Line Of Credit Risks and Rewards

Sydney the home of a line of credit

Line Of Credit Risks and Rewards

Beware that your home equity line of credit doesn't get out of hand

What’s the Best Choice, a HELOC or a line of credit?

Essentially they are one and the same. A HELOC is a Home Equity Line of Credit, which basically means the same as a Line of Credit. That said, there is one subtle difference in that a HELOC is secured by the equity in your home.

Whereas a Line of Credit doesn’t necessarily have to be secured by property. Some Lines of Credit can be business LOC’s, much like a business overdraft. However, with this article we’re going to be focusing on the Home Equity Line of Credit.

Essentially, what is a home equity line of credit?

Some call a line of credit a money machineHow can you use one successfully? A line of credit (LOC) is a loan option that allows you to have an upfront approved cash credit limit that you can access at any time. There are no interest charges on the credit limit you are approved for only on the amount you have drawn down on, or the outstanding unpaid balance.

It operates much like your own bank account. Except the money you have access to is not really yours and whatever you use you’ll be charged interest on it. You can spend the money on whatever you like as long as you don’t exceed the approved limit.

You can take money out, pay it back and borrow over and over again, simply making sure you don’t go over the limit.

You get a Grace Period
The differential between a credit card and an LOC is, you get a grace period with credit card interest charges, sometimes up to 55 days. There is no grace period with an LOC. An LOC is a borrowing tool not a payment tool, because much like a home mortgage, the moment you take the money the interest charges start accumulating from day one.

A line of credit provides the borrower with a ready source of cash that people use for various reasons. Typically the limit can be set higher than a regular credit card at a lower rate of interest. You don’t have to take out a personal loan that forces you to make payments on the full amount whether you want to use all of it or not.

In other words it provides flexibility to pay what you need to pay when you want to pay it and only pay fees on the drawn balance. Common purposes for a line of credit are to pay school fees, consolidate other debts, do home renovations, holiday money or any other expenses.

You Could Lose Your Home
These days, if the line of creditA home equity line of credit is not for frivolous spending is secured by your home or other residential property it’s now evolved over time to be tagged as a Home Equity Line of Credit or HELOC.

The major concern associated with home equity lines of credit is you’re putting your home up as security.

Since any type of residential home mortgage lender will want your real estate asset as collateral you’ll want to be very sure that your line of credit doesn’t get out of hand, whereby you become delinquent with your repayments.

Falling behind on repayments and not being able to catch them up will very well put your property in peril of foreclosure.

Don’t Play with Fire Without an Extinguisher
Do your due diligence up front and find out if there are going to be other costs, like settlement costs or loan establishment fees. Some of these products will charge you a fee anytime you make a withdrawal or even a monthly account fee.

Over time these fees can start to add, notably if you’re in the habit of regularly withdrawing cash out.

That said, you really want to avoid using one of these as a personal piggy bank to start paying your everyday living expenses. Should you find yourself with your budget out of whack, then creating more debt isn’t the greatest solution in the world.

No, they’re Really not a Giant Credit Card
A home equity loan can be a disaster for someKeep in mind, one of these is not like a credit card, although they’re sometimes described as a giant credit card. However, as soon as you draw down on it for any given amount you are immediately charged interest on that amount from day one.

You do have to be careful with one of these and be able to manage your cash flow well, as lines of credit come with interest only repayments and some even allow you to capitalise the interest they’re charging you. That means, you don’t have to make any payments at all (until you reach your approved limit, of course) I’ll leave it up to your imagination as to how big a debt hole you could dig with one of these.

Make sure, for whatever debt you clock up you’ve got an effective plan worked out for paying it back.

Managed well, They’re Handy to Have Around
One of it’s benefits is it can remain in place for years, you can pay the balance down to zero and not pay anything until you have a need for it again. Keep in mind, a lot of lenders will charge you a nominal monthly fee for the privilege of having one.

Although, you should be aware that the usual term and conditions of these types of loan products allow the lender at any time to reduce your credit limit or even call on you to pay any outstanding balance in full.

Now, that’s unlikely to happen if you have been managing the loan with good conduct. Nonetheless, keep that point in mind.

Don’t get Caught Going the Wrong Way in a One-Way Street
Most lines of credit productsA home equity loan can be a disaster for some provide a variable interest rate, which is terrific while interest rates are at historical lows. Nevertheless, I’ve had customers in the past tell me that their LOC or HELOC is going the wrong way, in that they’ve been complacent and allowed themselves to use it for the wrong reasons.

Keep in mind if you allow that limit to keep on rising and then all of a sudden your bank increases your interest rate, where will that end up with your ability to repay them.

I don’t mean to be boring, but seriously there are definite risks associated with lines of credit. Whatever you do, don’t use it as an emergency fund, this is the most common frequent trap I see people get themselves into. At any time, the bank can close it down on you.

These May not Be Right for You
There are other choices besides a line of credit for enabling you to get access to extra cash. For example you can apply to your lender to top up your existing loan for the amount you need.

This is a better option if you need a one off cash injection for home remodelling/renovations, purchase a vehicle, pay a tax bill etc. Once the bank approves you they will adjust your regular repayment amount and you will start paying the debt down.

If you’re doing renovations where the money is paid out incrementally over a period of time, have the lender put the amount you borrowed into your offset account so any remaining balance offsets against your mortgage.

Sexy Maybe, but can You Afford to Have One?
How sexy is a home equity line of credit when you have to pay it backDon’t be lured into the roller coaster of a line of credit where you can be exposed to the temptation of using the money over and over again. It takes a strong willed person to resist putting their hand into the biscuit tin again and again

One more final cautionary word: Fast Cash Lenders (Payday Lenders) and some non-bank (secondary) lenders are now in the market place offering LOC’s with credit limits up to $20,000. Run the other way. when it comes to debt traps, this is the bear trap of all traps, they charge interest rates of 60% plus along with actrocious fees that can force you to get another loan to pay the first one off.

Line Of Credit Risks and Rewards

Beware that your home equity line of credit doesn't get out of hand

What’s the Best Choice, a HELOC or a line of credit?

Essentially they are one and the same. A HELOC is a Home Equity Line of Credit, which basically means the same as a Line of Credit. That said, there is one subtle difference in that a HELOC is secured by the equity in your home.

Whereas a Line of Credit doesn’t necessarily have to be secured by property. Some Lines of Credit can be business LOC’s, much like a business overdraft. However, with this article we’re going to be focusing on the Home Equity Line of Credit.

Essentially, what is a home equity line of credit?

Some call a line of credit a money machineHow can you use one successfully? A line of credit (LOC) is a loan option that allows you to have an upfront approved cash credit limit that you can access at any time. There are no interest charges on the credit limit you are approved for only on the amount you have drawn down on, or the outstanding unpaid balance.

It operates much like your own bank account. Except the money you have access to is not really yours and whatever you use you’ll be charged interest on it. You can spend the money on whatever you like as long as you don’t exceed the approved limit.

You can take money out, pay it back and borrow over and over again, simply making sure you don’t go over the limit.

You get a Grace Period
The differential between a credit card and an LOC is, you get a grace period with credit card interest charges, sometimes up to 55 days. There is no grace period with an LOC. An LOC is a borrowing tool not a payment tool, because much like a home mortgage, the moment you take the money the interest charges start accumulating from day one.

A line of credit provides the borrower with a ready source of cash that people use for various reasons. Typically the limit can be set higher than a regular credit card at a lower rate of interest. You don’t have to take out a personal loan that forces you to make payments on the full amount whether you want to use all of it or not.

In other words it provides flexibility to pay what you need to pay when you want to pay it and only pay fees on the drawn balance. Common purposes for a line of credit are to pay school fees, consolidate other debts, do home renovations, holiday money or any other expenses.

You Could Lose Your Home
These days, if the line of creditA home equity line of credit is not for frivolous spending is secured by your home or other residential property it’s now evolved over time to be tagged as a Home Equity Line of Credit or HELOC.

The major concern associated with home equity lines of credit is you’re putting your home up as security.

Since any type of residential home mortgage lender will want your real estate asset as collateral you’ll want to be very sure that your line of credit doesn’t get out of hand, whereby you become delinquent with your repayments.

Falling behind on repayments and not being able to catch them up will very well put your property in peril of foreclosure.

Don’t Play with Fire Without an Extinguisher
Do your due diligence up front and find out if there are going to be other costs, like settlement costs or loan establishment fees. Some of these products will charge you a fee anytime you make a withdrawal or even a monthly account fee.

Over time these fees can start to add, notably if you’re in the habit of regularly withdrawing cash out.

That said, you really want to avoid using one of these as a personal piggy bank to start paying your everyday living expenses. Should you find yourself with your budget out of whack, then creating more debt isn’t the greatest solution in the world.

No, they’re Really not a Giant Credit Card
A home equity loan can be a disaster for someKeep in mind, one of these is not like a credit card, although they’re sometimes described as a giant credit card. However, as soon as you draw down on it for any given amount you are immediately charged interest on that amount from day one.

You do have to be careful with one of these and be able to manage your cash flow well, as lines of credit come with interest only repayments and some even allow you to capitalise the interest they’re charging you. That means, you don’t have to make any payments at all (until you reach your approved limit, of course) I’ll leave it up to your imagination as to how big a debt hole you could dig with one of these.

Make sure, for whatever debt you clock up you’ve got an effective plan worked out for paying it back.

Managed well, They’re Handy to Have Around
One of it’s benefits is it can remain in place for years, you can pay the balance down to zero and not pay anything until you have a need for it again. Keep in mind, a lot of lenders will charge you a nominal monthly fee for the privilege of having one.

Although, you should be aware that the usual term and conditions of these types of loan products allow the lender at any time to reduce your credit limit or even call on you to pay any outstanding balance in full.

Now, that’s unlikely to happen if you have been managing the loan with good conduct. Nonetheless, keep that point in mind.

Don’t get Caught Going the Wrong Way in a One-Way Street
Most lines of credit productsA home equity loan can be a disaster for some provide a variable interest rate, which is terrific while interest rates are at historical lows. Nevertheless, I’ve had customers in the past tell me that their LOC or HELOC is going the wrong way, in that they’ve been complacent and allowed themselves to use it for the wrong reasons.

Keep in mind if you allow that limit to keep on rising and then all of a sudden your bank increases your interest rate, where will that end up with your ability to repay them.

I don’t mean to be boring, but seriously there are definite risks associated with lines of credit. Whatever you do, don’t use it as an emergency fund, this is the most common frequent trap I see people get themselves into. At any time, the bank can close it down on you.

These May not Be Right for You
There are other choices besides a line of credit for enabling you to get access to extra cash. For example you can apply to your lender to top up your existing loan for the amount you need.

This is a better option if you need a one off cash injection for home remodelling/renovations, purchase a vehicle, pay a tax bill etc. Once the bank approves you they will adjust your regular repayment amount and you will start paying the debt down.

If you’re doing renovations where the money is paid out incrementally over a period of time, have the lender put the amount you borrowed into your offset account so any remaining balance offsets against your mortgage.

Sexy Maybe, but can You Afford to Have One?
How sexy is a home equity line of credit when you have to pay it backDon’t be lured into the roller coaster of a line of credit where you can be exposed to the temptation of using the money over and over again. It takes a strong willed person to resist putting their hand into the biscuit tin again and again

One more final cautionary word: Fast Cash Lenders (Payday Lenders) and some non-bank (secondary) lenders are now in the market place offering LOC’s with credit limits up to $20,000. Run the other way. when it comes to debt traps, this is the bear trap of all traps, they charge interest rates of 60% plus along with actrocious fees that can force you to get another loan to pay the first one off.

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Do Savings On Fixed Rate Loans Surpass Variable Rate Loans?

Do Savings On Fixed Rate Loans Surpass Variable Rate Loans?

Is Now the best Time to Fix
Your Home Loan Rate?

The interest rates on offer in Australia now are the lowest they’ve ever been, which is sparking a lot of people to not only review what their lender is charging them, but if they don’t get a better deal, refinance to a better rate. Also, a lot of people are looking to take this opportunity to lock in a historically low fixed rate.

Who can Blame Them?

There are any number of lenders offering fixed rates below the 2% benchmark for owner occupied home loans, and any number of lenders offering around the 2.5% mark for interest only investment property loans.

Frankly, I’ve never been a fan of fixed rate mortgages, because I’ve seen too many people get burned by them. You know, the going rates are around the 6-7 percent mark, there’s a lot of media hype (mostly engendered by the lenders themselves) about interest rates going up.

So, like a lot of blind sheep we rush in to our bank and fix our interest rate. Of course, the lender rubs their hands together in glee, quietly thinking to themselves that you’re not going to be going anywhere fast for the whole of the fixed rate term.

Then over the next few months to our horror and anguish we watch interest rates start to fall while we remain stuck up there on the high interest rate shelf.

I agree, that doesn’t necessarily happen all the time, but it does happen. My philosophy has always been that if you maintained a competitive variable rate you would always be ahead of the game.

...

‘However, in this current market you have to start questioning yourself’.

Where are Interest Rates Going to go from Here?

The Reserve Bank of Australia (RBA) has cut the official wholesale rate to 0.15%. Will they cut rates any further? It’s difficult for me and most others to imagine they would.

Additionally, most lenders are not passing the rate cuts on anyway, claiming a variety of excuses. The main one being, any rate cut is going to affect the rates they deliver to their depositer customers.

Before we go any further, let’s be clear and quickly recap what the difference is between a fixed and a variable rate. So a variable rate is going to go up and down, depending on two things: one, what the lender does with their individual policies and two, what the Reserve Bank of Australia does with their official cash rate.

Do You Prefer a Bit of Predictability in Your Life?

A Fixed rate, on the other hand, is going to give you certainty over the interest rate for a given period of time. Now most lenders will allow you to fix for up to a maximum of five years. That means for those five years your interest rate is not going to change, regardless of what the RBA does to the official cash rate.

As with everything in finance, there are pros and there are cons of fixing interest rates, the pros in this case are fairly obvious.

First of all, you’re going to protect yourself against future interest rate increases and also you’re going have better certainty on what your cash flow needs are going to be.

...

There are Restrictions You Should Know About!

However, there are a number of downsides to fix interest rates which we need to consider. In the unlikely event the Reserve Bank decides to lower interest rates, you will not benefit from the reduction in interest.

Plus, most lenders have restrictions on how much extra you can reduce the principal balance of the mortgage by over a given period of time. e.g. pay off an extra $5,000 or $10,000 for each year of the fixed term.

This can be very restrictive for those people who are serious about getting out of debt.

Additionally, most fixed rate lenders won’t allow you to have an offset account against your fixed rate mortgage.

Are You an Offset Account Fan, Listen Up?

If you have been reading some of my previous blog posts you would know that I’m quite a fan of ‘offset accounts’ as they essentially provide a risk-free, tax-free return equal to the interest rate on your mortgage, which is way better than any savings account in today’s market.

The good news is, there are a limited number of lenders out there that do offer an offset account with their fixed rate loan products. To me, that’s an awesome feature if you can also get a low rate to go with it.

Don’t be Fooled!

Although, be aware there are two types of offset accounts. These can be described as non-transactional and transactional.

Non-transactional, allows for any money deposited into the offset account to offset against your mortgage balance and save on interest charges. However, if you want to utilise any of that money to pay bills, B-Pay, ATM withdrawal, etc. you have to transfer the required amount over to a normal bank account.

That can be a hassle for some, not so much an inconvenience for others.

Transactional offset accounts allow you to access any deposited funds freely. They operate like a normal bank checking/savings account. The main benefit being convenience. Because, while you have instant access to your funds, any amount left sitting in the account offsets against your mortgage balance, saving you on interest charges.

The other negative to watch out for are partial offset accounts; For example, the lender might say that you can have an offset account, but only 30 or 40 % of the funds held in the offset account will offset against your mortgage. Substantially reducing any savings you will make.

...

I Heard You can be Slapped with Penalties, Right?

Many people avoid fixed rate loans because they are concerned about penalties they may incur if they break the fixed term contract, in the event they want to sell their property or refinance their mortgage. Therefore, they would only ever consider fixing if they believed their circumstances weren’t going to change for the fixed term of the loan period.

There’s good news here too, as most lenders offering fixed term loans that have the offset account feature have removed those types of restrictions. Meaning, you can pay off as much as you want, whenever you want.

Something to consider that a lot of people haven’t thought about is, when you fix a loan you are essentially betting against the bank. The bank will set the fix rate above or below the variable rate, depending on where they see the official cash rate headed.

Consequently, if they believe that the official cash rate is going up, then they’re going to put the fixed rate above the variable rate, because they anticipate that the variable rate is going to rise. If they think the official cash rate is going to fall, then their fixed rate is going to be below the variable rate, because they believe that the variable rate is going to fall.

Now, I don’t know about you, but the idea of betting against people who have billions of dollars invested in getting this call right is a little daunting to me. Fixed interest rates are currently low, deliciously low and it seems they are going to be staying that way for some time to come.

What are the Experts Saying About Interest Rates?

Or, more accurately in this market, interest rates are going to stay at the current low levels for an extended period. Most financial experts that I monitor seem to be of the same opinion.

Thus, I like the flexibility that you get from a fixed rate loan with an offset account, which you just don’t get from the mainstream fixed rate loans. I like the ability to make extra payments. I like the get out of the contract feature and I especially love the offset account.

You get the best of all worlds, interest rate predictability, cash flow stability, offset savings and possibly a good nights sleep as well.

Not Sure Which Way To Go, Hedge Your Bet?

In as much as you can’t decide what’s better for you fixed or variable, or your preferred lender doesn’t offer a fixed loan with offset feature, then why not take a split approach? This is where you fix a portion of your loan amount and you leave the balance as variable.

(Split Loan Calculator)

By doing this, you’re essentially hedging your bets. You’re going to get the flexibility that comes with a variable loan (with offset) and you’re going to get the certainty that comes with a fixed loan. Over time, one of them is going to work out more beneficial for you. Depending of course, on what the cash rate does and on what happens in your personal circumstances.

For anyone who’s keen on a fixing later approach, I suggest they may want to try the hybrid approach, part variable and part fixed. I’m sure you can tell by now, I’m wasn’t a big fan in the past of fixing a mortgage, but with owner occupied fixed interest rates under 2% I no longer have those reservations, go for it!

Whichever way you do decide to go, don’t just get sucked in by the lowest, interest rate possible, consider the features of the loan and how that ties in with your financial goals.

Retain the services of a seasoned trustworthy mortgage broker who will take the time to explain things to you, do the calculations and candidly tell you what your best options are as opposed to just telling you what you want to hear.

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Discover How To Increase Your Borrowing Power

Discover How To Increase Your Borrowing Power

Do You Know Your Borrowing Power?
Learn How To INCREASE It!

Weightlifting strongman squating with heavy weight

The Essential Borrowing Power Guide

When you’re looking to purchase property, refinance to a better rate or release equity from your home, one of the first steps you should undertake is to find out what your borrowing power is, or how much your lender is willing to lend you.

Here, you’ll learn what is meant by your borrowing capacity, what impacts it and how it’s calculated. Then we’ll provide you with four tips on how to improve it.

By the end of this article, you’ll have a better understanding of what you might be able to borrow and how you can potentially increase your borrowing capacity.

However before we start, if you’re also into getting other savvy home loan tips about Australian mortgage products, you can go to our home website and take a look around. If you’re into saving money and getting ahead financially, it’ll be time well invested.

What is borrowing power?

So, how is borrowing power calculated? Although the exact criteria will differ from lender to lender your borrowing power will be calculated based on the following:

How Does Cash Flow Add Up to Strong Borrowing Power?

Your income is one of the most important factors when calculating your borrowing power. Your current and future income situation indicates to the lender how you are going to be able to meet the ongoing nature of the repayments?

Income used for borrowing capacity purposes can be derived from multiple sources such as employment, rental, income dividends or other investments.

Whatever income is being used, the lender will want to confirm the ongoing and sustainable nature of the income source, your asset and liability position, as well as ongoing and other living expenses.

You can access our free borrowing power calculator here.

Will Your Assets and Liabilities Tip the Scales?

A strong financial position shows your ability to handle money and expenses. If you own enough assets or have sufficient equity in your property, you will be able to use this equity as collateral and can also increase your borrowing power.

If you have little to no existing debt and a high asset position, you’re more likely to have a much higher borrowing power than someone with much more debt and a lower asset position.

E.G Even if you have a credit card with a $0 balance that you pay off each month with a high limit, the lender will still use the limit in order to calculate your borrowing power.

You see, as far as they are concerned your capacity to borrow against that credit card limit is viewed as a liability to them. They’re worried you’re going to jump on a cruise liner tomorrow and run the credit card balance up to the limit in the ships casino (lol).

Are You a Spendaholic?

Expenses are broken down into both discretionary and non discretionary expenses. Discretionary expenses are expenses that can be changed, such as eating out at nice, restaurants and lifestyle expenses.

Non discretionary expenses are the mandatory expenses that need to be paid back each month. For example, a non discretionary expense can be something like insurance or childcare, or even groceries, Something that must be ongoing and paid back each month.

If your lifestyle expenses are high, this could in all likelihood impact your ability to borrow, and in some circumstances you may even need to justify some non-discretionary living expenses and the ongoing nature of these outgoings.

Understanding the Importance of the HEM Protocol

In today’s residential/consumer lending market lenders have to observe and comply with the National Consumer Credit Protection Act (NCCP) or responsible lending act.

The main benchmark for this policy is measured against what is known as the Household Expenditure Method (HEM). This pre-determined benchmark amount will have an impact on your borrowing capacity.

There are varying benchmarks used for the number of people in your immediate family circle. E.G. you’re single, you’re a couple, your single with kids, you’re a couple with kids etc.

The more people that are in the immediate family circle means the higher they will judge your regular living expenses to be. Therefore, the (HEM) has pre established higher benchmark amounts for each size group.

Of course, you can debate whether you fit the mold, but if you’re under the pre-determined benchmark, then you have to come up with a practical explanation.

When Was the Last Time You Saw a Copy of Your Credit Report?

Last but not least, your credit history will also impact your borrowing power significantly. If you want to get an estimate of how much you can borrow use this link to access our free borrowing power calculator.

What can you do to help increase your borrowing power?

The best way to increase your borrowing, power and chances of credit approval are to indicate to the lender that you’re financially sound and can meet your loan repayments.

A simple way is to get rid of unnecessary debt and credit cards. How much debt you currently have will influence your borrowing power to a great extent. Having unnecessary debt, such as credit cards that you don’t even use could significantly deter a lender from the amount they’re willing to lend you.

Another way is to reduce your expenses. Lenders want to know that you can comfortably meet your repayments and if they sense you might be living week to week and could be at risk of mortgage stress, this can significantly affect your borrowing power and even your ability to get approved for any loan.

How Good a Money Manager are You?

Looking up the curved driveway to a nidely restored residential home

It’s smart to regularly review your expenses and see if you can cut back on any non discretionary expenses such as the gym membership you never use.

Be aware, in today’s regulatory mortgage market banks take a very close look at how much net money you have coming in and how much of that you have going out.

They have terms like NSR (net servicing ratio), DTI (debt to income ratio).

The bottom line is, the lender will take close note of what your net income is (after tax and any other compulsory deductions), from that they will subtract your living expenses and your financial liability repayments. Then they will take a hard look at what you have left as well as the ratio of your debt to net income percentage.

Many can be left scratching their head, because even though they have a good income, have never defaulted or have never ever paid late on any loan, but they still get declined.

It’s good idea that you review your financial position and adjust it to your best financial advantage before divulging any of your financial information to a prospective lender. Seek out an experienced mortgage broker to help you with this.

What Does Your Savings Track Record Say About You?

Having a good savings history indicates to the lender that you are financially sound and if your circumstances do change in the future, you have a much higher chance of being able to meet the ongoing nature of the repayments.

At the same time, if you are purchasing property the larger the deposit equals the less amount you’ll need to borrow.

What Importance do Lenders Put on Credit Scores?

Lastly, you want to be aware of and try and improve your credit score. Your credit report is a reflection of your credit history and includes things such as all inquiries you’ve had, for any credit, as well as any hardships such as defaults.

Having an adverse credit history or a bad credit score can significantly reduce your borrowing power, as it indicates to the lender that there’s a much higher risk of default on the loan.

What is considered a Good Credit Score?

You will find that any credit score can vary depending on which credit scoring model you are using. Generally though, if you score between 580 to 669 that’s rated as fair; If you end up between 670 to 739 that’s rated good; from 740 to 799 you’re getting into the very good marker; from 800 and up is rated as excellent.

You can get a free credit score report here

If you want to learn more about credit scores contact a knowledgeable mortgage broker.

There you have it, the essentials you need to know about borrowing power and the four tips you can use to help increase yours. If you’re looking for more great tips click through to our main home website page and fossick around where we talk all things home loans. We hope you have found the above helpful…

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The Modern Rules OF Low Doc Loans

3-D image of a person looking at a computer screen that has the word self employed on it in large letters

The Little Known Rules For Low Doc Loans

In the last few years, definitely one of the most rapidly thriving segments of the Local mortgage market place has been lo doc homeloans. These are home loans that clients are authorised to “avow” their cash flow in the course of the application process. Detailed finance information such as payslips or tax returns do not need to be given by the debtor.

Low-Doc mortgages were brought out largely for the self employed entrepreneur or those with uneven earnings whose financial situations might perhaps not be up-to-date at the time of the mortgage application.

The worth of low doc mortgage approvals in Australia has really increased over the years, even though these loans are estimated to only represent around 5% of the loan market.

Where Do You Find Low Doc Loans These Day’s?

Originally, low-doc mortgages were literally promoted solely by specialty non-bank loan providers, however in the last few years traditional creditors and even the primary banks have also entered the niche market.

Whereas a few of the non-bank mortgage lenders are geared up to grant lo doc loans to borrowers with not so good credit score backgrounds or other “non-conforming” qualities, traditional loan companies continue to count on the prospect to have an ongoing flawless credit history and a largish down payment.

The favorable news is that for the more favourable financial profiles the up front payment insisted upon for a Low Doc residential homeloan can now be as nominal as 10%. Furthermore, the borrowing rate which in turn was at one time charged for the extraneous risk is presently not much different to the basic variable rate of interest.

How Much Can You Borrow With Low Doc Loans?

Lenders have also improved the maximum size of low documentation lendings that they are now prepared to arrange. At the time lo-doc mortgages were initially kicked off, the optimum permitted loan size was ordinarily more or less half a million. However, these restrictions have now been broadened, contributing to an escalation in typical home loan sizes.

Be Careful What You Wish For When It Comes To Low Doc Loans

That said, within more recent years, the Australian ATO has exhibited concerns at the increasing numbers of tax payers going for fundings that permit them to show earnings over and above than that disclosed in their return. The ATO is threatening to target users of lo-doc mortgage items when it comes to their potential future tax return audits.

To facilitate this the Tax Office is looking at pressing mortgage companies to furnish sensitive customer information and facts empowering them to match tax returns against home mortgage application records.

Macquarie Research quotes the low doc borrowing marketplace is very well worth well over $50 billion, in other words eight to twelve percent of the mortgage loan market.

Based on recent reviews by Australia’s major home insurers, delinquencies concerning lo-doc loans have been rising but at this stage do not present a worrying headache.

What’s Happening With No Doc Mortgages?

No Doc residential mortgages are currently are out of the question in today’s national mortgage market. Up until the Global Financial Crisis they were generally commonly made available and were generally very similar to Low-Doc Homeloans with the only exception being that very little information and facts had to be offered by the debtor on his or her income or asset values.

The lender was practically giving the customer a property loan only guaranteed through the residence being bought.

The nearest thing one can get to a No-Doc lending these days will be a financing where the homeowners accountant signs an acknowledgment declaring that the purchaser pulls in a specified sum of yearly before tax income.

Who Is Best Suited To Low Doc Loans?

Consumers, who own business enterprises, are behind on their annual returns etc., earn commissions, live off of investitures, snag their earnings by cash in hand – sometimes do not want to have to offer up their privacy and are literally in many cases prepared to pay out for this privilege. Lo-Doc homeowner’s loans were truly developed for such consumers.

Buyers pay for the freedom and privacy level of these kinds of residential home loans. Clean credit is a must. Some lending institutions usually want Low-Doc customers to give a larger down payment (generally 20% to 30%).

Several of the principal notions why an applicant would most likely contemplate a lo doc residential home loan would include:

  • Self Employed applicants whose business and personal financials are just not updated;
  • Financially independent customers with intricate income and asset structures;
  • Retirees who survive on financial investments;
  • People whose lifestyles are in a flux because of breakup, recent passing away of a spouse, or job adjustment.

How To Use Low Doc Loans As A Wealth Creation Tool

Lo-Doc loans are somewhat relatively new to Australia, even though they have been easily available for a number of years already. These types of credit products have actually made it viable for many people who can manage a mortgage nevertheless do not fill the bill with a more traditional lender to borrow.

These mortgage lenders have likewise made it practical for people who are asset rich, and yet cash poor to have access to the equity in their real property without being required to sell any investments.

Low Doc home-loans in particular, have the ability to work as an excellent wealth accumulation resource because borrowers have the capacity to put into action the equity in their owned assets as a security payment in the pro-curation of future investments and in this way gradually grow and maintain a residential property portfolio.

Should you want to take a look at more information relating to the Low-Doc Home mortgage products or would like help with any other types of loans get in touch.

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The many hats we wear

mastermortgagebrokersydney.com.au/mortgage-broker-kellyvilleActors act. Cleaners clean. Taxi drivers drive taxis. Mortgage brokers? Well, we don’t just do mortgages. Here are the other aspects of your life we can help with when it comes to your financing options.

Look, we’re not saying we’re as versatile as firefighters – fetching cats from trees, appearing in calendars, or you know, fighting fires – but we’ve got quite a few strings to our own bow.

We’re not just specialists at helping you obtain a great home loan and then refinancing it when the time comes.

Here are some other aspects of your life we can help out with when it comes to obtaining finance.

Car finance

People often make the mistake of buying a car using finance through a dealership after seeing a sign that says ‘Drive away, 0% finance to pay’.

But all too often the dealerships sell these vehicles at inflated prices.

Using a car finance broker won’t cost you a penny. And we’ll negotiate on your behalf to help you obtain both the car and finance at a great rate. It’s safe to say the dealership won’t have the same motivations.

Commercial or business loans

If you’re fed up working for the man, grinding away in a 9-to-5 job, and want to start your own business, well, chances are you’re going to need some finance to get it up and running.

We can also provide financing options for more established businesses to manage their capital and assist with improving cash flow (which is the number one business killer).

Equipment finance

Trucks, buses, forklifts and cranes. Computers and office equipment. Medical and manufacturing equipment.

If your business needs equipment, and doesn’t have the cash to pay for it upfront, then we can help line you up with appropriate financing options.

ATO tax debt

No one enjoys the ATO impatiently hovering over their shoulder waiting for them to pay off a large tax debt. But as cash flow is the number one business killer in Australia, paying it all off in one lump sum isn’t any more appealing.

While it is possible to enter into tax payment plans with the ATO, they’re not always the most ideal option and it’s definitely worth exploring other avenues with business loan lenders.

Credit card

If you’ve racked up a big debt on a credit card and are paying an interest rate of 15-20%, there’s no point just putting up with it. We can help you find a personal or debt consolidation loan solution that has a much lower interest rate than your credit card.

Debt consolidation

Having trouble juggling a number of debts? We can help you consolidate them into one tidy loan that’s simple to keep track of. Debts that can be consolidated include personal loans, car loans, small debts, credit cards or store cards.

SMSF finance

Did you know it may be possible for your SMSF to borrow to invest in real estate?

Purchasing a property via a SMSF is slightly different to purchasing a property directly, but we can help with the process as well as help you obtain appropriate finance.

Reverse mortgage

A reverse mortgage allows you to borrow cash against the value of your home. It’s an option that’s often taken up by people aged 60-years or older to unlock the wealth in their homes after retirement.

It can be a tricky area to navigate, as interest rates and ongoing fees can be higher than the average home loan, and the interest compounds too – so it’s worth having someone by your side who has been through it before.

Final word

Basically it boils down to this: if you have an existing or prospective debt that you’re not happy with and think there’s room for improvement, then get in touch.

We’ll take the stress and worry off your shoulders and help line you up with a great finance solution.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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3 ways to kick your gambling habit this footy season

https://mastermortgagebrokersydney.com.au/mortgage-broker-kellyvilleWhen it comes to footy, Australians love a punt – of both the kicking and betting varieties. The thing is though, one is great fun, the other can cost you thousands of dollars a year. 

With the AFL and NRL footy seasons kicking off in March, we thought now was a great time to address that little problem that can creep up on us this time each year: gambling.

Did you know the average Australian loses $990 each year – no other country in the world gambles away more money per capita – and 75% of Australian adults gamble each year.

That’s a decent lump of money that could go towards a mortgage repayment, overseas flights, or paying off a credit card bill.

So rather than hand over your hard earned cash to sports betting companies on a weekly basis, here are three ways you can still enjoy each match without gambling on the result, first try scorer, whether it’ll rain, etc, etc, etc…

The 100 Day Challenge

Up for a camping trip to explore the great outdoors? Time for a clothing cull? Is the car overdue for a service?

The Victorian Responsible Gambling Foundation recently launched the 100 Day Challenge, which is a list of 100 different yet very manageable activities designed to help you reclaim your life and resist the urge to gamble on footy.

The activities have been categorised into six groups, including: wellness, solitary, practical, physical, creative and social, and are available in web and app based formats.

Since its launch last year, more than 4000 people have signed up for the challenge, many of whom support each other through a strong online community.

Fantasy Footy

Fantasy Football is huge in the US. And in recent years it’s been gaining popularity here in Australia, too.

The general gist of it is that you act as a coach and select players who you think will perform best each week. Each round you can trade a number of players in and out.

The beauty of Fantasy Footy is that usually you will have at least one player from your selected side playing in each match, so there’s always a vested interest.

You can also set up your own comp to battle against your family, friends and colleagues at any of the below sites, which also offer prizes.

AFL: AFL Fantasy (official AFL site), SuperCoach (NewsCorp).

NRL: NRL Fantasy (official NRL site), SuperCoach (NewsCorp).

Tipping comp

Those who are more interested in team performances, rather than individual performances, may be better suited to a tipping comp.

Tipping comps are also more inclusive for groups with more casual fans (diehard fans tend to dominate the Fantasy comps), because if in doubt you can always default to backing the higher team on the ladder!

If you want to set up a comp for your work, keep an eye out in newspapers in the coming weeks for a big foldout tipping table – it’s always great to have an actual leaderboard on hand to point to when bragging.

Otherwise there are the online options below, which also offer prizes.

AFL: AFL Tipping (official AFL site).

NRL: NRL Tipping (official NRL site).

Final word

As you can see, there are plenty of ways to enjoy the weekend footy without having to stake a chunk of money on it.

Also, it’s never fun to brag about how much money you won (or most likely lost) betting on a match. Beating your friends and family in a tipping comp though? You’ll have fun milking that for the entire off-season!

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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Top 5 tips for standing out on Airbnb

Mortgage Broker KellyvilleThe short term rental market is booming. Each year, tens of thousands of Australians list their properties on Airbnb to make a tidy buck on the side. Here are our top five tips on how to stand head and shoulders above your competition.

Most people who own an investment property prefer to rent it out long term. It’s more of a set and forget approach, if you like.

But for some, such as those who own one home and/or those who travel for long periods, renting out their property on platforms such as Airbnb and Stayz is becoming an increasingly appealing option.

In fact, in 2017 more than 30,000 people listed their homes on Airbnb across Sydney and Melbourne alone.

These numbers have made the Australian Taxation Office (ATO) sit up and take notice. So much so that the ATO recently declared they’ll be ramping up their enforcement activities and will undertake 4,500 audits of taxpayers they suspect may not be declaring Airbnb income.

Suffice to say, when the ATO starts paying attention to a marketplace, you know money is being made.

Here are our top 5 tips on how to make more money than the next person.

1. Professional photos

First impressions last, and these days the first impression is the webpage impression on your Airbnb listing.

You don’t see real estate agents walking around with outdated camera phones taking dank snaps of the living room. And neither should you!

A good photographer has the skills and equipment to highlight the beautiful little details that makes your property sing, and crop out the less than desirable qualities that may turn a potential guest away.

Obtaining high quality images from a professional real estate photographer costs between $150-$300 via websites such as Snappr or Airtasker.

If they get you just one extra two to three night booking they’ll have already paid themselves off.

2. The devil is in the details

There’s no point in having a photographer take wonderful photos of your property only for the guest to show up and feel like they’ve been conned by the old bait and switch!

You need to put in that extra bit of effort to make their stay memorable. After all, they’ve chosen your place ahead of a hotel, not to mention all the other Airbnb competition out there.

There’s a good chance your guest is visiting your local area to check it out. So try and include as much (classy) local artwork, local guidebooks, decorations and information as possible.

The bathroom should also always be spotless, make sure good quality tea and coffee is available for free, and ensure all the basic kitchenware is easy to find.

Other tips include providing menus for local takeaway, tips for local sightseeing, entertainment such as books and boardgames, all necessary electrical appliances such an iron and hairdryer, and some basic cleaning equipment and products in case something gets spilled.

3. Play host, but don’t smother your guest

It’s important that you’re available to your guest should they need to check anything.

That might range from “where is the frying pan?” all the way to “where’s the local hospital?”.

It’s critical that you never show irritation, no matter how trivial or inconsiderate a guest’s inquiry might appear.

That’s because one scathing review can undo a lot of the money, time and effort you’ve invested.

It’s equally important to give your guest the privacy they require. Be on hand to offer any simple tips or suggestions, but don’t pin them down for hours on end chatting to them about your own travels.

This is their holiday after all!

4. Consider using a property management service

If you’re going to be away from your property for a while it’s worth considering taking the hassle and stress out of trying to manage your property from afar by outsourcing to a professional service.

There are plenty of options out there to choose from, including (but not limited to) Hey TomHometimeHomeHost and Airsorted.

Expect to pay about a 15% to 20% (+ GST) commission to them, however most boast that they can help increase your Airbnb income.

5. Thank guests for their reviews

Taking the time out to thank every single guest for their review shows you’re a super attentive host who’s always aiming to please.

The best thing is it also gives you the opportunity to further highlight the positive aspects of your property.

For example, if a guest writes in their review that they had great ocean reviews, reply: “Thanks for the review Craig! Stoked that you enjoyed the ocean views from your bedroom!”

The best thing about this trick is that it even works for negative reviews.

That’s because most negative reviews will also mention something positive about the property. So make sure you thank them for that, acknowledge their complaint and thank them for bringing it to your attention, and advise that you’ve taken steps to rectify the issue for future guests (and actually do so!).

This shows other guests that you’re a very reasonable person who takes all concerns seriously – and will be approachable if they need you during their stay.

Guess who else is approachable?

We are!

If you have any queries or questions about your property and think we might be able to help out, don’t hesitate to get in touch – we’d love to help out.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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A huge thank you for all your support

mortgage broker castle hillWhat a roller coaster month it’s been for the mortgage brokering industry and our customers. The good news for the both of us is that our service to you will stay exactly the same moving forward, no matter who wins government come May.

The people have spoken and both the government and opposition have listened.

Both sides of the political spectrum have agreed not to change the mortgage broker remuneration model to a user-pays system moving forward.

That’s great news for consumers, who would have had to fork out thousands of extra dollars each time they took out a loan through a mortgage broker.

It’s also great news for us.

The Royal Commission report didn’t exactly paint our industry in a positive light, which was more than a touch unfair considering that less than 1% of consumer credit complaints to the Financial Ombudsman Service have been about mortgage brokers.

Without getting into the politics and policy details of it all, both the Coalition and Labor have agreed to continue with a commission-based structure.

Now, both parties have different viewpoints on how commissions should work moving forward, but the long and short of it is that both proposed policies will ensure it’ll be business as usual for the both of us moving forward.

So, from the bottom of our hearts we’d like to say thank you.

We’ve been completely overwhelmed by all the messages of support we’ve received, as well as all the emails and petition signatures that were sent to local MP’s protesting against the proposed changes.

And it definitely has made a difference!

In fact, it’s the only recommendation from the Royal Commission that both parties have ruled out implementing.

Rest assured that no matter what, our first priority will always be you: our customer.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Property Buyers Turning To Mortgage Brokers

Property buyers are increasingly
turning to mortgage brokers

marketing graph showing the increased popularity of mortgage brokers with property purchasersExcuse the humble brag, but property buyers are turning to mortgage brokers in record numbers. Here’s why that’s great news for the both of us.

Ok, ok, sure, we know we’re beating our own drum a little here.

But there’s a good reason why, we promise.

Firstly, it’s fantastic to see that at a time when the royal commission is dominating headlines and consumer confidence in the big banks is tanking, our industry is proving worthy of people’s trust.

During the September 2018 quarter, mortgage brokers settled an unprecedented 59.1% of all residential home loans.

That’s up from 53.6% in 2016 and 55.7 per cent in 2017 over the same period.

MFAA CEO Mike Felton points out that the result reflects not only the trust and confidence customers have in their mortgage broker, but the systemic importance of the mortgage broking industry.

“As banks have persisted in making it more difficult to secure a loan, turning many would-be borrowers away, consumers have continued to increasingly utilise the broker channel for experience, expertise and greater market choice to secure access to credit,” Mr Felton says.

Take that, banks

The figures emerge as the big banks continually try to curb the effectiveness of mortgage brokers. And it doesn’t take Einstein to figure out why: mortgage brokers promote a more competitive lending market at their expense.

According to Deloitte Access Economics, over the past three decades brokers have contributed to the fall in net interest margin for banks of over 3% points. This saves you $300,000 on a $500,000 30-year home loan (based on an interest rate fall from 7% to 4% pa).

Furthermore, on average, mortgage brokers have 34 lenders on their panel, and 28% of the time arrange residential loans through lenders other than the big four banks.

“In addition to providing customers access to a panel of 34 lenders on average, brokers are ideally positioned to help customers, especially those with more complex lending scenarios, to understand the ever-evolving application process and provide the information necessary to meet changing lender requirements,” adds Mr Felton.

Current model under threat

There’s been a recent push by at least one of the big four banks to make the customers pay for the services of a mortgage broker. If they had their way, that would be an industry-wide standard.

However, news that more and more customers are flocking to mortgage brokers under the current system will hopefully help us both out in the long run.

Better yet, a recent report shows that 9 out of 10 customers are satisfied with the services provided by mortgage brokers, so we sincerely thank you for your support.

Got a minute help us out a little more?

Besides continuing to use our services, and recommending us to family and friends, another way you can support us is by contacting your local MP to let them know you’re happy with the mortgage broking service we’re currently providing.

By letting your local Federal Member of Parliament know this you can help prevent the cost of our future services being transferred from the bank over to you – and you’ll also be showing your support for us.

If you’d like any more information on this issue don’t hesitate to get in touch. We’d love to speak to you more about it.

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Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

How Much Are The Big Banks Ripping You Off For?

Banks’ Unclear Pricing Costing Frustrated Borrowers Thousands

 

mortgage broker sydneyBorrowers who don’t shop around due to the banks’ unclear pricing tactics are losing out on an average of $850 a year, an ACCC report has found.

Get a load of this: there’s this tactic that the big four banks (ANZ, CBA, NAB and Westpac) use that makes it “difficult” and “frustrating” for borrowers to discover their best home loan offer.

The tactic is called discretionary pricing, and the Australian Competition and Consumer Commission (ACCC) has just released a scathing report on it.

So what is discretionary pricing?

The banks don’t really advertise their best home loan deals. But there are two kinds of discounts that they do offer.

The first is their “advertised discounts”, which are generally published on their website and relatively easy for borrowers to discover.

The second is “discretionary discounts”, which are much harder to find.

Discretionary discounts are offered on a case-by-case basis to individual borrowers, usually after the lender has assessed their application.

However, the criteria for discretionary discounts is generally not disclosed to borrowers.

So what’s the problem?

Basically, the banks are intentionally making it pretty damn hard and time-consuming for borrowers to obtain accurate lowest interest rate offers from multiple lenders.

In doing so, they’re hoping you’ll just get too frustrated and put the whole ‘searching around for a better deal’ thing in the too-hard-basket.

The ACCC says that’s how it was for 70% of recent borrowers from one bank – they obtained just one quote before taking out their residential mortgage.

“The lack of transparency in discretionary discounts makes it unnecessarily difficult and more costly for borrowers to discover the best price offers,” says the ACCC.

“This adversely impacts borrowers’ willingness to shop around, either for a new residential mortgage or when they are contemplating switching their existing residential mortgage to another lender. The unnecessarily high cost that prospective borrowers incur to discover price information from lenders causes inefficiency.”

How effective is this tactic?

Extremely so.

The rate of borrowers switching lenders remained extremely low last financial year.

In fact, less than 4% of borrowers with variable rate residential mortgages with the top five banks refinanced to another lender, says the ACCC.

That’s just 1 in every 25 mortgages.

(It’s also worth noting that only 11% of people got a better home loan deal from their current bank by either asking for it or being offered it.)

“The big four banks profit from the suppression of borrower incentives to shop around and lack strong incentives to make prices more transparent,” says the ACCC.

How much are these opaque tactics costing some borrowers?

In two words: A lot.

The ACCC believes an existing borrower with an average-sized residential mortgage who negotiates to pay the same interest rate as the average new borrower could initially save up to $850 a year in interest.

“This could add up to tens of thousands of dollars over the full term of their residential mortgage in net present value terms,” the ACCC adds.

So will the banks stop doing it?

Unlikely. Well, anytime soon that is. Here’s what the ACCC say about it:

“At least one Inquiry Bank appears to be aware of borrower frustration with discretionary pricing. There is little evidence of any Inquiry Bank responding to that frustration by moving away from the practice,” the ACCC says.

“More generally, the Inquiry Banks, particularly the big four banks, lack a strong incentive to reduce the cost that prospective borrowers incur to discover price information because they profit from the suppression of borrowers’ incentives to shop around.”

So what can I do about it then?

That’s the easy part. Get in touch with us to discuss your refinancing and/or renegotiating options.

By teaming up with us, not only can you save yourself the headache of having to research what each lender’s best available discount is, we will happily negotiate for it on your behalf.

So if you’re interested in potentially cutting down the amount of interest you pay each year, give us a call today.

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