the property’s value, not control of the property. Legally, under this model, each owner has the right to full access to the entire property.

The co-ownership agreement created in collaboration with your conveyancer should set out how the costs of maintenance and insurances are divided, as well as how sale proceeds will be divided.

It should also cover plans for depreciation and capital gains tax, selling a share of the property to another co-owner, choosing tenants or determining rent, selling a share of the property to a third party, and selling the property altogether.

If all purchasers are planning to occupy the property, the agreement should make plans for if one wants to move out but continue their ownership. Under the tenants in common co-ownership structure, the other owners occupying the property would not be obligated to pay rent to the one who has moved out, as long as they are not restricting that co-owner’s access to the property.

As is the case with any property purchase with any structure, each co-owner should have an up-to-date will that specifies who inherits their stake in the property.

There are many more considerations when buying property jointly, so speak to an expert early on to make sure you’re doing it the right way.

How do lenders assess applications?

While loan officers work solely for a lending institution and can only offer that institution’s products, brokers can help connect you to the lender best fit to serve your mortgage needs by shopping around on your behalf.

Finance brokers on the other hand are paid commissions by lenders to match borrowers to the right products and can negotiate the lowest rate on your behalf, which is why more than half of borrowers today turn to finance brokers when it comes to finding a home loan.

In order to decide whether or not to provide you with a loan, lenders will generally assess you against five qualities.

1. Your ability to repay the loan

To establish your capacity the lender will look at your employment history and salary to evaluate whether you have enough cash coming in to reliably pay the loan over time.

2. How much cash you have up front

Assessing your ability to put down a percentage of the value of the property being purchase up front is standard. The percentages vary, and specialist lenders may approve a 5% deposit.

3. The property appraisal price

Since the property is used as collateral if you are unable to repay the loan, the lender will value the property. Based on the report, the lender will decide whether the property is worth the loan being approved.

4. Your financial history

Your credit rating, expenses and debts will help the lender assess your character as a borrower and whether you are worth the risk.

5. Market conditions

Economic circumstances in the market can influence what interest rate you have access to and whether you need to provide extra security. They can also influence the repayment schedule.

Loan to value ratios

The mortgage industry is a wide, wondrous world with a language all of its own. One of the many acronyms bandied about is ‘LVR’, which stands for ‘Loan to Value Ratio’. Here’s what it means.

When you are working out what amount you can borrow to purchase a property, the size of deposit you need to save, and whether you are eligible for a particular mortgage product, the LVR is one of the most important considerations.

In the simplest terms, the LVR is the percentage of the property’s value, as assessed by the lender that your loan equates to.

So, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is 80% of the property value, making your LVR 80%.

LVR is important because different lenders and loan types have different maximum LVRs and some lenders will only lend up to a certain LVR for small properties or properties in certain areas.

Most lenders will finance 80% LVR, or higher with Lenders Mortgage Insurance (LMI), while low documentation loans may be limited to 60% LVR without LMI.

Getting your home loan approved faster

Every home loan application is unique, so the time between your first contact with your broker and approval can never be predetermined.

If an application is not completed correctly, you risk delays in approval, or even being declined by potential lenders. There are, however, some things you can do to help the process move quicker.

The most common reason for a delay is a lender’s turnaround time to assessment, especially when some lenders have competitive offerings and experience larger application volumes, but a lack of preparation can cause this delay to snowball.

Be prepared

In order for a lender to assess your capacity to service loan repayments, every financial detail must be taken into account.

Other than the obvious documentation that needs to accompany an application – satisfactory identification and evidence of income by way of pay slips – many lenders will expect to see a reference from your employer, group certificates or tax returns, and records of any investments or shares that you might have.

If you are self-employed, you will need to organise alternative documentation to prove income, such as financial statements relating to the profit and loss of your business going back two years.

Lenders will also want to see bank statements going back a few months in order to track your spending and savings history. Most importantly, you will need to provide the details of your debts.

By having all your documents organised and a savings and repayment plan documented, as well as evidence that you can commit to the plan, you will increase your chances of receiving the loan you are after.

Disclose all information

Lenders want to see proof that you are capable of managing the responsibility of the loan, through steady employment, a good credit history and a debt-free approach to your financials.

To avoid back and forth requests, which can delay your application, ensure your lender has a thorough understanding of you as an applicant including appropriate identification of all borrowers.

Provide all the supporting and necessary documents upfront to your broker, have good, current information on your financial position and convey as much detail as possible in relation to your requirements and objectives as possible.

Your broker will not only need to have your full financial details, they’ll also need to take reasonable steps to verify them.

Skip the valuation queue

Not all applications require a valuation, depending on the property and lending institution and forgoing this step can save a considerable amount of time. You can also save time by having a valuation completed prior to your application, if it’s accepted by your chosen lender, but check with your broker first.

How to avoid paying too much for a home

Knowing what a property is worth is central to avoiding paying too much for it. It’s about doing your homework, knowing what you want, knowing the market and making sensible offers.

Set a benchmark

Comparing nearby properties that have sold recently is the best way to assess an acceptable price for the property you are looking at and provides a valuable bargaining tool when you are negotiating with a seller or agent. Make sure the properties are comparable, with a similar land size and number of bedrooms, so you aren’t measuring apples against oranges.

Keep in mind current market conditions

The property market is always changing, so doing this research once and sitting on it for a few months will offer little help. Going to open homes and auctions regularly will give you insight into the current state of the market and how much certain properties are going for.

Expand your search

Don’t limit yourself to a particular area or suburb, take a look around to expand your options. You might find your dream property just a couple of suburbs away that still meets all your needs.

Don’t exceed your financial capacity

If you’ll be taking out a loan to purchase a property, it's a good idea to seek pre-approval before you start making offers.

Aside from meaning that when you do eventually make an offer it will be taken seriously by the seller or their agent, having finance sorted out means that you can be sure of what your stamp duty and associated costs are, and exactly what price range you can consider.

Remember, even if a lender approves you for a particular loan amount, it doesn’t mean you have to accept it – a higher loan amount means higher interest charges over the life of the loan, increasing the total cost of the property purchase. Only ever commit to a loan that you can afford alongside your current income and real expenditure.

When calculating figures for the price of a home, ensure you also budget for maintenance and repair costs, as well as any other expertise you may require in the purchasing process.

Bring in the extra support

You may want to consider using the services of a buyer’s agent, they can help you with things like negotiating a price or bidding for you at an auction.

Construction loans

If you’re thinking of building your own home, you’ll need to be familiar with the ins-and-outs of construction loans.

Construction loans are not as straightforward as standard home loans. There are additional decisions to be made about the structure of the loan, additional documentation is required, and the funding is released in an entirely different way.

Documentation

In addition to documentation about your finances, income and identity, your application for a construction loan needs to include contracts or tenders for the construction, as well as the plans so that a valuation can be performed.

Further documentation will also be required before the first payment is made from the lender to the builder, including a schedule of the payments to be made (called drawdowns), the builders’ insurance details, and the final plans that have been approved by the local council.

Structure

To avoid having to contribute your full deposit and being charged interest on the entire loan amount from the moment the land purchase settles, you can split your mortgage into a land loan and a construction loan.

At settlement of the land purchase you start being charged interest and making repayments on the balance of the land loan – you may also be required to pay lenders mortgage insurance (LMI) depending on your deposit size.

The interest and repayments on the construction portion then kick in only as each drawdown is processed.

Funding

The drawdown schedule is very important; as you don’t start paying interest on each portion of the loan until it is paid to the builder, you, the lender, and the builder, need to be satisfied with the schedule.

For the lender to make each payment to the builder, you will need to fill out a drawdown request form from your lender, and submit it to your builder. The builder can then send the lender your form with an invoice for that part of the payment and, after the lender is satisfied that the work has been completed and is up to the standard expected in the valuation, the drawdown can be completed with a payment to the builder.

Any changes to the contract and plans can trigger a reassessment of the loan, so be as sure as you can that the plans and contracts the lender sees are final. It’s also worth trying to pay for any small amendments from your own pocket, rather than changing the loan and risking a reassessment.

Problems can also arise when other work on the site that isn't completed by the builder needs to be paid for, as some lenders only make the remaining funds of the mortgage available after the completion of construction.

While some builders will include subcontractors as part of the main contract, meaning that they can be paid by the builder as stages of work are complete throughout the drawdown schedule, others will not do this. Again, this may make it necessary to pay from your own pocket.

The extra costs of buying a home?

When taking out a mortgage, many people forget to consider the fees and expenses that come on top of the purchase price of the property.

Here are some of the extra costs that you’ll need to consider when you take out a home loan.

Home loan application fees

Most lenders charge a home loan application fee. The fee will depend on the loan you are applying for and the lender.

Home loan application fees cover:

•  loan contracts

•  property title checks

•  credit checks

•  attending a settlement.

Mortgage fees and costs

•  Mortgage establishment fees – lenders generally charge a mortgage establishment fee, which is a fee for setting up a mortgage.

•  Property valuation fee – a third party chosen by the lender, is appointed to determine the value of your land and improvements.

•  Mortgage registration – your mortgage deed needs to be registered with the government. Some State Governments charge stamp duty to register your mortgage.

•  Lenders Mortgage Insurance – if you don’t have 20% of the purchase price or the value of the property, the lender will require you to pay for a lenders mortgage insurance policy that covers their risk in the event you default on your repayments.

Property fees and costs

•  Building, pest and electrical inspection fees – it’s wise to have your property inspected for any structural or electrical problems and for pests.

•  Registration of transfer fee – the new owner of the property needs to be registered at the land titles office.

•  Legal fees – you generally need to pay a solicitor or settlement agent to handle the transfer of ownership of the property on your behalf.

•  Home and contents insurance – most homeowners insure their home and contents against a range of threats, such as burglary, fire, storm, etc. Lenders insist that your property is insured while you have a mortgage.

•  Life and income protection insurance – borrowers should consider protecting their incomes and themselves while they have a mortgage.

•  Utility costs – connecting electricity, gas and telephone can attract a fee.

•  Council rates – your local council charges rates to cover garbage collection and a host of other services.

•  Water rates – the water corporation charges rates for the supply and upkeep of water to your property.

•  Strata / body corporate fees – if you buy an apartment or strata titled property, body corporate fees are charged, and some fees can be significant, particularly if the building is in need of a major work, or if there are lifts, pools and other communal facilities.

•  Maintenance costs – don’t forget to make provision for regular maintenance on your home, even if you decide not to undertake significant renovation.

Lenders mortgage insurance (LMI)

Lenders mortgage insurance (LMI) is required when the value of a loan is more than 80% of a property’s purchase price, or property valuation if refinancing. In very basic terms, a lender considers a loan to carry a higher risk if the Loan to Value Ratio (LVR) is above 80%, in which case LMI is payable.

Not to be confused with mortgage protection insurance, which is designed to protect the borrower, LMI covers the lender’s risk within a residential mortgage transaction in case the borrower fails to make loan repayments. LMI is a fairly common practice within the industry, particularly for first home buyers who may struggle to save a 20% deposit.

Even though the actual property acts as security for the mortgage, the nature of the property market, like any investment class, means there is a chance that its value declines. This could result in a financial loss for the lender if the borrower is unable to repay the loan and the property is sold at a price below the value of the loan.

The cost of the LMI premium is dependent on several factors, such as the loan size and property value. Most insurers are flexible when it comes to the method of payment of LMI, it can either be a one-off upfront premium payment, or a premium could be included in the overall cost of the loan and included in the regular repayments.

It is not transferable, which means a new loan, for example if the borrower refinances the loan, may require a new LMI premium depending on how much equity the borrower has in the property.

What’s in it for me?

While LMI protects the interests of the lender, there is value to borrowers in paying the LMI premium.

Opting for LMI means it allows a borrower to independently purchase a property sooner than they otherwise might. LMI is the alternative to using a guarantor or having to save for a bigger deposit, both of which are not feasible options for many first home buyers.

A deposit of at least 20% of the desired loan amount is required for a borrower to not be deemed ‘high-risk’. For many buyers it is difficult to save this amount, LMI allows those borrowers with smaller deposits to enter the market sooner rather than later.

The major benefit of LMI is that it can allow the dream of homeownership to become a reality for a lot of first home buyers.

How can I avoid paying LMI?

Depending on your circumstances, you could save for a higher deposit – a higher deposit means a smaller loan amount and therefore a lower LVR thereby reducing the lender’s risk. A loan of 80% or less of the property’s value is the key to avoiding paying LMI.

If you don’t have the financial capacity to meet a 20% deposit but still want to avoid LMI, you do have the option of getting a guarantor for your loan. A close relative, such as a parent, sibling or perhaps a grandparent, may be eligible to act as a guarantor, and they use the equity in their property to help you secure yours and keep your total loan below 80%. However, it’s important to remember that acting as a guarantor does come with some risks too.

Stamp duty

Stamp duty, also referred to as ‘transfer duty’, is revenue levied by states on transactions relating to the transfer of land or property. It is paid upfront and needs to be budgeted for, in addition to your loan deposit.

The amount of stamp duty you are required to pay differs in each state, however there are three universal factors, along with the value of the property, that determine how much stamp duty you will pay. Contributing factors include:

1.             Whether or not the property is a primary residence or investment property.

2.             Whether or not you’re a first home buyer.

3.             If you are purchasing an established home, a new home or vacant land.

There are several stamp duty calculators available online that take the guesswork out of budgeting for a property. Factoring in this additional cost can’t be overlooked when you’re considering your capacity to repay a loan.

However, in a bid by state governments to stimulate home ownership and growth, there are a range of tax concessions available to reduce stamp duty.

Again, exact amounts differ across each state, but those likely to benefit the most are first home buyers and those opting to buy a new home.

Solicitors and conveyancers – what’s the difference?

Solicitors and conveyancers are different, and it’s important to have the right one on your team, to avoid paying too much while still getting the advice you need.

Buying property is one of the biggest financial decisions most of us will make in our lifetime – it’s something you want to get right.

Every Australian state and territory has different laws, forms, regulations, and taxes associated with purchasing property, so having either a solicitor or a conveyancer will help the whole process run smoothly.

Conveyancers

Although there is a licensing process for conveyancers, they do not have to be legal professionals so are cheaper to hire. However, they can only provide information relating to property, so if you have additional legal questions, you might have to search elsewhere.

For a straightforward property purchase, a conveyancer can do the job. Their main responsibilities include giving advice and information about the sale of property, preparing documentation and conducting any settlement processes.

Conveyancers must cease to act for a person as soon as the matter moves beyond conveyancing, when this happens, they must refer you to a solicitor for advice.

Solicitors

While conveyancers are limited to advising on your property purchase, solicitors can provide you with a wide range of legal advice in addition to your conveyancing needs, and may be necessary if your property transaction isn’t straightforward.

If there are other matters that affect the transaction like family law, asset protection, asset structuring, tax law or estate planning, you will need a solicitor’s advice.

Solicitors are more expensive, but the investment may be worthwhile if you anticipate any legal issues – having this established relationship with a solicitor means you won’t have to scramble for one later.

Who is involved in a property purchase?

Buying a property is more complex than most other purchases you’ll ever make. Here are the different parties who may be involved in your home-buying process and how you can leverage their valuable experience and knowledge..

Finance broker

Brokers act as a liaison between you and the lender. They will find out about your finances and your property goals, and search for and negotiate a loan product that matches your needs. Not only will they do the legwork and ensure your loan is processed as smoothly as possible, but they are there to guide you throughout the entire process.

Real estate agent

Unless you’re working with a private vendor, meeting a real estate agent is inevitable when it comes to purchasing a property.

Hired by the vendor, or seller, the real estate agent’s role is to advise the vendor on preparing the property for sale, market and communicate about the property, and negotiate with potential buyers.

Insurance companies

A property purchase is a high-value purchase and long-term financial commitment making risk management vital. Insurance, including mortgage protection and property insurance, will help you avoid being hit with a major financial burden should anything not go according to plan. Many finance brokers can deal with insurance as well or will recommend an insurance broker who can.

Conveyancer

The legal aspect of a property purchase is taken care of by a licensed and qualified conveyancer. If they are a solicitor, they can also provide legal advice.

Their role is to prepare the documents to ensure that transfer of ownership of the property has met the legal requirements in your state or territory.

Property valuer

Knowing the value of a property is essential in a loan application, so a valuer can play a huge role in the property buying process. A lender will often engage an impartial valuer to ensure that the buyer and the lender will know what loan amount may be warranted. The value is based on the property and location, as well as the current market.

Pest and building inspectors

Without the services of pest and building inspectors, a homebuyer’s worst nightmare – finding out the property they have bought requires costly renovations or pest treatment – may come true. Organising a pre-purchase inspection is essential.

If the property requires structural, wiring or repair work, these inspections can stop you from making a costly mistake or, if the property is still your dream home but just needs a little work, can provide a valuable bargaining chip.

Lenders

If you need to borrow money to make your purchase, you will need a lender, whether it’s a major bank, a second-tier or non-major, or a specialist lender for more difficult funding proposals.