4 pointers to help you find the right home loan
Adrian Sheahan, manager of lending operations at Switzer Home Loans, answers some common questions about mortgages.
WHAT ARE SOME OF THE THINGS THAT BUYERS NEED TO KNOW WHEN THEY LOOK FOR A HOME LOAN?
Borrowers need to ask themselves what the loan is for – is it for a purchase, do they want to refinance their existing loan, are they looking to purchase an investment property, or do they simply wish to access the equity in their home, either for personal or investment reasons? – this will dictate the kind of product they will need.
They need to know how long they intend to retain the loan. For example, if it’s for an investment property that they want to sell in five years for the capital gain, interest only repayments could possibly be the most suitable repayment structure.
They need to know what kind of ‘bells and whistles’ they want. Do they need full transaction capabilities with the loan , or is a simple set and forget style loan more suitable? Do they need to identify multiple purposes within the loan? If so, they should be looking for a loan that provides multiple portions under the one approved limit. Simple structures like this can make tax time much less stressful and ongoing management more straightforward.
WHAT ARE THE LENDERS LOOKING FOR?
Essentially the lenders will look at three core items when they assess your mortgage application.
Does the applicant have the capacity (ie income) to repay the debt and continue to meet their other loan commitments and living expenses?
Is there enough security for the loan and is it suitable to the lender? Is the property being used for security for the loan in an acceptable location for the lender, is it a suitable property type and is it a property that would be readily saleable in a normal residential property market? For example, properties with multiple dwellings are often considered outside the scope of the normal property market.
Is the applicant credit worthy? Do they have any credit issues and are their existing loan repayment records satisfactory? Do they have a stable employment history and is their asset/liability position reflective of their age, income and circumstances?
The lender of course looks at other factors in the application, but these will be the initial focus.
WHAT MISTAKES DO PEOPLE OFTEN MAKE?
The factor that is most commonly misunderstood is the area of income and repayment capacity assessment, or the ability to repay.
The recent introduction of additional regulatory requirements for lenders has contributed to this by increasing their requirement to demonstrate how the applicant can meet the loan repayment obligations without placing them under financial stress.
The lenders therefore have tighter policies surrounding how they assess applicants’ income (for example overtime or bonus income), which directly impacts on how much they can borrow. In addition to that, the lenders are more closely scrutinising applicants’ living expenses and applying higher living allowances, which again, negatively impact the applicant’s borrowing capacity.
The other thing that they often don’t appreciate is that when the banks look at how much they can afford to repay, the banks apply a loading or stress rate to that. If interest rates rise they need to be confident you can still meet repayments. Given rates have been so low for the last few years that fact isn’t front of mind for some people.
The applicant’s contribution has a significant impact on the interest rate and loan fees. Lenders generally prefer the loan amount to be no more than 80% of the security provided for the loan, as it represents a lower risk for them. To encourage that, they will offer discounts on the interest rate for loans at less than 80% of the security value. Loans above the 80% figure also attract Lenders Mortgage Insurance, which adds cost and time to the loan process.
Once potential borrowers are clear about what they need from a home loan, it’s a good idea to speak with a residential mortgage lending expert to help them sift through the many products available on the market.
WHAT SHOULD INVESTORS BE LOOKING FOR WHEN USING A MORTGAGE PROFESSIONAL OR BROKER?
A good mortgage professional should be experienced and able to work with you to find the best loan option or, more specifically, the most suitable loan structure for your individual needs.
They must be able to listen to you so they can fully understand both your short and long-term goals because that will determine the best mix of rate structures, loan splits and product features.
They should also take into account your tax situation and find tax efficient options for you. Of course competitive rates are a must and a good broker should be able to find you the best rate possible but it is not necessarily the most critical factor in making a choice of loan. A good broker doesn’t provide loans simply based on rate, they provide the loan that most closely suits your needs.