Your Complete Residential Mortgage Guide

Purchasing a home is an exciting milestone in many peoples’ lives.

Whether it is your first or 50th property purchase, it is also a time fraught with confusion and burdened by questions.

We understand the numerous details involved in buying a home can frustrate and overwhelm the savviest people.

In this guide, we cover the many details involved with home purchasing. You may also contact us directly for personal assistance.

How Much Will I Need for a Minimum Deposit?

For many, saving the proper amount for your minimum deposit is the first (and often most challenging) step in the buying process.

While individual lenders can provide a specific amount for the property you plan on purchasing, it is typical for lenders to require approximately nine per cent of the price you are paying for the property.

You should note that if you have a minimum deposit that is less than 20 per cent of the purchase price, you must purchase Lenders’ Mortgage Insurance, also called LMI.

What is Lenders Mortgage Insurance?

As the name suggests, LMI exists to protect the financial institution who has loaned the funds for your property in the event that you default on your loan. If you have a minimum deposit greater than 20 per cent of the price of your property, LMI will not be a requirement for your loan.

 Points to Remember:

• LMI does not absolve you of financial responsibility should you default on the loan. It pays the lender any amount of the loan not covered when the property sells after a default.
• If your lender makes a claim on the LMI, you must repay the insurer.
• Your lender arranges the LMI.
• LMI protects your lender, not you.
• Do NOT confuse LMI with a Mortgage Protection Insurance policy. The Mortgage Protection Insurance is a separate entity which covers your mortgage repayments if you become unemployed, disabled or in the event of your death.
• The calculation for the price of LMI is a percentage of your loan amount. You can learn more about the amount of your LMI by using this LMI estimator.
• You can pay for your LMI either as a part of your loan repayment schedule or in one lump sum.

What Can I Do if I Do Not Have a Sufficient Deposit?

Fortunately, there are other options that make purchasing a home possible, even if you do not have the necessary minimum deposit. Here are several viable options that buyers choose when they do not have the deposit amount.

1. Parental Guarantee (Family Security Guarantee)
   A parental guarantee also called a family security guarantee, is a common way for parents to help their children purchase a home without needing to come up with a substantial amount of cash. Parents or other loan guarantors use the equity in their own homes to guarantee their children’s loan. There are several facts that must be clear to all parties before finalising this arrangement:- The guarantor chooses the amount to contribute
   • The guarantor can ask for release from the arrangement once the when the mandatory loan to value ratio is met, prior to the loan repayment.
   • A borrower can use an amount up to 100 per cent of the property cost
   • Typically, the parental guarantee is for the amount necessary to achieve a loan to value ratio of less than 80 per cent
   • All parties involved must understand that the guarantor’s property is subject to seizure if the borrower defaults on the loan.
2. Deposit Protect Bond
   The Deposit Protect Bond, also called the Deposit Bond, is a helpful way to secure enough money for a property purchase but cannot access the money because it is tied up in other investments, your home, or a term deposit. The Deposit Protect Bond is very useful for first time home buyers, a property owner planning to increase their portfolio or someone who owns a property and plans to buy additional property.Benefits of Deposit Protect Bonds:-The borrower only has a single fee to pay for a Deposit Protect Bond
   • The Deposit Bonds are easily put together
   • Deposit Protect Bonds have multiple uses such as residential property, land purchases, commercial property, or multiple auctionsRestrictions that apply to Deposit Protect Bonds:-Deposit Bonds are available for up to 10 per cent of your property purchase price
   • Six-month short-term Deposit Protect Bonds are available
   • You must be a permanent resident of Australia or an Australian citizen to apply for a Deposit Bond
3. First Homeowner Grant
   On July 1, 2000, Australia initiated the First Homeowner Grant (FHOG) program. Each state and territory are responsible for administering the program according to their own statutes with individual terms that may vary by location. Additionally, terms, fees, and conditions are subject to change. Applicants to the First Homeowner, Grant should visit the official First Home Owner Grant website to see the specific conditions that pertain to their state. More can be found on the first home owners grant for Perth and Western Australia on the state’s official FHOG page.
4. Genuine Savings
   The term genuine savings refers to the funds that a potential borrower accumulated gradually over time. The amount must be a minimum of five per cent of the property purchase price over at least three months if the loan value ratio (LVR) exceeds 90 per cent. Working with the genuine savings calculator is often helpful to give you a reasonable estimate of the necessary amount of required genuine savings.The necessity of Genuine Savings Based on How Much You Borrow:
   • If you will borrow 90 per cent or less of the property value genuine savings is not usually necessary
   • When borrowing between 91 to 95 per cent of the property value, the majority of lenders will require genuine savings
   • Loans between 96 and 99 per cent of the property’s value will require genuine savingsExamples of Genuine Savings:-Equity in a currently owned property
   • Managed funds or shares in your name for a minimum of three months
   • Cash held in a bank account in your name for at least three months
   • Money in a term deposit in your name for three months or more
   • A deposit that a builder or developer holds for three months or longer
   • Occasionally proof of a very strong rental history will suffice in place of other types of genuine savings

What is Preapproval?

Preapproval means that your lending institution agrees (in principle) to loan you a specified amount of money for property purchase. It is not a finalised or agreement. There are a few reasons your preapproval status may change. These include:

• Changes in the property’s repair
• The property you want to purchase has a negative valuation
• Personal changes in your life
• New or amended government regulations

Generally speaking, the majority of preapproved loans receive approval in the final stage of the loan process.

Do I Need a Preapproval?

Potential borrowers are not required to get preapproved before beginning the home buying process. However, preapproval is a good first step en route to your new home.

What Are the Benefits of Preapproval?

• Being preapproved shows sellers that you are a serious buyer who can afford the property
• Negotiating terms is easier when you are pre-approved
• Because your lending institution will preapprove for a specific amount, you can narrow your search and plan your budget
• It is a useful marker if you are bidding for a property at an auction

What Are My Loan Options?

While these are not the only options for loans if you are purchasing a house, the most common types of home loans fall into one of the following categories:

• Fixed-rate Loans – A home loan with a fixed interest rate is one of the easiest loans to understand. Your rate of interest will stay the same for a predetermined amount of time.
• Variable Rate Loans – If you choose a variable rate, your interest will follow the changes when banks raise or lower their rates
• Split-rate Loans – Purchasing a home with a split-rate loan means that a part of your loan will have a fixed interest rate, and the remainder of the loan will fluctuate with changes in bank rates.
• Low-doc Loans – Although the interest rates with low-doc loans tend to be higher than the other kinds of loans, this type of loan is an excellent option for freelancers and self-employed individuals who do not have the same documentation as someone who works for a traditional employer.

Repayment

Another choice that borrowers must make is choosing between a loan that repays the principal and interest or a loan the is interest only. Both types of loans have their merit.

 Principal and Interest Repayment

• Potential to pay less over the life of the loan
• Begin paying the principal immediately
• Tend to have overall lower interest rates than interest-only loans

Interest-Only Repayment

• Payment amounts are lower because you pay only the amount of interest on the loan
• After the interest-only term ends, your amount of repayment will be higher as the principal becomes a factor in the payment amount
• You will not reduce the amount you owe on the loan while paying only interest

What Additional Costs Can I Expect When Purchasing a Home?

Stamp Duty

Technically, stamp duty is a land transfer tax. Australian states and territories collect the tax at the purchase of all property. The amount you will pay depends on several factors, including the value of the property and the purpose of the purchase, whether it is a rental, investment, or owner-occupied property.

 In Western Australia, there are four rates of duty:

1. General Rate– This rate applies to commercial property, vacant land that does not qualify as a residential, rural property that is not used as a residential property.
   The residential rate applies to places of residence, rental homes, mixed-use property, and land where a residence was constructed within five years from the liability of duty date.
2. Residential Rate– This rate applies to Western Australia business asset or residential property valued at $200,000 or less.
3. Concessional Rate– This rate applies to Western Australia business asset or residential property valued at $200,000 or less.
4. First Homeowner Rate– This rate applies if you qualify or would have qualified for the first homeowner grant or if you are a resident of the Indian Ocean Territory purchasing your first home. Using the Western Australia Transfer Duty Calculator will help you get a clearer picture of how much Stamp Duty will impact your budget. Most lenders encourage borrowers to learn their stamp duty as soon as possible because the amount frequently has a significant impact on if a property is within a buyer’s budget.

Registration of Transfer

This is a fee set by individual state governments, so it varies. The registration of transfer fee covers the cost of transferring the ownership of a piece of property from one owner to another.

Registration of Mortgage

State governments set this fee which is for the registration of a mortgage against a property. The amount required depends on the state where you purchase your property.

Lender Fees

Various lending institutions charge a variety of fees to customers. It is important to be aware of these charges. The lender fees typically fall into one of the following categories:

Upfront Fees – The fees you pay upfront are often application fees, legal fees, and valuation fees. Since you pay these at the beginning of your buying process, you will not need to concern yourself with them later.

Ongoing Fees – Typically, these charges will follow you throughout the life of the loan. The ongoing fees include monthly service fees, annual fees, and redraw fees.

Exit Fees – When you discharge your home loan, you often will pay a discharge fee to cover the finalisation of your mortgage. If you break a fixed-rate mortgage, you will pay fixed-rate break costs.

Legal/ Conveyancing Costs

Among the charges involved in the purchase of a home, you should plan on fees for conveyancing.

What is Conveyancing?

Conveyancing is the process involved in the transfer of property ownership from one party to another.

To give you a better idea of the charges involved, you can view the costs of conveyancing here.

Must I Retain the Services of a Conveyancer?

While employing a conveyancer is not legally mandated, there are numerous benefits to having a conveyancer.

These benefits include, but are not limited to:

• Prepare and lodge all of the required paperwork involved in the property purchase
• Research the property and inform you of any irregularities
• Work with the local land authority to lodge a caveat to protect your interests
• Represent you and communicate with the seller or the seller’s representative
• Negotiate contract changes
• Attend at settlement
• Save you countless amounts of time and frustration sifting through all of the legal terminology involved with preparing documents

Each state has its own set of mandates regarding the fees associated with conveyancing. Be sure to check to see your state’s regulations.

Rates/ Strata Reimbursement

Often sellers must pay fees upfront or for a specified amount of time. The rates/strata reimbursement fees are paid by the buyer to the seller when there are remaining funds.

For example, if the person selling their home pays into the council rates for six months but sells the home and vacates the property in two months. The amount equal to the remaining four months goes to the seller because they fronted the money before its sale. Your conveyancer usually refers to the rates/ strata reimbursement fees as adjustments.

Serviceability Requirements

Prior to granting a loan for property purchase, the responsible lending rules in force in Australia mandate that the potential borrower show they are able to repay or service the loan.

How is Serviceability Calculated?

When determining if a potential borrower will have sufficient income to service the loan lenders calculate monthly income by looking at the following sources:

• Wages
• Commissions
• Rental property income
• Child support
• Pensions
• Bonuses

Lending institutions then calculate the monthly living expenses of the loan applicant, including:

• Utilities
• Rent
• Medical expenses
• Healthcare
• Childcare
• Groceries
• Property rates
• Insurance
• Outstanding debts
• School fees
• Child support payments
• Gym memberships
• Phone service
• Recurring pay television services
• Internet charges
• Transportation expenses
• Clothing expenditures

By subtracting your monthly living expenses from your monthly income, the lenders calculate your Net Income Surplus; commonly called NIS. If you do not have a surplus after calculating your NIS, it is almost certain your loan will not get approval.

Key Points About Serviceability

•  You should note that not all lending institutions place the same weight on all of the sources of income. It is not uncommon to learn that child support and government pensions are not a part of an individual’s monthly income.
• Additionally, some lenders devalue various income such as rent received from investment property because they believe circumstances can change eliminating the income. All home loan serviceability is under the watch of the Australian Prudential Regulation Authority (APRA).
• Also, be aware of the fact that accuracy in your living expense declaration is paramount. The Royal Bank Commission discovered improper practices used to assess living expenses that resulted in borrowers being over their heads with home loans. The result is more scrutiny regarding living expenses as well as discretionary spending. In some instances, lenders ask for bank and credit card statements so they can track living expenses and discretionary spending.

Existing Account Conduct/ Transaction History

Providing lenders with bank accounts and credit scores is a typical part of the home buying process. However, lenders are looking closely at how you manage your existing financial responsibilities. An account with several negative activities like missed or late payments is likely to influence lenders to deny the loan.

Credit Score

By using your past behaviour to predict future action, lenders look to your credit score as a way to determine how much risk exists in offering you a loan. Your credit score has a major impact on your ability to get a home loan and the ability to get a good interest rate on a home loan.

How is a Credit Score Calculated?

 To create your credit score, the providers examine numerous factors:

• Personal data including place of residence and age
• Your number of credit applications
• The kind of credit you used or are using
• The amount you presently owe
• Loans or credit that is unpaid or overdue
• Any arrangements related to bankruptcy
• The types of credit you used in the past two years
• How much you remit when making repayments
• Frequency and punctuality of repayments

What is the Meaning of My Credit Rating?

Your credit rating is a score between zero and 1,000 or in some cases 1,200 depending on which credit reporting agency calculates the score. After calculating a number, the reporting agency classifies you in one of five categories.

• Excellent Credit- You are extremely unlikely to have any unfavourable events impact your credit score in the next 12 months and are a top-tier candidate for credit
• Very Good Credit- You are unlikely to experience unfavourable events that will impact your credit score within the next 12 months
• Good Credit- You are less likely to experience unfavourable events that will impact your credit score in the next 12 months
• Average Credit- You are likely to experience unfavourable events that will impact your credit score in the next 12 months
• Below Average Credit- You are more likely to experience unfavourable events that will impact your credit score in the next 12 months

How Can I Make My Credit Score Better?

The first step when trying to improve your credit is to start with a clear and accurate picture of your financial situation. From that point, there are several ways you can improve your credit score, including:

• Make all of your credit repayments on time
• Pay your mortgage or rent and utilities on time
• Consolidate your personal loans and credit cards
• Avoid applying for credit
• Ask lenders to lower your credit card limits
• Pay off your credit cards each month

Remember to take the time to check your credit report. Doing so is a good way to guard against the fraudulent use of your identity. Additionally, you may discover missing or incorrect information that could be lowering your credit score.

Use this guide to avoid misinformation and half-truths regarding the ins and outs of buying a home. All material is for informational purposes only and not a guarantee of terms or specific practices.

Remember the experts at Quantum Finance are available to assist you with all the steps involved in purchasing a home.