Breaking News in the Australian mortgage industry from Central Choice
Friday 9th April 2011 - Purchasing a property using a guarantor
What is a guarantor?
When clients have a limited deposit, in certain circumstances, the bank will allow a direct family member ie a parent to act as a "guarantor" to the property, by using the equity from their existing property to "guarantee" the debt. This helps borrowers who do not have enough deposit to buy a home, and can be a very useful way to avoid mortgage insurance.
Normally, the bank will allow an 80% lend against residential property. For instance, if the property is valued at $500,000, the bank will allow $400,000 in lending. Therefore, if the parents owe $300,000 on their property, there will be $100,000 available to lend against, which can be used in place of the deposit.
If the client is therefore purchasing a house for $400,000, the bank will lend $320,000 (without mortgage insurance). If the parents have $100,000 in equity, this means the borrower will be able to borrow $320,000 + $100,000 = $420,000 which will be enough to cover 100% of the purchase price and closing costs such as stamp duty.
We usually set up what is called a "Limited Guarantee" for your parents. What this means is that in the worst case scenario where the client cannot afford to pay theirdebts, the parents are only obligated for the amount that needs to be guaranteed (ie the amount above 80% which is the difference between the actual loan size and the $300,000 that they owe). There are certain risks involved, such as if the client does not pay their loan, the parents will now be responsible for the loan.
The conditions behind getting a guarantor loan are usually
1. The property should be an investment property, not an owner occupied property. This is to prevent the bank from selling the parent's house in event of a default
2. The parents need to be working (not pensioners or unemployed)
3. The parents will need to afford all of their loans, including the guarantee amount
4. Some lenders will even require the parents to afford the borrower's entire debt, given that they can possibly be responsible for the entire loan.
5. Generally cannot act as a guarantor to allow a borrower to purchase an investment property
However, it is not the case that if the borrower defaults on the loan, that the parent's property will immediately be seized and sold off. Firstly, the primary security (ie the purchase property) will be sold, and any remaining debt can either first be refinanced by the parents, but in the even that they do not qualify for the loan, then the bank will take the drastic step of selling the guarantors property.
The bank may also want to see that the borrowers have income protection insurance and life insurance to ensure there is less risk in the event that the client is unable to work due to injury. We can assist in arranging these types of personal risk insurances.
The decision to act as a guarantor has many implications for both borrower and guarantor, not least for the fact that it affects the borrowing capacity of the guarantor.Notwithstanding this, there is still always the option to release the guarantor once there is sufficient equity in the property when the property increases in value.
In all instances, it is recommended to seek independent legal advice to ensure that the guarantor is aware of their responsibilities, and of course our brokers are able to assist in providing relevant information as there are many more important considerations to take into account.
Monday 28th March 2011 - Negotiate bigger discounts with bigger loans (and the benefits of using a broker vs the banks)!
It is common knowledge that most lenders will provide a discount for larger loans. As with anything, if you purchase in bulk, you should be entitled to larger discounts. Generally, the big 4 banks will offer you something in the range of 0.70% off the standard variable for a loan size above $250,000. Last week, a Central Choice broker negotiated a massive 1.0% rate discount off the standard variable rate from one of the big 4 Australian banks! The total size of the loans was approximately $950,000.
As the standard discount is only 0.70% if the client had walked directly in the bank, this saved the client an additional 0.30% off the interest rate, representing a saving of approximately $2,850 per year!
A commonly asked question is that "How can a broker receive a cheaper rate than going to the bank direct? Don't the banks have to pay the brokers a commission as well?" This is the story that many banks will have you believe, however it is also true that the cost of sourcing a loan through a bank includes:
- Wages
- Superannuation
- Rent
- Marketing
- Stationary
- Electricity
- Heating
- Air conditioning
- Security
- Cleaning
- Conferences
- Functions for their executives
- and many more!
In addition to this, it is useful to know how your bank staff gets paid. They will get paid not only on "asset or lending growth" which is a fancy name for the number or value of loans written, but they also achieve bonuses based on "revenue per client." What this actually means is that they are more likely to receive their quarterly/annual bonuses if they are able to earn more money off you by charging you a higher rate of interest!
On the other hand, there is only one cost that the lender needs to pay for loans introduced through brokers, and that is a performance based commission - that is, the broker will only be paid when the bank is guaranteed to be making money when the loan settles. It makes no difference to our brokers (commission wise) what rate is delivered to you because our commission remains the same. Therefore, we will always work our hardest to get the lowest interest rate possible for our clients, because our business depends on our clients telling their family and friends about our services because we were able to negotiate with them a rate that they would otherwise not be able to obtain themselves.
Please note however that these loans are discounted on a client-by-client basis so make sure you talk to a Central Choice finance specialist, who will explain all of the above to you and give you the best chance to negotiate the lowest rate!
Friday 18th March 2011 - Bank Wars Continuing with CBA the latest to remove Deferred Establishment Fees from their product range
Many of our clients have been asking us when will Australia's biggest lender, Commonwealth Bank (CBA) remove their early exit fees (deferred establishment fees) from their home loans, when other lenders such as National Australia Bank and ANZ have already done so for over a month now? Well the good news for borrowers is that from Saturday 19 March 2011, CBA will be removing the
- Deferred Establishment Fee (DEF) for new Home and Investment Loan
- Switching Fee for existing and new home investment home loans and lines of credit
The DEF at CBA is currently $700 for loans that are paid out within 4 years, and the switching fee is $250 is to cover the cost of switching between products, or principal & interest v interest only, variable to fixed, etc.
This is good news for borrowers, although they have said that this will apply only to new loans that are being lodged from Saturday, and therefore does not apply retrospectively.
In any event, we suspect that they are anticipating the moves by the Federal Government to ban all types of exit fees starting from July 1 this year.
Monday 28th February 2011 - ANZ joins the bank price war!
Now ANZ have joined the price war as well, although not just targeting the refinance market
New and existing ANZ customers who apply for new or additional mortgage lending of $250,000 or more, will receive a 0.80% p.a. on ANZ Standard Variable Rate Loans and Equity Manager accounts and 0.15% p.a. on ANZ 1 to 5, 7 and 10 years Fixed Rate Loans.
ANZ say that the new discounts will not be applied to existing loans although if anyone has an ANZ loan, there is no reason why we wouldn't be able to get the discount for people who are existing customers of ANZ using the old method of threatening to leave the bank!
Although there are lots of discounts flying around, it is important to talk to a broker to determine whether a particular loan suits your purposes.
Monday 21st February 2011 - Bank Wars!
There has been a lot of media press relating to various banks offering incentives to refinance from each other. Just to clarify the situation:
NAB was first to move offering to pay up to $700 if a customer refinanced from the other major banks (eg Westpac, Commonwealth and ANZ) with the much publicised "breaking up with the other banks" campaign which started on Valentines Day.
CBA replied to say they would offer to pay $1200 for customers who refinanced from NAB.
Westpac offered new discounts for clients who were borrowing above $500,000, with a discount of 0.8% off the standard variable rate, and the package fee of $395 being waived for the first year.
ANZ have at this stage commented that they are not going to be drawn into the "price war" because "our service is more about price".
Although banks are giving incentives to refinance from one another, we do have over 50 lenders that we deal with and it is therefore useful for your clients to see a broker to find out what is the most appropriate lender for their circumstances. |
