Living expenses

When a lender is determining how much they are willing to loan you on a home loan they will look at a number of factors. This short article covers off how your living expenses factor in to your borrowing power.

As part of the broader picture of your overall credit worthiness, the lender will want to verify your living expenses and will take your living expenses into account. Your living expenses, along with other factors including your overall income and types of income, will determine how much the lender is willing to lend you.  Under the NCCP responsible lending guidelines, a lender must satisfy themselves that you will be able to pay off the loan without falling into financial difficulty.

What are living expenses

Living expenses are what you spend in a typical week, month, or year in order to maintain a reasonable lifestyle.  They are usually categorised something like this:

• Groceries

• Utilities, rates, strata

• Entertainment

• Transport

• Health

• Insurances

• Personal care

• Clothing

A common misconception is that if you have some large but non-recurring expenses (such as an overseas holiday or purchasing a new bike) that they will be included in your living expenses and will impact your application.  This is not the case, and as part of your application we will explain any unusual or one-off expenses.

A lender will usually assess your living expenses using a self-assessment and declaration by you, or a review of your bank statements, or a combination of the two.  If your expenses are on the lower side, the lender may rely on the Household Expenditure Measure (HEM) which is a measurement tool used to estimate the average spending for households and is based on the income and location of a household.  

If you’re thinking of applying for a loan but are unsure about how your living expenses might impact your application, please get in touch with us and we will be happy to answer any questions you have.

Fixed versus variable - what's best for you?

A home loan is a big financial commitment – often the biggest one you will ever make – so getting the right loan is important.

If you want to make an informed choice, understanding the options available is a necessity.  One of the biggest choices to make is whether to go with a fixed rate or a variable rate.  There is no right and wrong when it comes to choosing fixed or variable rate; the choice is determined by your own preferences and personal circumstances.

Variable rate

A variable rate loan is one where the interest rate can fluctuate up or down at any time.  Rate changes can be driven by a complex mix of economic factors.  The Reserve Bank official cash rate is one main factor, but other things like wholesale funding and competitiveness of the home loan market will also have an impact.  Variable rate loans are historically more popular than fixed rate loans.

Fixed rate

A fixed rate loan is one where for a period of time (usually between 1-5 years) the interest rate is locked in.  During the fixed rate period you are at no risk of your repayments changing, regardless of what happens with the Reserve Bank cash rate or the broader economy.  At the end of the fixed rate period the loan will automatically revert to a variable rate one.

The pros and cons

Variable - The biggest advantage of variable rate loans is flexibility.  Variable rate loans will allow you to make unlimited extra payments, allow you to redraw any surplus payments, and will often have an offset facility.  And if rates come down you will reap the benefits of the lower rate.  On the flipside, if rates go up so will the amount that you pay.

Fixed - If rates start to rise while you’re in a fixed rate loan you won’t suffer from an increase in repayments.  It’s the confidence this brings that makes fixed rates attractive for borrowers.  Budgeting and managing cash flow is easy when you know that your repayments are fixed.  Fixed rate loans typically offer less flexibility that variable rate loans, with restrictions on being able to make extra payments being a big one.  If you wanted to refinance or sell your property during the fixed rate period there is usually a break cost fee.

Split loans

Splitting your borrowing into separate fixed and variable portions is a way to hedge your bets.  This way you can get the peace of mind that a fixed rate offers while still maintaining a degree of flexibility with the variable portion.  Split loans with an offset on the variable portion are a popular choice with borrowers.

When recommending an option we will take into account all of your circumstances.  We will explain everything in detail so you are making informed choices.  Everyone’s circumstances are unique and having quality broker like Blackwattle Finance in your corner will mean that you get the best option for you.

Insights from a buyer's agent

One interesting facet of my work is learning from other professionals in my network.  I often cross paths with lawyers, accountants, real estate agents etc and when I do, I take the opportunity to learn what I can about their view of the world.  Often my clients will ask questions that aren’t in my field of expertise, so it is great to be able to share what I know and to connect my clients to other experts. 

I caught up recently with Hamada Alameddine of BuyerX.  Hamada is a buyer’s agent specialising in Sydney’s inner west and is a wealth of knowledge and advice on buying and on property in general.  Buyers agents have become an important resource for many buyers who are looking to save time and money on a property purchase.  Hamada was kind enough to answer some questions for me and to share his insights. 

Is trying to time your entry into the market possible? And does it even matter?

Harv Eker famously said: ““Don’t wait to buy real estate, buy real estate and wait”.  

Timing the market is nearly impossible, by the time you think you have timed it right you’re more than likely behind.  The best time to buy is when you’re financially comfortable and have enough cash flow.   

If the property you’re buying is for long term primary residence the time you own it will likely show appreciation because if we look back historically, the data will show us that property will grow in  value over 10-15-20 years.

For investment purposes, you need to make sure you’re buying with the a few key fundamentals guiding you.  Buy close to public transport, schools, shops and other amenities.  Vacancy rates is also a great indicator as to what the property market is doing.

In short, timing the market is irrelevant but being in the market long term is key!

How long does it typically take for someone to find and buy a property?

Prior to engaging me as a buyer’s agent, on average my clients have been searching for a property for over 4 months.  Some clients have been at it for well over 12 months.

On average it takes me 4-8 weeks to find the ideal home for my clients.  There are of course instances when we identify the right property in less time. It’s is really important for me to understand exactly what my clients are looking for so I can then guide them in the right direction.  I am also able to take non-emotional approach to help clients see the home for what is and not be swept away by the pretty shiny bits!

Most people take a few bites of the cherry because they don't have the experience to identify a property’s true value: they are being guided solely by what the sales agent is pushing.  By identifying what they are after, understanding the non-negotiable aspects of their future home and the aspects clients are willing to be flexible on, I am able to weed out the homes that aren’t suitable ensuring we are keeping our eye on their prize.

Auction or private treaty – which is best?

Private treaty is the best way to buy a property.  It somewhat gives the buyer more clarity around price and hence makes negotiations simpler. In the current market (inner west) auctions are absolutely going wild with pent up emotional buyer’s sick of missing out. 

What should be your “no compromise” features when looking for a home or an investment?

The price! You need to make sure you can identify what the property is worth; you don’t want to get caught out over-paying. 

What is home equity and how can you use it?

Accessing the equity in your house can help you with your next major purchase.

Using the equity built up in your home can be a smart way to use your wealth to make a major purchase.  If you are looking to buy a car, renovate your home, or buy an investment property you can use your home equity to make such a purchase.

Equity is very simply the difference between your home’s value and the amount you have outstanding on your mortgage.  If you have a million-dollar home and owe $500,000 on the mortgage, then your equity is $500,000.  People usually build equity in their home by paying down the initial mortgage and through rising home values over time. 

Equity can be accessed for many different purposes: consolidation of credit cards, paying for a holiday, buying a car/boat/caravan, home improvements, or even to pay for a wedding. 

Along with those purposes listed above, using equity to buy an investment property is a very popular way of using your accumulated wealth to invest and create more wealth. 

Often when accessing equity to buy an investment property there is the opportunity to borrow enough that your out of pocket expenses with a property purchase are covered.  This means that you don’t have to tap into your savings for things like stamp duty.  You might also be able to balance out so that the rental returns cover your outgoings, creating passive income. 

Typically, I would not recommend borrowing more than 80% of the property’s value, but there can be exceptions. 

Things to consider:

• You will need to be able to show that you can afford the repayments on the extra amount owing (and any investment loan if that is the loan purpose)

• The lender will assess your situation and want to understand what the equity is to be used for, and will sometimes want to see proof

• If you are using equity to purchase, for instance, a car, you should understand the cost differences between adding debt to your 25 year mortgage as opposed to taking out a six year car loan

There are a few simple steps to accessing home equity:

1.       Work out how much equity you have. 

This can be done simply by establishing the value of your home and subtracting the amount owing on the mortgage.

2.       Calculate the equity you can realistically access. 

You will need to be able to service the repayments on the extra loan amount and this will impact the amount of equity you can access.

3.       Review the options available to you. 

We can help you to research suitable lenders and products, comparing features, rates and costs to find the loan that best suits you.

4.       Work out the costs and fees. 

If you switch lenders there may be additional fees with government fees, application fees, and break costs on your existing loan.

5.       Apply for the loan and proceeding to settlement. 

We will work with you to apply for the loan and to see you through to settlement.

If you want to understand more about home equity and how is can be accessed, please speak to us.  We would love to hear from you!

What’s the difference between offset and redraw?

The difference between offset and redraw is not always understood.  So, what is the difference between offset and redraw?  Does it matter?  And how could it affect you?

Some of you who were following the news over the last couple of months may remember this story where ME Bank made some changes to their redraw policy.  Effectively what happened was that customers who had paid in advance on redraw loans had their advance payment taken away, meaning that they couldn’t access the advance payments.  There was instant outrage from their customers and the decision was quickly reversed.

What is redraw and how does it differ from an offset account?

On a redraw loan, the customer makes payments over and above the minimum monthly loan repayment.  This is an effective way to minimise the interest charged and to reduce the overall cost of the loan.  If needed you can “redraw” the advance payments to use for other purposes.

An offset by comparison is a separate account to the loan account, and any money sitting in this separate account “offsets” the balance upon which interest is charged on the loan.  If you had a $500,000 loan with $100,000 in your offset account you will only be charged interest on $400,000. 

Whilst a redraw loan lets you access your advance payments there’s a risk that the lender will take the redraw away.  There is often limits on the amount you can redraw and the number of times a year you are able to redraw.  Sometimes there is a fee for redrawing.

Offset accounts typically work like any other transaction account: you can access them at any time for any amount, you can have your pay paid into it etc. Loans with offset features often have an annual fee attached and can have a slightly higher interest rate.

Choosing what is right for you

So, which is better?  The decision between redraw and offset is ultimately one of personal preference.  Offset has greater flexibility but may have more costs and a higher rate.  Redraw is simple and usually cheaper, but you may run the risk of not being able to access the advance funds if and when you need it. 

Understanding the pros and cons of each will allow you to make an informed choice.  You as the consumer should think about your needs and objectives to make a call on what is best suited to you.

Buying with a smaller deposit - lenders' mortgage insurance

When you consider that an inner Sydney apartment could set you back a million dollars, saving a 20% deposit to buy can seem an insurmountable task. That’s where insurance can help.

Lenders mortgage insurance (LMI) may be an added expense, but it offers buyers the opportunity to dive into the property market earlier, without saving up an entire 20 per cent of the property’s purchase price as a deposit.

What is it?

LMI protects the bank or lender should a home loan go into default, guaranteeing that the lender will get its money back if the property needs to be sold and there is a shortfall in repaying the loan.

While a 20% deposit generally provides a good buffer against any drops in property value over the life of a loan, LMI can also provide the same protection, meaning borrowers can purchase property with a smaller deposit.

What’s in it for you?

For the borrower, it may seem LMI is just another expense to cover. But insurance can mean that some buyers will be able to enter the property market with, for example, only a five per cent deposit saved. For a million-dollar property, this brings the deposit down from $200,000 to $50,000.

And, if the market is hot and prices are rising rapidly, paying LMI so that you can buy now could be cheaper than taking the time to save a bigger deposit. In the time it takes to save a higher deposit amount, property prices may well have surged by more than cost of the insurance so, for some properties and purchasers, it can make good financial sense to purchase earlier even with the added cost of LMI, especially when you consider the rent that you would pay while you’re saving.

What you need to know

The insurance premium is generally a one-off payment, but you can usually capitalise it into the loan amount so that you are paying for it month-by-month along with your mortgage. 

There can be a big difference in premium amount paid.  If for example you have a 10 per cent deposit compared with a five per cent the LMI premium will be much cheaper.  It’s worth gathering all the extra funds you can muster, even if you despair of reaching the full 20 per cent.

How to pay off your home loan faster

Reducing the life of your loan isn’t difficult; there are many simple things you can do to cut years off your mortgage. Here are some tips that will help you be mortgage-free sooner than planned.

 Small extra repayments

One of the most obvious ways to pay off your home loan quicker is to make extra repayments. Depositing lump sums, such as a tax return or work bonus, will always be beneficial, however it doesn’t always take large amounts or windfalls to make a substantial difference – planning for regular, small cash injections can have a great impact over the life of a loan.

 Let’s say we give an extra $50 a fortnight on a $500,000 loan, that saves you $32,000 of interest over the life of the loan which in turn will save you just over two years,

 Switch your payment intervals

If you find that you don’t have the discipline to make extra repayments, then simply switching your payment structure can also help save years off your mortgage, as well as simplifying your finances if you are paid fortnightly.

 Because there are 12 months in a year but 13 four-week cycles, by switching your payment intervals from monthly to fortnightly, you are essentially paying off an extra month per year.

 Make sure you have the right type of loan

Ensuring your loan allows extra repayments without penalty will let you to make the most of bonuses or funnel small extra payments to reduce the loan principle more quickly, saving on interest immediately, while an offset account will use your savings or living expenses to reduce your principle, while still allowing you to access these funds from a transaction account.

 Offset accounts are particularly useful. Because interest is calculated daily but charged monthly, any money sitting in the account will help reduce the loan.

 Although you may have to pay extra fees for the offset or redraw account, these may well be lower amounts than the interest saved. Talking to usis the easiest way to work out whether this option is financially sound.

 Paying off your home loan faster isn’t difficult, however it does require financial discipline and expertise in ensuring the right loan features are in place.

Home loan pre-approval

Pre-approval is a lender’s assessment of your likelihood of being approved for an otherwise suitable loan. The appraisal is made on the basis of your ability to service a loan by looking into your living expenses and liabilities, your credit history, your employment circumstances and how often you have moved home or employment in the recent past.

As it is performed prior to a property being found and chosen, it does not take into account the particulars of a specific property and valuation, which is why uncertainties can arise.

Pre-approval is helpful for those who want to know how much they can borrow before attending open homes, and can be reassuring for new borrowers.  It gives some certainty in terms of knowing your price range, and comfort in knowing that a lender has looked at the application to make sure it meets policy.

Pre-approvals are usually valid for up to 90 days but, depending on the lender, may be renewed to allow more time to find a property.

It is very important to note that a pre-approval is not a guaranteed loan. It is your potential lender’s way of signalling how much they expect to lend you. This may change on your official application.  Before formalising the loan the lender will want to check that your circumstances haven’t changed (such as taking out another credit card or changing jobs).

Your pre-approval will also usually be conditional on a property valuation. If your lender does not deem the property a marketable asset, they may not approve a loan.

Speak to us about pre-approval before you lock in your Saturday open home schedule.

How to speed up your home loan approval

There's no straightforward answer to the question "how long will it take to get my loan approved".  Every application is unique, so the time between your first contact with your bank or broker and approval can never be predetermined. There are, however, some things you can do to help hurry your application along.

A best case scenario for loan approval is usually two or three days.  When the client’s lending position is fairly straightforward in terms of employment, asset and liability position, along with a lower LVR, it's more likely to be a quick assessment.  If there is some complexity in employment status, property type, or loan structure this will often cause time frames to increase.  Also, if the lender has a promotion or particularly good offers on the market this can mean they're busy and therefore slower.  We are also seeing lenders ask for additional information more frequently in recent times, and this creates a to and fro which can extend approval time.  

Disclose all information

To reduce the likelihood of 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, and convey as much detail as possible in relation to your requirements and objectives and have good, current information on your financial position. The broker will need to not only have your full financial details but will also need to take reasonable steps to verify it.

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, as long as it’s accepted by your chosen lender – but check with us first.

To ensure your application avoids any unnecessary delays, speak to us. 

Understanding Credit

Have you ever wondered what a lender looks at when assessing someone for a loan?
  
The fact of the matter is that there are innumerable variables that come in to consideration – way too many to cover off in a short blog post – but there are some basic tenants that are helpful for a borrower to understand when they are getting ready to apply for a loan. 
  
First and foremost, a lender will want to know about your credit history and will check your credit file.  Obviously if you have defaulted on a previous loan they will want to know about it, but there are more clues on a credit file than basic defaults or bankruptcy.  For instance, if there is a pattern of lots of enquiries for credit this may influence whether you are seen as credit worthy.  If you do have a default this doesn’t necessarily rule you out for a loan entirely. Sometimes, the lender can be influenced by mitigating circumstances, otherwise there are specialist lenders in the market who may still write you a loan with conditions (such as a higher interest rate).  There are also credit repair companies that can help with blemishes on your credit file.  If you are in a situation like this get in touch and we will see if Blackwattle can help you. 
  
Lenders will also want to see that you have stability in your personal circumstances. Factors such as how long you’ve been in your job and/or industry will be considered, and whether you have moved house frequently.  For self-employed and commercial loans, a lender will want to know that you have a good track record in business.  
  
The lender will also want to feel comfortable that you can repay the loan without experiencing undue hardship.  In short, they will not want to loan you more money than you can afford to pay back.  They will check how much money you have coming in versus how much you are spending on your living expenses.  Budgeting tools can help you stay on track of your outgoings, and you can estimate your borrowing power to see what is affordable for you.  
  
Your asset position will also come in to play.  What do you own?  Do you have property already, and if so, how much equity is there?  Do you have shares or other investments? Savings?  What other debts do you have?  And ultimately, what is the net position after your assets and liabilities are set off against each other.  This is pretty simple: the stronger your asset position the more comfortable a lender will be with giving you a loan. 
  
If you are looking for a secured loan (such as a home loan), the lender will want to know that the secured asset (the house) is worth more than the loan.  This gives the lender security that if something goes wrong that you will be able to cover the debt by the value of the asset.  Same rings true for any secured loan such as a car on a car loan, or business assets on a commercial loan – the lender will want to cover all or most of the debt with the value of the asset.  
  
Finally, broader macroeconomic factors will be taken in to consideration.  Things such as official interest rates, economic direction, and sometimes factors relating to your industry of business or employment will influence a lenders decision to give you money.  
  
A good broker will understand the factors considered by a lender and will be able to help you navigate the credit approval process and make the best case when applying for credit.  Get in touch with us now for help with your next loan.