FAQs

Quick and simple answers to frequently asked questions about mortgages, the terminology used, and any questions you may already be thinking about

Applying for a home loan?

Applying for a home loan can be simple when you break it down into a few steps:

  • Find a suitable home loan and lender
  • Collect your identification and income documents
  • Submit your application

To increase your chances of success, you need to make sure you have all the paperwork, have your spending under control and consider getting pre-approval before you buy.

Speak to us at Turnkey Finance to make the process easier for you.

How to apply for home loan pre-approval

When you’re in the market to buy property, it could be useful to understand how much you can borrow from a lender. Conditional pre-approval for a home loan is not essential, however can potentially be handy for some people.

A home loan pre-approval, also known as conditional approval or approval in principle, is when a financial institution gives you an estimate of how much you could borrow for a home loan, provided you meet certain conditions. This is generally confirmed in writing with the conditions clearly listed.

Conditions could include paying off an existing debt, selling another home or providing further documentation (for example, a professional valuation of a property you would like to purchase),depending on your circumstances.

Home loan and mortgage fees you should know about

Along with loan interest, lenders may charge a variety of home loan fees, and where they apply, it all adds up towards the total cost of the loan.

So, it makes good financial sense to check out any fees or other charges associated with a loan to get a true picture of what you’re really paying. After all, a low rate home loan could come packed with a variety of fees, some of which may not be obvious when you’re browsing products.

To give you an idea of the impact fees can have on the cost of a loan, according to Canstar’s home loan comparison calculator, there’s an overall difference of $4,100 over a 30-year term between the cost of two hypothetical loans with identical interest rates but where one of the loans comes with a $500 one-off establishment fee and a $10 monthly fee.

The main mortgage fees to be aware of

Home loan fees can be broadly broken down into three main categories. Here’s what to watch for. See the table at the bottom of this section for details on how the fee levels mentioned below have been calculated.

1. Upfront fees

When you first take out a home loan, the lender may charge a variety of upfront fees. These are one-off fees, but they can still take a bite out of your home-buying budget. Upfront fees can include:

Application/loan establishment fees

You may come across application fees described as ‘establishment’ or ‘set-up’ fees. How much you may pay varies between lenders, however it may be possible to avoid this cost altogether depending on the lender you choose.

Among lenders that do charge application fees, the average cost is $504, but there can be big variations, with application fees ranging from $200 to $1,599.

Valuation fees

Your lender may also ask you to pay a valuation fee. This covers the cost for a lender to have the home you’re planning to buy professionally valued before your mortgage can be fully approved.

The valuation fee can vary depending on the type of property if it is residential or commercial, so you could be asked to pay anything from $248 to $4000+.

Legal fees

Lenders may pass on the legal fees they have notched up for the work involved in preparing formal loan documents. Among the lenders who pass this cost on, legal fees range from $200 to $396.

Bear in mind, a lender’s legal fees are separate from your own. You will still need to pay legal fees to your own solicitor or conveyancer for the work they do reviewing the contract of sale, and transferring the title of the property out of the seller’s name and into your own.

Settlement fee

A settlement fee can be charged when you first take out a home loan, or when you want to top up your current loan with additional funds, or if you decide to refinance to a new loan. On average, expect to pay around $225, though where they apply, settlement fees can vary from $99 to $995.

2. Ongoing fees

A variety of ongoing, regular fees may apply to your home loan. Again, what you pay can depend on your lender, and your choice of loan. That said, there are two main fees to be aware of:

Monthly home loan fees

Not all home loans come with monthly fees – also known as ‘loan service fees’, but they are surprisingly common. The range of fees can be anywhere between $5 and $15 per month. This may seem like a small sum, but over the course of a 25 or 30 year home loan, it can really add up.

Annual package fees

Package home loans typically bundle a number of financial products together such as a home loan, transaction/offset account and maybe a credit card. A potential plus of package loans is an ongoing discount on the home loan interest rate, and it’s often accompanied by additional benefits such as savings on credit card annual fees.

In return for these savings, home owners pay an annual package fee. This fee can range from $248to $400 each year.

3. Fees when you end your loan

Discharge fees

A small minority of lenders may pass on the admin costs associated with ending your loan eitherwhen you pay it off in full or if you refinance to a different lender. These ‘discharge’ fees can rangefrom $145 to $995, with the average being around $325.

Other home loan fees you need to know about

Some loan fees aren’t factored into the comparison rate as they may only apply in certain circumstances. These typically include:

  • Lenders’ mortgage insurance: Not a fee, as such, but a potentially hefty cost incurred bysome borrowers with a low deposit when taking out a home loan.
  • Late payment fees, also called a default fee, which can be payable if you fall behind with a regular repayment.
  • Break fees, or break costs, usually kick in if you bail out of a fixed rate home loan before the fixed rate term is over.
  • Redraw fees that may apply if you use a redraw facility.

What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) is an insurance policy that some home loan borrowers need to pay for. The purpose of LMI is to protect the lender from financial loss if the borrower can’t afford to meet their home loan repayments.

If the borrower defaults on their loan and the sale of the property doesn’t equal the unpaid value of the mortgage, lenders can claim on the LMI policy to make up the difference.

Many people believe that LMI is designed to protect the borrower in the case of loan default, however this is actually mortgage protection insurance, which is a different product. The true purpose of LMI is to protect the lender. Additionally, by reducing the risk to the lender, LMI can allow banks and other financial institutions to lend larger amounts and approve more home loan applications.

If your lender requires you to take out LMI, it can typically be paid upfront or capitalised into (added to) your home loan. If the LMI amount is capitalised into your loan, you would generally be charged interest on it by your lender, along with the rest of your home loan. LMI premiums are typically non-refundable which means if you switch your loan to another provider in the future, you generally won’t be able to transfer your LMI to another lender. Depending on the situation, you may have to pay for a new policy through the new lender.

Generally a lender will require you to pay for LMI if your home loan deposit is less than 20% of the total value of your property – so if your loan-to-value ratio (LVR) is more than 80%. However, as different lenders may have different rules, it could be worth checking what each individual lender’s policy is.

If you’re looking to avoid paying LMI but you don’t have enough of a deposit saved up, you may be better off not entering the housing market just yet, and waiting until you have saved up the 20%deposit that is generally required to avoid paying LMI. You could also consider the First Home Guarantee Scheme, if you are eligible.

There are a few factors that may affect the cost of LMI. These could include:

  1. The size of your home loan
  2. Your deposit amount
  3. Whether the property is for investment purposes or to live in
  4. Whether you are a full-time or casual employee
  5. The insurer used by the financial institution

1. The size of loan

The more money you are borrowing, the greater the potential loss to the financial institution in the event that you default. For borrowers, this typically means the bigger your loan, the higher the cost of the insurance.

2. Your deposit amount

The smaller the deposit you have, the higher the cost of LMI.

For example, according to the Genworth LMI Premium Calculator, a hypothetical first home buyer (and owner-occupier) with a 5% deposit for a property valued at $600,000 and a loan term of up to 30 years would pay approximately $23,954 in LMI, if they chose to pay the premium upfront. In comparison, if the same borrower had a 15% deposit, they’d pay about $6,463 in LMI costs.

3. Whether the property is for investment or to live in

Some financial institutions and insurers may differentiate between an investment and residential property purchase when it comes to LMI cost.

Using the same amounts as the hypothetical examples above, an investment borrower with a 5% deposit would pay around $27,565 for LMI, and the same investment borrower with a 15% deposit would pay around $7,413, according to Genworth’s Calculator. Based on these sample calculations, an investor could end up paying around 215% more for LMI than an owner-occupier first home buyer.

4. Full-time or casual?

Your employment status can also affect the perceived risk of lending to you, so this is another factor that might affect your LMI premium.

5. The insurer used by the financial institution

There are several providers of LMI and, just like any other insurance product, premiums can differ between institutions.

What is a comparison rate?

A comparison rate is a percentage rate that all lenders must display by law, next to their advertised interest rates. It's a rate that takes into account most of the fees and charges of a home loan. It's designed to give you a more accurate picture of a loan's true cost once all of the fees and charges are taken into account.

Unfortunately, the comparison rate doesn't always help borrowers. The rate is calculated on a proposed loan that might look nothing like yours. To really understand your home loan costs you should use a repayment calculator and factor in the cost of fees yourself.

A comparison rate on a home loan is mandated by law to be calculated based on:

  • Loan example of $150,000
  • Loan period of 25 years
  • A principal and interest loan

What is an offset account?

An offset account is a transaction account that is linked to your home loan. The account’s balance(or a proportion of that balance) is ‘offset’ daily against your home loan balance. As a result, you’re only charged interest on the difference between the total loan balance and the amount offset.

This means the lender charges you less in interest because they are not charging you interest on the full, actual remaining balance of your loan.

Offset accounts are more commonly linked to a variable rate home loan, but they can also be linked to a fixed rate home loan.

For example, if you had a loan with a balance of $250,000, with $50,000 in a linked 100% offset account, you would only pay interest on $200,000 of your balance.

Fixed vs Variable home loans?

The terms ‘fixed rate home loan’ and ‘variable rate home loan’ refer to the two major types of home loan rates on the market in Australia. The difference between the two comes down to the interest rate. When you take out a fixed rate home loan, the interest rate remains set in place of ‘fixed’ for a specified period of time, whereas when you take out a variable rate home loan, the interest rate can fluctuate, going up or down depending on the decisions of your lender.

If you wish, you may be able to combine a fixed and variable rate home loan together into what is known as a split rate home loan, potentially allowing you to take advantage of features of both.

What are the pros and cons of a fixed rate mortgage?

Potential benefits of a fixed rate mortgage include:

  • Protection from rate rises: If interest rates go up, your repayments will remain consistent, protecting you from rate rises throughout your fixed term.
  • Certainty in your repayments: Knowing how much your mortgage will cost you each month can give you the ability and peace of mind to budget for other expenses.
  • Potential to save on fees and charges: Variable rate home loans come with various extras, but these can be expensive, so if you’re happy without them, you can avoid some fees with a fixed rate.

Potential drawbacks of a fixed rate mortgage include:

  • A lack of features: The features of a variable rate home loan can be convenient. For instance, an offset account can be used to lower the balance of your home loan while accessing funds for everyday banking. Some fixed rate loans do come with a redraw facility, but you will need to check with your lender to see if this is available.
  • Potential to miss out on rate cuts: If interest rates fall, you will not get the benefit of this if you have locked your rate in for a set period of time.
  • Inability to make additional repayments: Variable rate home loans generally allow you to make additional repayments to pay off the balance faster, however one of the trade-offs for the certainty of a fixed rate is that you may not be able to do this. You may be able to pay off the balance of your home loan early, although if you wish to do this – or refinance to another lender – you may be charged a break fee, which could be expensive.

What are the pros and cons of a variable rate mortgage?

Potential benefits of a variable rate mortgage include:

  • Flexibility: The ability to make additional repayments to pay off the balance of your home loan more quickly, and reduce your interest repayments using an offset account, can be appealing.
  • Potential for lower repayments: If your lender puts interest rates down, you have the potential to pay less on your mortgage from one month to the next.
  • Features: Variable rate home loans can help streamline your finances with features such as everyday bank accounts and offset and redraw facilities, and packaged extras like credit cards.

Potential disadvantages of a variable rate mortgage include:

  • Potential for higher repayments: If your lender puts interest rates up, you have the potential to pay more on your mortgage month to month, and rate rises could make your mortgage even more expensive over time.
  • Uncertainty: Rate rises can be a source of uncertainty, making it challenging to set a budget in advance if you don’t know how high your repayments could rise, depending on interest rates.
  • Higher fees: Features such as offset and redraw facilities and packaged extras can be attractive, but it is worth keeping in mind that these have the potential to drive up the fees you pay.

Tips For Negotiating The Price Of A House

Buying a house could be one of the most significant and exciting purchases someone makes in their lifetime, however settling on the price and the terms of purchase can come with its challenges. There are several tips that may be helpful when it comes to negotiating the price of the property you have your heart set on.

1. Do your research beforehand

One of the keys to success is doing your due diligence. By arming yourself with as much information as possible on the value of a property you’re considering, you can more easily identify when a price is too high or question the reasoning when one seems too low. Most importantly, you can be more confident making an offer you think is fair.

  • Compare prices for similar properties
  • Understand market conditions
  • Get to know the vendors’ motivations
  • Check for potential issues with the property

2. Be finance ready

When it comes to negotiating the price of a property, it is important to be financially prepared. This could include knowing your budget so you can position yourself as a serious buyer.

One way you could do this is by considering a home loan pre-approval, so that you know what price range you are likely to be able to afford. This could potentially help demonstrate your standing as a motivated buyer when you need to negotiate your preferred terms. Do keep in mind that pre-approvals are not guarantees of approval and applying for multiple pre-approvals with different lenders could negatively impact your credit score.

3. Leave your emotions at the door

Naturally, many of us fall in love with a property when we decide we would like to purchase it. However, be wary of allowing your emotions to overly impact your negotiations. Instead, focus on the research you have gathered on the property and know your own limits when it comes to budget and conditions of sale. If you decide a home is overpriced and the seller refuses to lower their demands, it is a good idea to understand when you need to walk away to avoid entering into a poor investment or a purchase you may not afford.

It also may be worth considering what aspects you value the most in a home before jumping into negotiations. For some the value may be solely in the market price of the home, while for others it may be in the convenience the property offers in terms of location or when it is available to be purchased. Having an understanding of what you value the most in a property early on is important to have a successful negotiation down the track.

4. Use clear communication and stay calm

The way that you act around some real estate agents or private sellers could potentially impact your bargaining power. For example, if you appear particularly eager to buy, they may feel they do not need to move as much in their negotiations. On the other hand, acting disinterested could make you seem like you are not a serious buyer. Instead, clearly communicating about your intentions and hopes could help put yourself into the best possible position to get the deal you want.

One aspect of the negotiation that you may choose to keep close to your chest is your ‘walk-away’ price, or in other words the maximum purchase price that you are comfortable to spend. If you have been particularly open about this, you may not have much room to move during negotiations, as the agent knows exactly where you stand and could try to make you pay as close to that price as possible.

If you are asked to reveal your budget, you could instead think about advising that you have adequate finance and that you want to buy the property at market value. If needed, you could provide a market estimate based on your research and instead discuss the value of the property.

5. Make an offer in writing

If you are serious about a property and want to put in an offer, opting to do so in writing and asking for a written response from the sellers could not only show how serious you are as a buyer but could also potentially avoid confusion later on around the price or conditions you are proposing.

Offers generally should include how much you’re willing to pay and any conditions of sale, such as repairs, deposit amount and the timeframe in which you could settle.

When it comes to negotiating the price of a home, being prepared is a great way to boost your confidence. Like most major purchases, doing your groundwork, keeping your emotions out of the decision, knowing your financial limits, communicating clearly and making sure you are seen as a serious bidder could be key to getting the right deal for you.

Investing in property: Where to begin

Quite simply, investment property is any house or commercial building that you purchase with the intention of making a profit. This might sound like a simple distinction from regular property, however it throws up a lot of important differences. There are a number of ways in which you can make a profit on property. The classic property investment strategy (and typically the least labour-intensive one) is speculation. This involves buying a property at a given price in the hope that its value will increase. If and when this happens, you can sell it on and release the profit.

Another strategy is buying to rent. Here, you buy up buildings and lease them out to tenants, making your returns from rental payments. This is a slower money-maker than speculation, however it means your potential profits aren’t entirely at the mercy of the market. It also means that you don’t have to wait months or years to see your first income from your investment.

The approach you adopt will depend on your risk appetite, as well as the length of time you can afford to sit on a property after you invest in it.

Advantages of investment property

Property has a number of advantages over other types of investment. The key among these is its security. While property prices may rise and fall over time, the underlying value of land and buildings rarely changes. People will always need places to live and work, and property will remain functional for decades if it’s looked after. If, for example, you were to invest in stocks, you could conceivably lose all of your investment overnight if you made the wrong call. This is generally unlikely to happen if you invest in property.

Property prices also tend to increase steadily over time (depending on the area you have bought in)keeping you protected from the effects of inflation. This makes property an option for long-term investors, such as someone saving for retirement, may want to consider.

Residential property VS commercial

One of the most important considerations for a new entrant to the investment property market is whether to opt for residential or commercial property. Residential property is a house or apartment for people to live in. Commercial property is any building or land that the occupier will use for business purposes.

One major advantage of commercial property for landlords is its treatment in contract law. Because business owners are presumed to have a degree of savvy about their professional affairs, courts are not as forgiving when they breach lease terms. Courts are also mindful of the fact that a residential property may be the only thing standing between a family and homelessness, while this is not the case for a commercial property. Therefore, it is easier to secure an eviction in respect of a commercial property, if this becomes necessary.

However, residential property is often easier to manage. Commercial property will usually have some special requirements, especially in the case of larger businesses. Such larger businesses can also be demanding tenants, as their income is dependent on the suitability of their premises.

Commercial property can also be far more expensive to purchase, making it often inaccessible to smaller investors.

Apartments VS houses: Which to invest in?

So if you’re going to invest, should you look at an apartment or free-standing house? It ultimately comes down to what you can afford.

Investing in the Australian market

Property investment in Australia has its benefits. Investment property in Brisbane and Melbourne is different to similar ventures in New York or Singapore. Firstly, property prices in Australia as a percentage of average income are higher than in other developed nations, such as America or Great Britain. Property is especially pricey in Sydney and Melbourne. As an investor, however, this isn’t necessarily a bad thing. When you make a big investment, there is the potential for big returns, but there are pros and cons to consider. The Australian property market has proven to be resistant to economic shocks. Events such as the burst of the dot-com bubble, the 2008 recession and the end of the mining boom in 2014 did not cause major setbacks.

Property investment on a smaller scale

If you don’t have the resources to buy a property outright, there are still paths you can take to enter the investment property market. One easy option is syndication. You could club together with family members or work colleagues to purchase a property, splitting costs and returns equally (or in accordance with your shares).

With this strategy, you could potentially also afford to hire a property manager, if you plan on renting out your investment property. This manager would look after the maintenance of the building and the interactions with your tenants, leaving you free to watch the money come in while concentrating on other things.

If you don’t have people close to you in a position to do this, you could look into a property investment fund. These are capital market instruments that put investor funds into a pool. Fund managers then put this pool towards various property investments, dividing the returns among investors. This would be a good option if you have only a few thousand dollars to get started with.

Building a More Prosperous Future

Whether you have a small nest egg or millions to invest in, you’ll often find something within the property market to suit your needs. Property can be a stable and reliable asset, and its future in the Australian market looks bright.

How to use equity to buy a second property with no deposit

What is equity?

In short, it is the difference between the value of a property and the amount of any loan over that property. For example, if a property is valued at $400,000, and that property has a mortgage with$100,000 left to pay on it (excluding interest and fees), then the amount of equity in that property is the difference between those two amounts. In this example, the equity would be $300,000.

However, to be able to access that equity, it’s important to first understand what goes into a bank’s decision to offer a home loan. It’s also crucial to understand the difference between equity and useable equity – as you generally can’t use all of your overall equity.

How much equity do I need to buy a second home?

When you apply to borrow money from a bank or other financial institution, they typically look at several factors. One is the LVR (loan to value ratio) in relation to the property, or in other words the percentage of the property’s value you want to borrow. In the example above, the LVR is currently25%. Traditionally, a bank will lend up to 80% LVR on the value of your property minus the debt owing, provided you can meet the repayments, although this can differ depending on the lender.

How to calculate useable equity for your investment property

In our example above, the breakdown would be:
⇒Property value: $400,000
⇒80% LVR: $320,000
⇒Debt owing: $100,000
⇒An LVR of 80%, minus the debt owing, equals $220,000 of useable equity.

Can I use equity as a deposit? How much can I borrow?

Yes. Equity is typically used as a deposit when purchasing another property via an investment loan.

The process involves determining the amount of equity available. This is achieved by obtaining a bank valuation and deducting the amount of any loan over the property from the valuation amount. Your financier will also have to consider your ability to be able to service any extra loans arising from using that equity as the deposit. Once you know how much useable equity you have, you can roughly calculate the purchase price you can consider for an investment property.

It’s also worth noting that it may be possible to borrow more than 80% if you pay for Lenders Mortgage Insurance (LMI).

To really get an up-to-date snapshot of where you stand, you could get a valuation of your current property. However, keep in mind the above calculation is a rule of thumb, and not a guarantee. The amount your financial institution may be willing to lend you will depend on a number of factors.

The bank will also analyse the ability of any would-be borrowers to pay back the debt, including by looking at income such as wages and rent. This serviceability criteria that the bank requires the borrower to meet takes into consideration the homeowner’s other financial obligations such as credit cards, car loans, other mortgages.

A lender’s serviceability criteria can change from time to time, depending on factors like its internal risk assessment policies and the state of the market.

How to boost your equity in a property

1. Increase the potential value of your home

If you are looking to increase the equity of your property, there may be a few things you could consider doing to help increase its market value. Typically, these are by way of renovations or landscaping (adding value).Do keep in mind, that not all renovations may add value, so it pays to do your research first.

2. Reduce the amount of debt on your property

Another way you may be able to increase your equity is to reduce the amount of debt on your property and pay it down as quickly as you can. Having any investment income from the property going straight onto the home loan can be a great way to reduce the balance of the loan and increase your equity for future purchases. This could also reduce your interest payments over time.

How do you use the equity in your home to buy another?

Over time, property in most parts of Australia has tended to increase in value, which may help grow your equity. If the value of your property increases, your increased equity may help you to access a home loan that will enable you to increase the size of your property portfolio. If your useable equity goes up it could enable you to borrow more as the amount of security you can offer increases, however it’s important to note that this isn’t necessarily true for everyone.

The property market can be volatile, so it’s a good idea to speak to a financial expert and take your individual circumstances into consideration.

Some key considerations before purchasing an investment property

Before you choose to expand your property portfolio, make sure you have your finances in order. This includes asking yourself a number of questions to determine what your maximum purchase price is and how much you will need in rental income to make the investment sustainable. For example, you could consider asking yourself:

  • If I needed to drop the rent, could the rent still service the loan?
  • When property is in high demand, what is the highest amount of rent I can achieve?
  • If a tenant (commercial or residential) stops paying the rent or leaves at the end of their tenancy, can I afford to make the mortgage repayments while I try to find a new tenant?

I find a lot of people can have some fear when wanting to invest in property. Not the fear of buying an investment property, however the very rational worry of how they will service the loan if things go pear-shaped. These are very understandable concerns and these decisions shouldn’t be taken lightly.

A guide to investment property depreciation

Property depreciation is a legal tax deduction related to the wear and tear of your investment property. Put simply, you may be able to claim a tax deduction due to your property getting older with time.

How much can I claim in depreciation?

The amount you can claim will vary based on the specific property you have purchased and when it was built. The below figures are an example:

If you buy a property built between the years 1987 and 2000, you may be able to claim roughly$4,000 in deductions a year, or close to $40,000 over the first 10 years

.If you buy a property built between the years 2000 and 2020, it’s likely you’ll be able to claim around$6,500 a year, or close to $65,000 over the first 10 years you own the property.

If you buy a brand new property, you may be entitled to claim approximately $16,000 in year one and close to $100,000 over the first 10 years.

Please note, however, that these figures are intended as a rule-of-thumb estimate rather than a definitive calculation of how much you’ll be able to claim in depreciation.

How do I get a report and how much will it cost?

If you ascertain a depreciation schedule may reduce your tax, you can get a quote from a quantity surveyor (QS).Not all quantity surveyors are the same and the price may vary, you’ll pay between $400 to $750 for a quality report, with the main variance being whether a site inspection is required.

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