Budgeting for a loan
Before you try to get a loan, it helps to have worked out what you can afford to pay each week in loan repayments. If you need help with budgeting or calculating your repayment ability, you can get help from a financial planner or mortgage broker. Their services are free and most of the time they are available to visit your home to give you advice. You can find a great mortgage broker and financial planner on the Recommended Local Businesses page of this website.
What is a mortgage?
When a financial institution lends you money to buy your home, it acquires a legal interest in the property. In this case, the property is said to be ‘mortgaged’. A mortgage acts as a form of security in case you fail to make the repayments.
When you mortgage your property, you give the home loan provider the authority to lodge their interest in the property with the NSW Land and Property Management Authority. This means that you don’t have a clear title to the property and cannot sell it without their consent.
As the property owner, you are called the ‘mortgagor’ and the home loan provider is called the ‘mortgagee’.
Shopping for a credit provider
It’s wise to shop around for a credit provider (also known as a mortgage provider) as you would for a car or a house. It’s a big commitment and there are many players in the market. Doing your homework could save you thousands of dollars in the long run.
Check out the ‘Which mortgage?’ section on the Cannex website for a comparison of all the home loans available on the market. This site also compares personal loans, overdrafts and credit card deals.
Increasingly, Australians are using finance brokers (also called mortgage brokers) to find home loans that suit them. A finance broker is an agent between you and your home loan provider. They look at your individual situation and may recommend one or more credit products that meet your specific requirements.
If you decide to use a finance broker, do your homework first so you know you’re getting a good deal. I often recommend Loan Market, they are extreamly knowledgeable in the field of fininding the best loan for buyers from the right lenders.
It’s also wise to ask them a few questions before you arrange a meeting. For example:
•How many credit providers and products do you access?
•Which credit providers do you have on your list of lenders?
•How do you get paid?
If you decide to use a finance broker make sure that details of any commissions received and fees charged are included on the finance broking contract that you are asked to sign, as well as the details of the credit you are looking for.
In most cases, a good broker will arrange to come to your home to talk with you.
How the law protects you
The National Consumer Credit Protection Act 2009 gives protection to people borrowing money. It requires home loan providers to give you information that is clear and easy to understand, so that you can make a decision on whether you can afford to borrow. The Act applies to:
•department store cards
•hire of goods
Before you sign a mortgage contract, the home loan provider must give you:
•details about fees and charges in a pre-contractual statement and
•an information statement which outlines your rights and obligations.
Pre-contractual statements should tell you:
•the amount of money you are borrowing
•the annual percentage interest rate
•how the interest is calculated and when it is charged
•the credit fees and charges to be paid or how they will be calculated
•how they will inform you of changes affecting interest rates and fees or charges.
IMPORTANT – Always read the mortgage contract thoroughly before you sign it. It’s a good idea to take a copy home so you can study it and get legal advice if you are unsure about some of the terms. Remember you are not obliged to sign anything on the spot.
A comparison rate is a tool to help you identify the true cost of a loan. It is a rate which includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure. For example, a credit product’s advertised interest rate may be 6.49% and its comparison rate 6.75%.
A comparison rate must be included in any advertisement for fixed term consumer credit which contains an interest rate.
Comparison rates only have to be provided for fixed term credit – that is, credit that must be repaid within a specific time period. A home loan with a term of 25 years, and a car loan with a term of 5 years are examples of fixed term credit. In contrast, credit cards, which do not have to be repaid within a particular time period, are examples of continuing credit.
Your credit history counts
If you don’t have a good credit rating you may not be able to get a home loan. If you have had problems paying off a loan or credit card in the past, your details may be held with a credit reference company.
Veda Advantage is the largest credit reporting agency in Australia. It has over 4,000 subscribers (many are home loan providers) who can check to see if you are a good risk.
If a home loan provider rejects your loan application because of your credit record, you may want to check what your record says. For a fee, Veda Advantage can send you a copy of your credit file within one working day, or if you have a little more time, you can choose to receive your credit record for free. Visit the mycreditfile website to request a copy of your credit record and for more information.
Getting someone to guarantee your loan
Sometimes when you have trouble borrowing money from a home loan provider, a friend or family member may be willing to guarantee the loan. This will make them a ‘guarantor’ under the law. However, this is a big step and a decision that shouldn’t be taken lightly. Essentially, it will mean that if you don’t pay, they will have to!
Before you take out the loan, your guarantor must be given a copy of the mortgage contract and the document explaining a guarantor’s rights and liabilities. If you stop making payments, the home loan provider will first take action against you. They can usually only take action against the guarantor after they have tried all avenues to get the money from you.
Borrowing with your partner
If you decide to take out a home loan where both your name and your partner’s name are on the mortgage contract, then you become a co-borrower. This means that you will both be responsible for the debt. If the payments stop the home loan provider can choose which one of you to sue for the whole debt. This may depend on:
•who has the highest income
•who can be found at the time.
There is no legal requirement that you and your spouse or partner must both sign a loan contract unless you are co-borrowers.
Vendor financing arrangements sound and seem simple, but they have the potential to deprive vulnerable people of their hard-earned savings. Anyone considering vendor finance as a way of purchasing a home should seek expert and independent legal opinion.
Income protection insurance
Income protection insurance covers you in case you can’t make repayments because of unforeseen circumstances such as unemployment, sickness or injury. The benefits and costs vary so it’s a good idea to shop around before you decide which insurance company to go with.
Mortgage providers can’t force you to take out the insurance. However, they can insist that you take out insurance for the building and contents. There is no obligation to take out insurance through the insurance arm of the credit provider. Shop around to find the best deal. If you are after insurance have a look on the Recommended Local Businesses page of this website and you will find some professional organisations who will be able to help you.
Changes to the mortgage contract
Your mortgagee can only change the contract if the contract specifies that changes may be made. Read the contract carefully so that you know what changes may occur.
The mortgagee must generally notify you of interest rate increases. Notice must be given no later than the day on which the increase takes effect.
Notice must be 20 days if:
•the way interest is calculated or applied is changed, or
•a credit fee or charge is increased.
If the mortgagee does not notify you individually about the change, the mortgagee must publish the change in a newspaper which has state wide circulation and will confirm the information on your next statement.
Difficulties with making payments
If you can’t meet your repayment obligations due to temporary unemployment, sickness or other reasonable cause, you can apply to the mortgage provider to vary your payments. If you can’t reach an agreement contact your mortgage broker or the Australian Securities and Investments Commission (ASIC) at www.moneysmart.gov.au or phone 1300 300 630 for help.
For any further information on getting a loan to buy a property give Dave Williams a call on 0488 88 4573.