A fee shouldn’t be ‘make or break’ as it’s more ‘expected’ to pay it than to not…
It’s a little bit like flying from point A to point B and choosing which airline to fly based on ticket price!
Airline X may give you a discount upfront on your ticket and Airline Y does not. However along your journey you find that Airline X doesn’t feed you or have any personal entertainment unless you pay for it, where as Airline Y has included meals and entertainment in their ticket price. Both airlines will get you to your destination, but you may pay extra along the way using one over the other!
Was it worth that few hundred dollars saving upfront in the long-run?
Sometimes yes and sometimes no…
The point being…A decision to choose one lender over the other doesn’t need to be based SOLELY on not paying an ‘application fee’ or the waiving of a ‘valuation fee’…
People may save money upfront and get an amazing product also…or they may save money upfront and pay extra in fees along the way…
Look at it this way…the goal is to get finance, with a product that suits the needs with an end goal of paying this off as soon as possible. A fee is ‘expected’ and I am satisfied to pay it if I can get a suitable product that does me well over my loan term…which should include a good interest rate and flexibility to make additional repayments…
If I can get the ‘suitable product’ and not pay an application fee then fantastic…it’s a bonus!
However, if I can get that product which suits my needs then an application fee is expected and so be it…
If people do choose the correct product then the savings they will save over the term of the loan will be in the thousands, by far off-setting any application fee in the beginning
And if they are going to compare lenders then compare the products and the product features… not just the application fees.
Lenders Mortgage Insurance (LMI) protects the lender in the event that a mortgage borrower defaults on their loan. The insurance policy is only required for home loans that have a balance exceeding 80% of the value of the property at application.
Traditionally, home loans were only issued up to a maximum of 80% loan to value. This meant that the borrower needed to put down a deposit of at least 20% if they wanted to buy a home with a mortgage. This was done because the lower loan to value ratio resulted in a lower mortgage risk for the lender. In the case of default, the lender could repossess and sell the property at a discount to recover their funds.
Who is Covered by LMI?
However as time has gone by, some lenders have allowed people to borrow more than 80% of a property’s value. To offset the risk, lenders take out an insurance policy against the balance of the loan above 80% of the value of the property. That way, if the loan goes into default, the lender can recover some of the balance of the mortgage from the insurance company.
Although the LMI protects the lender, it is paid for by the borrower by way of a lump sum payment. While many types of insurance policies allow for regular monthly payments, the LMI premium must be paid for when the mortgage is taken out. Because LMI is usually take out by people who were unable to save for a deposit on their home, it is unlikely they will be able to pay an expensive premium as a lump sum. For this reason, many lenders allow borrowers to add the premium to the balance of their mortgage and pay it off over time.
Can You Shop Around for the Best Deal?
The lender will usually have a commercial arrangement with one insurance company with whom they put all their LMI cases to. This means that you will not be able to shop around for an insurance company if you want to apply for a home loan with a particular lender. The lender will also apply for the LMI for you – there is no need for you to apply separately.
LMI only insures the lender. It is not a replacement product for building or contents insurance, or for personal insurances such as life assurance and income protection. The borrower receives no benefit from the LMI, except for the fact they will not need to pay for a large deposit to buy a home. Borrowers should therefore seek to protect themselves from financial distress by way of a personal insurance policy.
Being approved for LMI is not the same as being approved for a home loan. If you are buying a home you will still need to meet the lender’s normal requirements in order to be approved for the mortgage.
If you are looking to take out a high loan to value mortgage on your property you should speak to a mortgage broker. They will be able to select a lender which will offer the most beneficial home loan and the cheapest LMI to suit your particular circumstances.
Your Mortgage is probably the most significant financial commitment you will ever make. To ensure that you make the right decision and can communicate with your lender or broker it is essential for all Australian borrowers to understand the Australian mortgage jargon.
Attached are some of the most common Aussie lending terms in circulation:
Also referred to as AAPR (annualised annual percentage rate), the Comparison rate reflects the total cost of your loan by taking into account other costs other than the advertised interest rate. This is then expressed as a total interest rate cost to you over an average loan term.
Loan-to-Value Ratio (LVR)
This is the ratio of the loan required over the security value property. With a mortgage of $80,000 and the security property value of $100,000 – your LVR is 80%.
With such an LVR you will generally not have to pay mortgage insurance. Generally mortgage insurance charges are levied on the borrower once his mortgage LVR is greater than 80%.
Lenders Mortgage Insurance (LMI)
LMI protects the lender against potential loss in the event of default and mortgagee sale.
If the subsequent sale of the lender’s security fails to repay the outstanding loan in full the mortgage insurance policy will repay the shortfall. The insurance protects the lender, not the borrower. In the case of an ultimate loss (shortfall), an insurer may take action against the borrower to recover the loss. LMI is usually required where a loan to value ratio exceeds 80%.
This a loan taken when the purchaser wishes to buy a new property before selling their existing property. The lender will take security over both properties until the initial property is sold.
Reverse Mortgages are Home Loans for borrowers over 60 years old. Reverse mortgages allow the borrower to draw cash against the value of their home. The main difference between a Reverse Mortgage and a normal mortgage is that with a Reverse Mortgage the borrower does not have to make regular repayments until they move into care, sell their home or die. When the loan ends the borrower or their estate, must repay what’s owing, usually out of the proceeds of the sale of the home.
Home Equity refers to the difference between the value of your home and your outstanding mortgage. For example if your home is worth $300,000 and your outstanding mortgage is $150,000, your available equity in your home is $150,000.
You may wish to access the home equity in your home for a number of purposes such as :
– Debt Consolidation;
– Home Renovation;
– Investment etc.
To do this most borrowers refinance their home.
Line of Credit
A Line of Credit is a Mortgage facility which operates like a credit card secured by the equity in your home. You may use these funds for any purpose. The main advantage of a Line of Credit is that the funds are available to you at the cost of a home loan interest rate – much lower than the cost of a personal loan or credit card debt.
A second mortgage is an additional loan secured by a property that already has a mortgage attached to it. Second mortgages usually carry a higher interest charge as the first mortgage carries first priority in the case of default. The second mortgage also carries rights to the property, but these are subordinate to those of the first mortgage.
Every credit transaction performed in your name in Australia is recorded on your credit report. This will include applications for loans, telephone contracts and credit cards. In order to approve a loan, a lender will require a credit report on the borrower to confirm previous loans applied for or credit difficulties recorded. Credit reports are prepared by authorised credit reporting agencies, such as the Credit Reference Association of Australia. The Lender obtains the borrower’s permission in writing to proceed with a credit report.
When taking out a home loan it’s not as simple as one monthly or fortnightly payment.
There are a number of additional costs the borrower will incur in the process of buying a home. Your MFAA Member mortgage provider will guide you through the fees, but if you’re unsure ask them what they are, so there are no surprises after you have signed on the dotted line.
The following is a list of the additional costs associated with taking out a mortgage. Don’t panic, you most likely won’t have to pay all of them, what and how much you pay depends on your individual circumstances.
Application or Establishment Fee: Usually a once off fee paid to the lender upon getting unconditional approval for the loan to cover the cost of setting up the home loan.
Break Costs: Lending institutions may charge a fee if you break out of a Fixed Rate Loan before the end of the fixed period. The amount charged usually depends on the amount of money still owing on the loan.
Deferred Establishment Fees or Exit Fees: These fees usually occur if you decide to refinance a loan or move to another loan product. The fee will depend on whether you’re moving your loan from one lender to another, or to a new product from the same lender.
Legal Fees and Disbursements: These fees are charged by the borrower’s solicitor to the borrower to finalise the mortgage contract. They are to check that the vendor has the right to sell the property and if so, change the ownership of the property to the borrower’s name.
Lender’s Mortgage Insurance (LMI): If a borrower does not have a 20%, deposit for the property the lender will usually require LMI. This is a once only premium paid on loan settlement to protect the lender (not the borrower) in case of default on the loan.
Monthly Account Management/Service Fees: Charged monthly and are usually included with your repayment, to cover the costs of administering and managing the mortgage.
Mortgage Registration Fee: This is a set fee paid to the Land Titles office of the State Government when the property is sold and is paid by the party who purchased the property.
Property Valuation: Lending institutions will have their accredited property valuers conduct a valuation of the property they are lending the money for; this cost is only usually passed onto the borrower if there is more than one security property.
Stamp Duty: Every home buyer is required to pay his or her State Government stamp duty on the purchase value of the property. This is charged on a sliding scale based on the property value. Stamp duty amounts and calculators can be found on the State Government’s Office of Revenue websites.
Transaction Fees: Usually associated with Mortgage Accounts, examples are Lines of Credit and Offset Accounts. A fee is charged when you withdraw money from the account, however most lenders offer a number of free transactions per month.