If you want to repay your mortgage quickly and still have easy access to your additional repayments, an offset account may be worth using.

What’s an offset account?

An offset account is a transaction account that is linked to your home loan and the money you deposit in it offsets the loan balance before interest is calculated. For example, if you owe $400,000 on your home loan and have accumulated $50,000 in an offset account, interest will be calculated on $350,000.

Benefits over regular savings accounts

If you hold your surplus cash in an offset account you can save interest at home loan rates, and no tax is payable on the interest savings. This is effectively like ‘earning’ the home loan interest rate tax-free.

Alternatively, you could hold your surplus cash in a regular savings account but the interest rate you earn is usually much lower than what you pay on your home loan. Plus, every dollar in interest you earn is taxable at your marginal rate, which could be up to 47%.¹

Benefits over direct loan repayments

When you make additional repayments directly into the loan you can achieve similar benefits to having an offset account. However, limits often apply to the frequency and amount of withdrawals you can make and withdrawal fees are usually charged. With offset accounts, you typically have ready access to the money via an ATM, cheque book and internet, and withdrawal fees are generally not charged.

The best of both worlds

You may even want to have your salary paid directly into an offset account and withdraw money as needed to meet your living expenses. This can enable you to make the interest savings available with direct loan repayments and have easy access to your money.

Other things to consider

• If you’d prefer not to have easy access to your additional loan repayments, you may want to make repayments directly into the loan where you are less likely to spend the money impulsively.
• If you would like to credit your salary into an offset account, you should check that your payroll provider is able to do this.
• Some lenders allow you to establish multiple offset accounts to help you better manage your cash flow.
• Some lenders pay an interest rate on the balance of the offset account that is less than the home loan rate. These are known as ‘partial’ offset accounts and are not as effective in saving you interest as an offset account which offsets 100% of the home loan interest rate.
• Offset accounts can usually only be linked to loans with variable interest rates, not fixed rate loans.
• To maximise your interest savings, you may want to pay for the majority of your living expenses on a credit card and repay the card in full before the end of the interest-free period. This enables you to use the credit card provider’s money to fund your living expenses while applying your own funds to reduce your average daily loan balance.
• If you want to invest some of the money held in an offset account, you should consider paying the money directly into your home loan and establishing a separate loan to fund the investments. By taking out a new loan for investment purposes, the interest would usually be tax deductible.

Source

¹ Includes the Medicare Levy.

Click here to download this article in PDF format.

The post Offset Accounts appeared first on AustAsia Group.

What’s good about a variable interest rate loan?

• You can make extra repayments to pay off your home loan sooner. Making additional repayments above your minimum repayment amount can reduce the term of your loan and save you money on interest. Visit our website and use our repayment calculators to see the difference that extra repayments can make to the term of your loan and to find out how much you could save.
• You get a redraw facility that allows you to withdraw your extra loan repayments if you need to access the money. (Some lenders do have minimum amounts you can redraw, see our Redraw & Offset Information fact sheet for more information.)
• You can use an offset account to reduce the interest you pay. That’s a transaction account linked to your home loan where the balance is ‘offset’ daily against your loan balance before interest is calculated. This reduces the principal amount the interest due is calculated on. (See our Redraw & Offset Information fact sheet for more details).
• Flexible repayment options so you can make your loan repayments weekly, fortnightly or monthly— whenever is most convenient to you. This can help maintain your budget requirements and align with your pay cycle to make it easier to manage your loan repayments.
• You can choose to split the loan to gain more control of the interest rate. That means you can have a fixed interest rate on a portion of the loan for up to five years, and a variable interest rate on the other portion of the loan. This allows you to gain some protection from potential interest rate rises.
• You can switch loans and lenders more easily if you have a variable rate loan. All variable mortgages advanced on or after 1st July 2011 have no early repayment penalties or exit fees. (However, lenders can charge discharge fees to cover the administrative costs and there are other Government charges which may apply.)

Things to consider

• With a variable rate loan, your repayments will increase with interest rate rises. You should consider how interest rate rises may impact your future financial situation and goals. Use our handy online calculators to help you plan and budget for possible rate rises.
• A basic or ‘no frills’ variable rate loan is one which lacks additional features such as an offset account and as a result, attracts a lower interest rate and fees. This type of home loan is useful for first home buyers who want to keep costs down and those who prefer a simple loan product without all the bells and whistles.
• A standard variable rate loan is suited to borrowers who prefer more flexibility and want the ability to redraw from the loan or place any extra funds in an offset account. These extra features are usually part of a Package Home Loan that includes offset accounts, a credit card and other associated facilities and discounts, for an annual fee.

What’s a Home Loan Package?

A Home Loan Package is an all-inclusive suite of products attached to a home loan. For an annual fee, you can get benefits such a discount on the variable interest rate, fee waivers for transaction or offset accounts, a credit card with an annual fee waiver and discounts on insurance products.

Things to consider

• To be eligible for a Home Loan Package, a minimum loan amount will be required (usually $250,000 or more).
• An annual package fee will apply and can range from $350 to $750 depending on the type of package and the lender.
• A credit card (with no annual fee) is usually part of the package. You may not require this card and the credit card limit may impact your borrowing capacity. It could also result in you incurring more debt at credit card interest rates.
• Talk with us and we’ll help you consider the pros and cons of each product, as well as the overall costs and savings, before choosing the option that suits your needs.

Click here to see our guide on how we can help to Find the Right Home Loan for you.

The post Variable rate loans appeared first on AustAsia Group.

Fixing your interest rate can be a suitable option for some people, however you should be aware of the following:

• Fixed rate home loans often have higher interest rates than variable rate home loans. Often, the longer the fixed rate term, the higher the interest rate is likely to be. For example, a five-year fixed loan will usually have a higher rate than a three-year fixed loan.
• If interest rates do not rise, or if they fall during your fixed rate period, you could then pay more interest than you would if you had a variable rate home loan.

What’s good about fixed rate home loans?

• During times of low interest rates, locking in a fixed rate could work to your advantage, because you can retain a low rate for a fixed term even if the rates rise steeply. Depending on the lender and the current interest rate, this could potentially lower your repayments and the total interest paid over the loan term.
• You know exactly how much your repayments will be during your fixed rate term, which can make budgeting easier.

Things to consider

• Less Flexibility. Fixed rate loans usually do not have the same flexibility that a variable rate loan provides. For example, you may not be able to make extra repayments and un turn redraw the extra amount paid into the loan. Some lenders do allow extra repayments to be made but will restrict the extra amount that can be paid during the fixed term or on an annual basis.
• No offset facilities. Most lenders will not allow you to have an offset account with a fixed rate loan so there is no opportunity to save on interest. Where offset facilities are available, they will usually only be available on a partial basis, with a 100% offset account being available through some lenders only.
• Break costs. The decision to break your fixed rate loan is entirely up to you however a break cost may be applicable.

Break costs may apply if:

• you want to exit before the end of the fixed term.
• you prepay part of or your entire loan before the end of your fixed rate period
• you switch to another product, interest rate or payment type before the end of your fixed rate period.
• you want to end the loan as part of selling the property.
• Calculating break costs. Each bank uses a different formula to work out the break costs, so it’s worth finding out how your lender calculates this fee as the formula is complex. However, in general terms if the current wholesale interest rate for the remaining part of the fixed interest term is lower than the original wholesale interest rate when the fixed interest rate period started, then a Break Cost will be charged.

The rate is usually not set until settlement. Some lenders will apply the fixed rate at the loan settlement date or the date the fixed rate period commences while others will apply the fixed rate available at the time you sign your letter of offer. This may or may not work in your favour. There may be an option to lock in your fixed rate (see below), however there might be a fee from the lender for this.

• Your decision whether to fix the interest rate on your loan should be based on your own circumstances, with your future in mind. Certainty of repayments is the best reason to fix your rate—they seldom help to beat rate rises over time.

Remember:

If variable rates increase, you may pay more interest than if you fix your rate. It will depend on the size of the increase(s), how far into the term the increase(s) occur, and how long you hold the loan after the increase(s) occur.

If variable rates stay flat or decrease, you will pay less interest than if you fix your rate. This is on the basis that your fixed rate is higher than the variable rate over the same period.

Rate Lock

Some lenders will provide you with the option of locking in the fixed rate prior to settlement occurring. This is referred to as “Rate Lock” and will involve paying a rate lock fee which will usually be calculated as a percentage of the loan amount.

This fee can be a significant amount, although some lenders will not charge a fee or may waive it. If you choose this option, then you can proceed with certainty and complete peace of mind that the decision to fix your interest rate will not move between when the rate lock is effective and the rate that would be applicable on the day of settlement.

Most people who elect to Rate Lock do so at the time the application is submitted. It can be done later in the process— however, the lender can announce a rate increase at any time before settlement and once announced the opportunity to lock in the previous rate passes. A “wait and see” approach carries with it the risk of missing out on the lowest fixed rate that could have been obtained.

If you decide to Rate Lock, make a note of the expiry date, as it will usually be in place for 90 days. If your settlement still hasn’t occurred when it expires, it will need to be renewed (including paying another fee) for it to remain in place. This can be an important consideration if you have negotiated a long settlement.

Click here to see our guide on how we can help to Find the Right Home Loan for you.

The post Fixed rate home loan appeared first on AustAsia Group.

What’s good about a Credit card

Security. While there’s only a small chance of having lost or stolen cash returned, a credit card can quickly be cancelled if you lose your wallet. Most financial institutions also have security processes in place to protect you if your card has been lost or stolen or if you suspect your account has been used for a fraudulent transaction.

Build your credit score. Your credit card account repayment history makes up a key part of your credit file. If you keep your account in good standing, this information will help you build up a good credit score, which could increase your chances of approval for other products.

Interest-free days. If you pay your balance in full before the statement period ends, you can be rewarded with interest-free days on future purchases for a set period.

Earn points. Rewards and frequent flyer credit cards allow you to earn reward points on every dollar you spend on eligible purchases, such as groceries and fuel. Rewards credit cards let you earn reward points to redeem with the bank’s rewards programs for perks which could include flights with partner airlines, products from the rewards store or cashback. Frequent flyer credit cards, on the other hand, let you earn points towards flights, upgrades and more with specific airline loyalty programs.

Emergency funds. Credit cards can be a financial safety net if you don’t have enough cash or savings to cover any unexpected costs that arise. Just remember that you have to repay everything you owe.

Travel. Most lenders will offer complimentary travel insurance when you hold a premium credit card which is a popular offer with many travellers.

Complimentary extras. Credit card features such as travel insurance, purchase protection and extended warranty insurance can save you money and give you peace of mind. Other value-adding features could include complimentary flight offers, airline lounge passes and even free wine when you dine.

Consolidate and pay off existing debts. Balance transfer credit cards allow you to move existing high-interest debts to a new account with a low or 0% promotional interest rate. This can save you money on interest charges and help you pay down debt faster.

Emergency Replacement Cards. If you lose or have your credit card stolen when travelling overseas, scheme issuers i.e. Visa, Mastercard offer an Emergency Replacement Card service where a replacement card will be provided to you within 24-48 hours, either by a courier or dropped off at concierge of the hotel you’re staying at, anywhere in the world. Some fees may be applicable.

Things to consider:

Interest charges

If you don’t pay your full closing balance by the due date, any interest-free period on purchases will generally not apply. This means you will pay interest on your outstanding purchase balance. Credit card interest rates are typically higher than most other types of credit.

Cash Advances

You may also pay interest on any cash advances and balance transfers. Cash advances typically attract interest from the date of the cash advance until it is paid off. For balance transfers, some lenders offer cards with a 0% balance transfer offer for a period of time. However, this typically reverts to a high interest rate once that period ends. This means that if you do not pay off the balance within the offer period, you will pay interest on the leftover balance.

If you are considering a credit card with a balance transfer offer, be aware of the longer-term implications of potential transfers and related costs.

Credit card fees

Credit cards can also come with a range of fees such as annual fees, late payment fees, international transaction fees, cash advance fees and balance transfer fees. Some lenders do offer cards with no annual fees, but if you are considering a rewards credit card, this will typically come with a higher annual fee.

May hurt your credit score, if you’re not careful

Like many other forms of debt, if you miss any credit card payments, this will usually be recorded on your credit report and may have a negative impact on your credit score. You are considered to have missed a payment if you make the payment more than 14 days after the due date.

The post Credit cards appeared first on AustAsia Group.

This may be something to consider if you are:

• Managing multiple debt repayments and struggling to keep track of what is due and when.
• Getting into a credit trap where all your spare income is used to pay interest, but you don’t have enough left over to reduce your debt balances.
• You’re paying a very high interest rate on your debts—perhaps you have credit card or cash advance debts, or store credit purchases.

There are several possible strategies to consolidate debts, which can include:

• Moving debts to a new credit facility (e.g. a personal loan or mortgage) with a lower rate of interest, or lower fees.
• Lengthening the term of existing loans (e.g. taking a mortgage debt back out to the 30-year loan term).
• Changing the repayment terms on an existing loan to interest only, or
• A combination of these strategies.

Usually a debt consolidation strategy is implemented to make it easier for you to pay back your debts. However, in some instances, the objective of a debt consolidation may be to improve your cash-flow.

If you implement a debt consolidation strategy, it’s important to understand that it doesn’t reduce your debts—it just makes your repayments more manageable. A debt consolidation strategy should be implemented in combination with a change to your spending behaviour, so you can work to reduce your overall debt level over time. This should include creating a budget to ensure the debt consolidation measures work effectively and using a budgeting template such as the one available on ASIC’s MoneySmart website (www.moneysmart.gov.au).

What’s good about debt consolidation?

Simplicity: One loan repayment is a lot easier to manage and more convenient than juggling several different repayments.

Savings on interest and fees: Debt consolidation could potentially reduce the amount of interest you pay on high-interest facilities like credit cards and save you money on fees for multiple credit facilities. This may make it easier to pay back your debts.

Potential cash savings: This is potentially the biggest benefit of debt consolidation. By consolidating your debt into a loan charging a lower interest rate, you have the potential to save interest on monthly repayments and reduce your overall interest.

Lower repayments: Reducing the interest rate and spreading out repayments over time could potentially reduce the monthly repayment amount due. 

Stress relief: Specialist lenders are available that may lend to you if you have missed repayments on your current debts, or if you have a poor credit history.

Things to consider:

Higher costs: Long-term interest costs could be higher if you extend the loan term during a debt consolidation program. While it may reduce the size of the repayments in the short term, the overall amount repaid is far greater—particularly if you are consolidating your debts into a home loan which may have a 30-year term.

Increased credit access: If you’re not careful when consolidating your debts, you could make your financial situation worse. Remember to close your cleared credit facilities. For example, if you roll your credit card balances into your home loan to consolidate your debts, you might be tempted to continue using your credit cards and run up even more debt if you don’t close them.

Concentration of risk: Consolidating all your debt into your mortgage means that you have a lot at stake if interest rates rise. We recommend that you take advantage of all available cash to make additional repayments to pay off the refinanced debt as quickly as possible, or to start a savings account to build up a safety net.

Using up equity: Consolidating debts into your mortgage can also mean you are using up equity gained through paying down the balance or through an increase in value of the property. This means your returns will be reduced when you sell. Furthermore, consolidating your debts into your home loan can increase your loan-to-value ratio (LVR) above 80 percent. If this occurs, you will be required to pay Lenders Mortgages Insurance (or LMI). LMI can be expensive, so this may affect the savings you receive from refinancing your home loan to consolidate your debts.

The post Debt consolidation appeared first on AustAsia Group.

A common example is to split your home loan to obtain a variable interest rate on one portion of the loan and a fixed rate on the other.

For example, if you require a loan amount of $350,000, you can decide to split your loan with $250,000 at a variable interest rate and the remaining $100,000 at a fixed interest rate. You will have the flexibility a variable rate loan offers, while still enjoying the interest rate certainty of a fixed rate on a portion of the loan.

Benefits of a split loan

• Split loans are a comfortable compromise that allows you to enjoy the benefits of both types of mortgages—variable and fixed—at the same time.
• The fixed rate portion of a split loan offers you some security and protection against sudden interest rate rises.
• The variable rate portion of a split loan provides flexibility and allows you to take advantage of decreases in interest rates.
• You can often make extra repayments on the variable portion of the home loan, which could help you pay it off sooner.
• The variable portion can have additional benefits such as an offset account or a redraw facility.
• There are no restrictions on how you split your home loan. For example, you can split your home loan down the middle 50/50, or you can split it 30% variable and 70% fixed. However, most lenders only allow two splits.

Things to consider

• You may miss out on potential savings on the fixed portion of your loan if interest rates should fall.
• You will pay more on the variable portion of your loan if interest rates rise.
• There may be additional costs associated with this type of loan.
• If you need to pay out the loan early within the fixed term, early repayment costs could be charged.
• Consider where you want to be in the next five years. This will help you choose a loan with features suitable to your goals and objectives.
• Break costs. The fixed rate portion of your split loan may be subject to break costs if:
• you want to exit before the end of the fixed term.
• you prepay part of or your entire loan before the end of your fixed rate period
• you switch to another product, interest rate or payment type before the end of your fixed rate period.
• break costs also apply if you want to end the loan as part of selling the property.

Calculating break costs. Each bank uses a different formula to work out its break costs, so it’s worth finding out how your lender calculates this fee as the formula is complex.  However, in general terms if the current wholesale interest rate for the remaining part of the fixed interest term is lower than the original wholesale interest rate when the fixed interest rate period started, then a Break Cost will be charged.

Click here to see our guide on how we can help to Find the Right Home Loan for you.

The post Split loans appeared first on AustAsia Group.

How offset accounts work

If you have a home loan balance of $500,000 and have $10,000 in your 100% offset account, you’ll only pay interest on a home loan balance of $490,000. Because your home loan interest is calculated daily, every dollar in your offset account can save you money in interest. That means more of your repayment goes towards paying down the principal, potentially helping you to repay your home loan faster.

Types of offset accounts available

• 100% offset account: 100% of the funds in your offset account are applied against your home loan balance before interest is calculated.
• Partial offset account: A partial offset means that part of the funds in the offset account are used against your home loan before interest is calculated. This can be far less effective than a 100% offset account.

Benefits of an offset account

• An offset account is easy to manage. Simply have your salary and any other income deposited into your account to have an immediate impact on the amount of interest you pay, as the interest on your home loan is calculated daily.
• An offset account offers convenience and flexibility should you need it, as the account allows transactions and transfers giving you the same accessibility as an everyday transaction account.
• Some lenders offer multiple offset accounts linked to your home loan, so you can manage your finances while still benefiting from the interest saved on your home loan. This can be a great way to save for big expenses such as a holiday or a new car while still saving on home loan interest.
• Offset accounts are usually part of a home loan package that incur an annual fee, lower interest rate and other product discounts could still help you save money.
• An offset account can be more beneficial than a savings account as the interest you may earn on a savings account is less than the interest incurred on a home loan.

Things to consider

• There are many kinds of offset accounts, and the features will differ depending on the loan type and lender. For example, not all offset accounts are 100%, some may only be partial. Fixed rate home loans may only allow 100% offset for a set period, or other conditions may apply.
• You may incur monthly fees for having an offset account. It pays to look at the total charges associated with your home loan package to determine if having this product leaves you better off financially.
• Some lenders may require a minimum balance in the offset account.
• Weigh up the pros and cons carefully to decide if an offset account is the right product for your situation.

Redraw Facilities

A redraw facility is a loan feature that is usually available with variable rate home loans and some fixed rate loans. A redraw facility lets you access any extra repayments you’ve made on your home loan.

To use a redraw facility, you first need to make extra repayments, or regularly pay more money on top of your minimum loan repayment amount. Use our handy online calculators to find out how much interest you could save by making extra or larger than minimum repayments.

How a redraw facility works

 If your minimum monthly repayments are $700 per month and you pay $900 for a period of 12 months, you will have paid an extra $2,400. A redraw facility would allow you to access the extra $2,400 you have paid.

Benefits of a redraw facility

• Access to funds – A redraw facility is a useful feature for those who want an emergency fund for unexpected situations or expenses and who don’t require regular or immediate access to their extra funds.
• Savings – A redraw facility can be an excellent savings tool. Any excess funds put into your home loan are earning the same interest rate being charged on your home loan. By comparison, savings accounts generally pay much lower interest rates.
• Interest and Tax benefits – There may potentially be tax advantages when using a redraw facility. Interest earned on your savings account is considered income and may be taxable, whereas any interest that is saved on your home loan by having money in a redraw facility will not be subject to tax and you’ll be building valuable equity in your property.

Things to consider

• Some lenders may charge a flat fee for having a redraw facility. This is known as an activation fee. Once the redraw facility is activated, you can use the redraw facility as often as you like.
• Some lenders may impose a fee for each redraw. This fee will vary between lenders and loans.
• Some lenders may offer unlimited free redraws while some lenders may only offer a few free redraws per year. Once the limit of free redraws is exceeded the lender might charge a fee for each additional redraw.
• Redraw facilities can have a minimum and maximum amount which can be withdrawn at any one time. While some will have no minimum set amounts, others may set the minimum redraw amount as high as $5,000.

Redraw versus offset

• Choosing between an offset account and a redraw facility on your home loan will depend on how accessible you need your money to be. You should also consider any associated bank fees with each facility.
• Weigh up the pros and cons carefully to decide if an offset account or a redraw facility is best for you
• You may prefer the convenience of the offset account as your everyday savings works for you to save interest without you having to do anything
• Alternatively, you may prefer the discipline of the redraw facility as your extra repayments are ‘out of sight, out of mind’ in your loan and not as easy to access (normally an overnight process).

Remember: An offset account is a separate deposit account, whereas a redraw facility is a feature on your loan.  It is possible to use a combination of both.

The post Offset accounts & redraw facilities appeared first on AustAsia Group.

LMI is a one-off fee charged by the Lender to you when you need to borrow more than 80% of the value of the property.

Benefits of LMI

• The benefit of LMI is it allows lenders to provide home loans to customers who do not have a substantial deposit but would otherwise meet the lenders credit requirements.
• LMI covers the outstanding balance of the loan owing to the lender if the sale of the property does not cover the total loan amount.

What is the cost of LMI?

• The LMI premium payable can either be included into the loan amount (called capitalisation of LMI) or paid upfront on settlement. The lender will be able to provide you the applicable costs of LMI.
• It is important to note, if you choose to capitalise the LMI, your loan repayments are based on the higher loan amount which includes the LMI premium.
• The cost of LMI will vary and it will depend on the lender, how much is borrowed and the size of the deposit.

Is LMI refundable?

• LMI may be partially refundable if the loan is terminated early, usually within the first two years.
• Each lender will have their own refund arrangements.
• What happens if a borrower defaults and the property is sold?
• If the borrower is unable to meet their loan repayments and there is no other resolution, the property may need to be sold to cover any outstanding loan amount.
• The LMI insurer will pay the lender in accordance with their LMI policy and could then ask the borrower to repay this sum directly to them.
• LMI does not protect you or cover your loan repayments in the event you are unable to make the repayments on your mortgage. You should discuss personal insurance options such as Mortgage Protection Insurance with your broker to cover any unforeseen circumstances. 

What happens when the loan is refinanced?

• LMI is lender specific, which means if you refinance your home loan to a different lender and you borrow more than 80% of the value of the property, you will have to pay LMI again.
• Do your research, as this may outweigh the benefits of refinancing to a lower interest rate.
• If the equity in your home has increased or you have paid down the principal on your loan, you may not need to borrow more than 80% with the new lender and therefore avoid paying LMI again.

Important: If you experience problems in meeting your loan repayments, you should contact your lender as soon as possible as you may be able to arrange a payment variation on the grounds of financial hardship. More information about LMI can be found at www.moneysmart.gov.au or www.asic.goc.au

The post Lenders Mortgage Insurance appeared first on AustAsia Group.

With an Interest Only loan (IO), your repayments only pay the interest that is due and do not reduce the balance (or the amount you borrowed). As a result, an IO loan can only be obtained for a limited period (usually up to five years). At the end of the IO period, the loan will automatically convert to a P&I loan unless you make an application to extend the IO period.

Who should use an Interest Only loan?

IO home loans are not designed for every type of borrower. For example, they are not recommended for standard owner- occupied home buyers. In this scenario, the less you pay off the principal amount, the more you end up paying in interest over the life of your loan. Your repayments are likely to be a lot higher as well, so there are very little benefits to an IO loan for owner-occupier home buyers.

However, IO loans can be very useful for property investors— that’s because the interest on a loan for a property investment is usually tax deductible. In this scenario, an IO loan can help an investor to arrange their finances to maximise their investment strategy, tax advantages and cash-flow.

How do IO repayments differ?

You can expect your repayments to be lower initially if you commence your loan with an IO period. However, while the IO period is in place, you can also expect to be paying a higher rate of interest than if you started with P&I repayments from the outset.

At the end of the IO period, your repayments will increase to cover repayments on both the principal and the interest—so you can expect this increase to be significant. You also need to consider the period left to pay off the principal is reduced, which could drive up your repayment amount even further.

Because IO repayments will result in you paying more interest over the term of the loan, this option should only be chosen to fill a requirement that you have—such as maximising your tax advantages with a property investment. They are usually not a wise choice just to make loan repayments more affordable.

Even with an IO period in place, you may be able to reduce the principal during this time by making voluntary extra payments, or by depositing funds into an offset account. Flexibility to do this may be restricted with some lenders, and some additional fees may apply.

What are the benefits of IO loans?

• Smaller repayments. During the IO period of the home loan, your monthly repayments will be lower than with a P&I loan.
• Improved cash-flow. Lower repayments mean you could use your cash for other purposes that may be financially beneficial – pay off debts, make other investments, fund a loan to purchase another property, or pay the cost of additional educational qualifications that may increase your earning potential.
• Maximise tax benefits for property investors. The interest on an investment property debt is usually tax deductible for property investors, as long as you follow the ATO rules. It should be noted, however, that owner-occupiers will not receive any tax deduction for interest if you take out an IO loan. Please speak to your accountant or financial planner to discuss if an IO loan is the right option for you.
• Benefits are ongoing for the life of the IO term. You can often choose an IO term of one, three, five or 10 years. This can be very beneficial for tax minimisation strategies and financial planning purposes, so please speak to your accountant or financial adviser to find out how to make it work for you.

Things to consider

• You may not build any equity. IO loan repayments do not help you to pay off the principal and build equity in your property. If property prices do not rise during the IO period of the loan, you will not have improved your financial situation. You may also be at financial risk if property prices should fall during the IO period.
• The loan reverts to P&I as soon as the IO period ends. If you take out an IO loan, you should plan for the end of your IO period. At that time, some lenders may allow you to renegotiate another IO term. Otherwise, you can plan for increased repayments, consider refinancing the loan, or selling the property.
• Not all lenders allow extra repayments during the IO period and the availability of additional features such as an offset account will vary between lenders and loan products.
• A loan with an IO period will cost more in interest over the life of the loan, than a loan that has P&I repayments from the outset. The cost differentials can be quite significant and should be clearly understood.

You could miss the opportunity to pay down the principal while interest rates are low. Paying as much as you can off the principal while rates are low could mean that when interest rates rise, you will be paying those higher rates on a reduced loan balance. This could mean lower loan repayments and/or paying less interest in the long-term.

Click here to see our guide on how we can help to Find the Right Home Loan for you.

The post Interest only loans & repayment types appeared first on AustAsia Group.

Many lenders allow parents or someone who is close to you, to use the equity in their property as security for your home in lieu of you saving the full deposit required.  This person is known as a guarantor.

How does it work?

With a family pledge guarantee, your mum and dad can provide their home as security to the loan, so you don’t need to save the full deposit required by the lender.

The easiest way to explain this is to give you an example.

If you were looking to buy a house valued at $600,000, you would need to save a minimum 5% deposit or $30,000.

To avoid paying mortgage insurance you need a deposit of at least 20% of the purchase price of $600,000 or $120,000.  That’s another $90,000 you would need to save!

Now, your mum and dad have a home valued at $900,000 and are willing to help you out.  They offer you the $90,000, but not as cash, as security for the loan.  This means the lender will take the offered security of $90,000 in your parents’ home so you don’t have to pay the mortgage insurance premium and don’t have to save that extra money!

Once the equity in your home reaches 20%, you and your parents can apply to the lender to release the guarantee.

The guarantor’s security (i.e. mum and dad’s home) does not cover the entire loan amount.  Just a portion of it in lieu of you having to save the full deposit.  The guarantee is limited to this amount.

How is it different to being a co-borrower?

A co-borrower on the loan is someone who is responsible for the entire loan until the debt is repaid in full as compared to a guarantor who is linked to the loan by a guarantee and is responsible for the amount specified in the guarantee.

A guarantor is linked to the loan by a guarantee.  This guarantee can be released and the guarantor’s responsibility will cease without the loan being repaid in full.

Who can be a guarantor?

Guarantors are generally limited to immediate family members. Normally, this would be a parent, but it can include siblings and grandparents.

There are obviously conditions around this, for example your parents or the person acting as guarantor must have the equity available in their property and an income.  If we use the above example, if your parents’ home was valued at $900,000 but they had a mortgage of $800,000 then the equity is not there to offer this to you.

Benefits for first home buyers

The main benefit of having a family pledge guarantee is that it may be able to help you avoid Lenders Mortgage Insurance (LMI), or considerably reduce the premium that you would otherwise need to pay.  This is typically a one-off fee paid by the borrower to the lender to protect the lender against financial loss should you be unable to meet your mortgage repayments. Lenders typically require borrowers to pay LMI on loans where the borrower has a deposit of less than 20% of the property’s value.  For more information on LMI refer to our LMI fact sheet or speak to your mortgage broker.

It is important to remember that as the borrower, you will be responsible for your loan repayments and you’ll need to be able to service the entire loan with your income.  You should always speak with your broker about ensuring you are comfortable that you can afford the loan repayments that will be required.

Other possible benefits of a guarantor home loan include:

• You may not have to save as much for a deposit
• You could get into the property market faster and more easily
• You can get the home you have fallen in love with and not have to settle for a cheaper alternative

While there are clearly some benefits to going guarantor, given it’s such a large financial commitment, it’s also worth weighing up the potential risks.

Considerations for guarantors

While it may sound like a great option to getting you in to your first home quicker, there are always risks that you and the guarantor need to be comfortable with.

The main consideration for the guarantor is ultimately, they will be liable to cover the mortgage repayment and fees if you are unable to.  It pays to consider how they would cope financially if the unexpected happens and have to make those repayments.  Specifically, parents on the path to retirement could be financially compromised and at worst, they could risk losing their own home if you were unable to make the repayment.

Taking on the role of a guarantor is not something that should be taken lightly.  Anyone considering being a guarantor for a property loan is advised to seek independent legal and financial advice before accepting the role. In fact, most lenders will insist on this, prior to accepting a guarantee.

Understand your obligations

The last thing you want is to cause any family tensions, so fully consider whether this is the right option for you and the person you are asking to be guarantor.

It’s very important that both you and your guarantor understand all of the conditions and obligations of a family guarantee before signing. For this reason it is essential that guarantors seek legal advice before entering into any guarantee agreement.

More information

Normal lending criteria and bank policy applies to guarantor loans, so you should discuss your borrowing eligibility with your mortgage broker.

It’s important to remember this is only a guide to help you ask the right questions and highlight the important considerations.

The post First home buyers family pledge guarantee appeared first on AustAsia Group.