Variable interest rate:

• Flexibility to make extra repayments.
• Flexibility to use offset account/redraw.
• To take advantage of potential future decreases in the interest rate
• Like the flexibility of variable rates.
  
  

Fixed interest rate:

• To provide certainty of repayments during fixed rate period
• Generally of the opinion that interest rates will increase
• Fix the interest rate for period of time to suit budget / cash flow
• Fixed interest cheaper than variable

Armed with the knowledge that every $1 we save in interest is $1 that goes off the loan balance (and is another $1 on which you aren’t paying interest – the compounding effect), paying off the mortgage quickly is all about finding ways to save as much interest as possible. 

Case study:

Peter and Marisa have just taken out a home loan for $400,000 at an interest rate of 4% over 30 years. Their minimum P&I repayment is $1,909. Assuming for this example that the interest rate doesn’t change and they don’t make any additional payments, here is a snapshot of their home loan over the 30 years*.

*Rounded to the nearest $1.

Interest only loans are where the loan repayment is set up to pay interest only. Meaning there is none of the principal loan amount being reduced. Therefore the loan balance will not reduce whilst repayments are set to interest only.

Lenders typically offer interest only repayment terms from 1 to 10 years however time limits vary depending on whether the loan is for Owner Occupied or Investment purposes

Having repayments set to interest only means you will pay additional interest over the life of the loan

However having repayments on interest only for a set period allows the borrower/s to reduce their repayment commitment and may allow for property investors to claim tax benefits relating to the total interest payable on a investment property.

In the current market interest only repayment products carry a higher interest rate than principal and interest products, however in many cases the repayment commitment with interest only repayment will still be lower 

Key points for interest only:

• Interest-only repayments are only available for a set period over the life of the loan
• When your interest-only term ends, your principal and interest repayments will commence and will be higher. As you will then be paying the interest portion and the principal portion of the loan 
• The balance of the loan will not reduce and therefoe the equity position in the property will be slower during the interest only period
• By paying interest-only for a period over the life of your loan it means you’ll pay more interest than if you’d been paying both the principal and interest.
• There are potential tax benefits for property investors
• You can generally claim a tax deduction on the interest paid to reduce your rental income and tax payable
• Allows property investors to keep their costs and commitments down to allow for additional investment opportunities
• If the property market is strong and the value of your property increases, this could be a good strategy. However, if the value of the property decreases and you’ve only paid interest payments, and you need to sell, you could face a net loss.

Lenders Mortgage Insurance (LMI) is a one-off and non-refundable fee that is added to your total home loan amount.

IF the loan amount v the property value is greater than 80%, then industry standard is that the lenders will then charge an LMI premium

A good way to think about it is it is calculated based on the size of your deposit and how much you borrow. The more you contribute to the purchase price of your property, the lower the cost will be. 

LMI is a bank designed fee designed to protect the bank against any loss they may occur if you were to not repay your loan. Essentially the lender or bank considers the loan to be an increased risk (as you can only contribute a lower deposit) and therefore they charge the LMI fee.

Example

• If you wish to purchase a house at $500,000, to avoid LMI you would need to have a minimum deposit of $100,000 (20% of the property’s value). Note: there is also additional Government stamp duty and other related fees which vary between states
• However, if you have only saved $50,000, but you have sufficient income to allow borrowing capcity, then the lender will consider a loan of $450,000 and charge a LMI fee
• In this instance the loan would be $450,000 and property value $500,000 giving a loan to property ratio of 90%
• The LMI is then calculated based on the 90% LVR (loan to value ratio)
  
  

Whilst the LMI fee is similar across the market there are fee differences between lenders, and this can sometimes be a significant difference when it comes to the final fee

Lenders use different calculations and different mortgage insurers when calculating the relevant LMI fee. Other factors include the location of property and applicant credit worthiness.  

Therefore, it is important to review a range of lenders when considering your purchase and selecting a lender. You can seek information around the potential LMI fees and related lender policies that may best suit your personal circumstances.

Is it Guaranteed?

LMI approval is not guaranteed. It forms part of the overall loan application process. Once the lender has assessed the loan application and is satisfied with application, they typically then request the LMI insurer to complete a secondary assessment and provide approval/acceptance for LMI. If both approve, then the application will be given unconditional approval status. However, LMI insurers often have different policies and expectations so this needs to be considered prior to applying.

What is an Offset Account?

An offset account is a transaction account which reduces the balance on which your interest payments are calculated. 

An offset account is just like a normal transaction account. You can have a debit card as well as deposit your pay in into your offset account. Any funds in the account, even if just for a day, will save you interest on your mortgage. 

Example:

Key Benefits of Offset Accounts

The key to saving money on your home loan is to have all your money working for you, offsetting the interest on your Owner-Occupied home loan.

The key benefits of an offset are;

1. Maximise interest savings, thereby paying your mortgage off quicker.
2. Preserve future tax deduction benefits if you rent the home out in the future.
   
   

You generally will not want to offset interest on investment debt until your Owner-Occupied mortgage is paid out in full (seek accountants advice). 

To understand cross securitisation (also called cross collateralisation) or Crossed/linked, you need to understand the concept of “Security”. 

What is “Security”.

It sounds harsh, but the easiest way to understand “Security” is to think what the bank will sell if you do not pay the loan back. 

So, for a home loan, the security will generally be the home that you have purchased. The loan is said to be secured against your home. If you don’t pay the mortgage, the bank will sell your home. 

What is cross securitisation?

Cross securitisation is where the bank takes security over more than one property to secure the loan. If you own 2 properties and your loans are secured against both properties, that means the bank can sell both your properties if you default on one of the mortgages.

Why is cross securitisation restrictive?

The central problem is that the bank holds more security than they need, giving them plenty of power and leaving you with fewer options down the track. 

If You Sell Your Home When Cross Securitised…

If you sell your home and were expecting surplus funds, the bank may not release them to you, but instead pay down the loan on the remaining property to strengthen their position. 

Furthermore, if the loans are cross securitised, the bank often has to value the other property and sign new mortgage documents. 

When You Cross Securitise You Can Get Locked In To One Bank

If you cross securitise, you effectively hand control to the bank. 

1. If all your loans are with the same bank, that can make it very difficult to change lenders if for example your bank won’t lend you any more money. 
2. You may lose product selection – your bank may not want to lend to you on an interest only basis any more. To change lenders for that loan to another lender, you would have refinance your entire portfolio. 
3. The Bank holds far more security than they need. E.g. If your homes is worth 600k and the mortgage is only $300,000, the bank effectively holds $300,000 of surplus equity that they control.  
4. Cannot revalue properties individually to release equity. Say one of your properties went up in value by 100K and one went down in value by 100K. If cross securitised, the bank won’t lend more money against this equity as overall the position is even. But, if properties were individually secured then you could take equity out of the property that went up in value, leaving the other property and loan untouched.

A rate lock is a loan feature that some lenders offer when applicants have selected a fixed rate home loan product. It provides an ability to lock the fixed rate at time of application. It is designed to provide assurance that the rate at time of application is secured.

It provides protection that should the interest rates increase whilst the application is being processed the anticipated and agreed fixed rate will still be the final rate given at approval.

It is important to note the amount of time the rate lock is valid varies between lenders. This time frame is typically 60 or 90 days across the market at present.

How much are rate lock fees?

The lenders typically charge a fee to lock the rate and this fee varies between lenders. However, for illustration purposes, the current average is around 0.2% of the loan amount. Therefore, for a $400,000 loan the fee would be around $800.fee payable to lock the agreed fixed rate.

It is important to note many lenders will not refund the fee if you application is unsuccessful, so this should be kept in mind when making decision to pay the fee to the lender.

When should I consider a rate lock?

Rate locks historically are most popular when fixed interest rates are predicted to increase. For example, if some lenders have started increasing their interest rates in the market and others may follow soon after.

It also is usually more beneficial for a longer fixed term as there is potentially more interest the borrower stands to save over the life of the loan.

It is important to understand that if a lender lowers its fixed interest rate and you have opted in for a rate lock, you are not necessarily guaranteed the lower rate. Each lender has a different policy regarding this occurrence and it may need to be manually re-applied to achieve the lower rate. If fixed rates change during your application process it is important that you enquire to understand the options for you at that point.

Speak with us if you have any questions or queries and we can assist with information relating to your individual position and where you stand with regard to lenders policies.