Buying a home – the other costs

27 Feb 2015 | Home Loans

Continuing our look at the Home Loan Process, this week we are going to look at the range of costs that are invloved with purchasing your new home and arranging finance.  It is quite possible that the Other Costs can end up being 5% to 10% of the property value.  The costs can be broken down into 3 main categories, Government costs, Home Financing costs and additional costs.

Government Costs

There are a number of Government Costs that are payable:

1. Registration of mortgage – One off fee payable to the land titles office to register the mortgage.
2. Registration of transfer – Once off fee charged by the State Government to cover transfer of the title of your new property.
3. Stamp Duty – Stamp (or Transfer) duty is a levy (or tax) charged by the State Government for legally recognising certain documents.
4. Land Tax – State governemts charge a tax based on the value of the land.

The costs assoicated with each of these charges varies depending on which state (or territory) the property or land is located.

Financing Costs

There are a number of fee’s and charges that your lender will charge in relation to providing a home loan.

1. Loan Establishment Fee – This is a one-off upfront cost to establish your loan.
2. Settlement Fee – One off upfront fee is payable when the Bank (or its representative) arranges the funding of a loan (regardless of whether or not we attend settlement) for a property purchase, or for the refinance of an existing loan that’s with another lender.
3. Rate Lock Fee – A fee paid by fixed rate borrowers on application for a mortgage. By paying a rate lock fee, your rate will be locked at application, instead of the normal practice of the rate being set at settlement.  Protects the borrower from a rate increase between the application being submitted and the loan being finalised.
4. Security Guarantee Fee – this is a charge in relation to having a guarantor putting up security for your loan.
5. Addition security fee – This fee is charged when you have more than one security for the loan (guarantee securities are excluded from this fee)
6. Home Loan Exit Fee – A fee payable for you to exit your home loan agreement, often charged when you repay the loan within a certain period after establishing the loan (e.g 2 years)
7. Lender’s Mortgage Insurance (LMI) – As discussed here LMI is typically charged when the LVR is greater than 80%.  There are special circumstances when LMI is charged at lower LVR’s (often for low doc loans) or at higher LVR’s (some lenders have special policies for some professions, eg doctors).
8. Valuation fee – some lenders will charge a fee to get a valuation on the property being purchased (and additional fees for any additional properties being used as security).
9. Document Preparation / Legal Fees – some lenders will charge a fee for preparing the loan documents and for any legal fees that they may incur in providing the loan.
10. Professional Package – offered by some lenders, this is an annual fee for the life of the loan, but often allows the borrower access to discounted interest rates, annual fee free credit cards, discounts on insurance and other products offered by the lender.

The financing costs will vary depending on the lender being used, which fees are charged and the amount being charged varies with each lender.  Often some of the fees will be waived during special offers or can be negotiated to be removed.  Options like the professional package add an annual fee, but will have fees like establishment fees waived as part of the package.

If you are refinancing an existing loan, it is important to find out from your current lender the costs associated with paying out the loan.  This is doublely important if you currently have a fixed rate loan.  It is often wise when talking to your lender to tell them you are currently considering selling your current home and you want the current payout figure for your loan for your budget.

Other Property Costs

There are a number of other costs that you may incur when purchasing a new property.

1. Solicitor/Conveyancor Fee – for the preparing/checking the legal document and providing legal advice around the property transaction.  Usually will also perform the title search for the property.  They will normally calculate how the funds will be disbursed, including costs like Council Rates which have been prepaid by the seller.
2. Building / Pest report – Examine the property and report on any problems, maintenance needs and pest found (like termites).
3. Council Building Inspection – to check the structure of your building
4. Building Insurance – The cost to insure your property. Ongoing cost on a monthly/annual basis.  Should be put in place once the contract of sale documents have been exchanged (or the cooling off period has finished).
5. Contents Insurce – the cost to insure the contents in your new home. Ongoing cost on a monthly/annual basis.  Should be put into place prior to moving into your new home.
6. Strata levies – if your property is on a strata title, there will be Body Corporate Fee which covers maintenance and upkeep of the common areas, and often will incorporate the building insurance.  Your Solicitor/Conveyancor will make adjustments for the first payment.  This will be ongoing usually on a quarterly basis.
7. Council Rates – your share of the rates from the date of settlement.  Usually paid quarterly or annually. Your Solicitor/Conveyancor will make adjustments for the first payment.
8. Utilities/Services – You will have pay a connection fee to get your utilities and services connected to your new home.  This may include electricity, water, gas, telephone, internet and pay tv.
9. Removalists costs – The cost of moving your belongings from your current residence into your new property.  This may include engaging a professional removalists or hiring a van and doing it yourself.

There are a number of costs that you need to take into account when purchasing your new home outside of the direct cost of purchasing the property.  It is highly reconmended that you set up a budget and put down an estimate of what the costs will be.  This will be useful information for you to have when determining how much you can afford to pay for your new property.

Covering some basic concepts

13 Feb 2015 | Home Loans

Before we continue with our in depth look at the Home Loan process there is some important concepts which I want to cover off.  Today we are going to have a look at Loan to Value Ratio (LVR), Lenders Mortgage Insurance (LMI), Genuine Savings and Guarantees.  I would like to stress again that each Lender is different and how they apply each of these items will vary depending on their credit policy.

Loan to Value Ratio (LVR)

Loan to Value Ratio or LVR is one of the most basic concepts relating to home loans.  The LVR is the amount of a loan as a percentage of the value of the asset it was used to buy and is calculated by dividing the loan amount by the value of the asset.

For example you have a house valued at $500,000 and you have $100,000 in cash for the deposit, then the loan amount you are looking to borrow is $400,000. Your LVR is calculated as follows:

$400,000 (loan amount required) / $500,000 (value of house) = 0.8 or 80% LVR

The higher the LVR the higher the risk for the lender.  Each lender’s credit policy will cover up to what LVR they are willing to lend, depending on the type of loan product or loan purpose that is being applied for. For example for a standard home loan a lender may lend up to 95% of the property value, but for a low document loan they may only lend 70% of the property value.

Standard practice for LVR’s over 80% is for Lenders to require Lenders Mortgage Insurance, which leads us to the next topic.

Lenders Mortgage Insurance (LMI)

Lenders mortgage insurance (LMI) protects a lender against financial loss if you default on your home loan and the property is subsequently repossessed and sold.  The LMI covers the amount left to pay on the loan if the amount recouped from the sale of the property is not enough to pay off the loan in full to the lender.  Note that LMI protects only the lender not you the borrower from loss.

LMI allows borrowers to obtain a loan that would otherwise not be available, or to obtain a loan much sooner than they would be able to if they had to save for a larger (more than 20 per cent) deposit.  Some of the key points for LMI include:

• LMI premimum is payable at settlement. It may be included in the loan amount borrowed or paid upfront.
• The costs of the LMI premimum will vary based on the size of the loan and the size of the deposit.
• It is not possible to transfer LMI between lenders, if you refinance your loan with a new lender you may have to pay a new LMI premimum
• If the LMI insurer has had to pay your lender an amount in accordance with the LMI policy, the insurer may then attempt to recoup that sum directly from you the borrower.

It us usual practice that Lenders will require LMI on loans with a LVR greater than 80%.

Genuine Savings

With high LVR’s, typically over 85%, a lender will require the borrower to show genuine savings.  This means borrower must show evidence of regular savings over a defined period, usually at least 3 months.  The lenders are looking for evidence that the borrower will be able to meet there loan repayment commitments when they fall due.

The types of genuine savings that can be typically accepted include:

• A savings pattern, e.g. regular deposits into a savings account
• Term Deposits
• Shares
• Gift
• Equity in an existing property
• Inheritance

The following type of savings are typically not acceptable forms of genuine savings

• First home owners grant
• Borrowed funds
• Sale of assets other than property (e.g. Motor vehicles)

Each lender will have their own requirements around Genuine Savings and what is acceptable as genuine savings and what is not.

Guarantee

A guarantee can give you a head start by making it easier for you to get into your home faster with the help from family members or others willing to assist.  A guarantee allows another person, generally a family member to use the equity in their home as additional security for a portion of your loan amount. This means you may be able to buy a property sooner, and avoid having to pay the LMI premium.

The features of Guarantees include

• Buy your own property sooner
• Avoid paying the premium for LMI
• Maximise the amount you can borrow (in some cases up to 100% of the purchase price)
• Guarantors will generally be family members (typically parents), however lenders will often consider other guarantors and determine if a security guarantee may be acceptable
• Guarantors can determine what portion of the loan they will secure.  Normally the guarantor will secure up to 20% of the loan amount.

Next week we will continue our look at the home loan process with an overview of the First Home Owners Grant and some of the other costs that you are likely to encounter

Documents Required for a Home Loan Application – Part 2

6 Feb 2015 | Home Loans

Before you can start your home loan application you will need to have a few documents on hand to prove your identity, income, assets and liabilities.

Last week we started looking at the documentation required around verifying your identity and income.  This week we will have a closer look at the documentation that will be required to support your assets and liabilities.  Please note the documentation required to support a home loan application will vary depending on the lender, this is just an overview and not a comprehensive list.

Assets

You will need to prove your savings with bank statements, as well as be able to provide details and values of any other assets, such as cars, stock, term deposits and property.

Savings/Equity

The savings/equity must be held in the name of the borrower(s) and can include any of the following:

• Savings account(s)
• Term Deposit(s)
• Cash Management Account(s)
• Share
• Equity in existing residential property

In some cases Genuine Savings has to be demonstrated (don’t panic we will explore genuine savings and other concepts further in future posts).  As a result the folowing may also be required:

• Statements or other records to show that you have held or accumulated the savings or equity over 3 months or more
• If the savings is a gift for example from your parents they will be required to provide a Statutory Declaration stating that the funds are a gift and you do not need to repay the money in the future.

Transaction Account

A transaction account is your main day to day banking account it is usually defined as the account that your salary is paid into and / or your main banking transactions occur. You may have more than one transaction account, for example your salary may go into one account, but you use a different account to pay your bills.

Depending on the lender you may have to provide between 1 month and 6 months of statements and for some lenders if you bank with them you will not be required to provide any statements.

Other Assets

Generally you will not be required to provide documents supporting your other assets, you would just list them off and provide an estimate of there valuation.  In some cases you may need to provide supporting evidence as to the ownership and value of an asset, particularly if you are using the asset to provide security for the loan.

Liabilities

Lenders assess you on your ability to make your future repayments and need to understand what your regular expenses are to ensure you can meet your obligations without financial hardship.

Existing Loan / Debt

The lender will be looking for supporting documentation to verify your any loans or debt that you currently have, this could include loans on other residential properties, credit or store cards, personal loans or equipment finance.  The type of supporting documents will include

• Current statements covering six months for mortgage related loans being refinanced
• Current statements covering three months for non mortgage debts being refinanced (e.g. Credit/store/charge cards, equipment finance or personal loans etc).
• Current statements covering one month for any limit facility not being refinanced (e.g. lines of credit, credit/store/charge cards, margin loans, etc)
• Current statements covering one month for any fixed debt/commitment not being refinanced (only required where the repayments cannot be verified through the transaction statements)

Living Expenses / Commitments

What are your day to day living expenses, this is usually best demonstrated by a family budget supported by statements for your transaction account(s) and credit cards.  Other regular expenses and commitments may include:

• Ongoing rental, board or living at home arrangements (for example where you are purchasing an investment property and plan to remain in your current living arrangements) – where the payments cannot be verified by the most recent transaction or credit card statements one of the following should be provided:
  • Statement or letter from the managing agent
  • Current lease agreement
  • Letter from parents confirming that applicant resides in their property and does not pay any rent or board if applicant is living at home and not paying rent or board.
  • Proof of rental or board payments from Bank records
  • Letter from parents or related family member if rent or board is being paid to a related family member
• Child maintenance – supported by Family Law Court order and bank statements or pay slip showing the payments
• Centrelink debt – supported by Centrelink statement and bank statements or pay slip showing the payments
• Court ruled debt – supported by Court order and bank statements or pay slip showing the payments
• Australian Tax Office debt – Correspondence with ATO showing repayment schedule and bank statements or pay slip showing the payments

Next week we will look at some of the additional documentation needed in particular circumstances, for example construction loans, first home owners grants or with guarantors.