Frequently Asked QuestionsQ. Should I have Fixed Rate, Variable Rate or Split Rate?
A. That depends on who 'you' are.
When you take out a home loan, you can choose to have an interest rate this is fixed, variable, or split (a combination of the two). There is no right or wrong option - it all depends on your circumstances.
Fixed Rate Home Loans
With the Fixed Rate Home Loan, the interest rate on your Mortgage doesn't change for an agreed period (usually 1-5 years) - no matter what happens to official interest rates.
Variable Rate Home Loans
With the Variable Rate Home Loan, the interest rate on your Mortgage can change. If official interest rates go down, your interest rates go down too. However, if the Reserve Bank increases interest rates, your Home Loan rate will probably rise too.
Split Rate Home Loans
A Split Rate Mortgage combines elements of the Fixed Rate and Variable Rate options. e.g. You can have 80% of your Home Loan at a Fixed Rate , while the remaining 20% is at an interest rate that varies with the market. Which Home Loan interest rate option is best?
Because it is absolutely predictable, the Fixed Rate Home Loan can give you greater confidence that you can meet your Mortgage repayments regardless of changing economic conditions. The disadvantage is that it generally lacks flexibility.
If official interest rates fall, the Variable Rate Home Loan can save you money, but you need to consider the risk that your Mortgage payments could rise in the future. If you are contemplating a low introductory or honeymoon rate for an initial period you will save initially, but you must find out what the rate will be when the 'honeymoon' is over. The lowest initial interest rate doesn't always mean the better deal.
The Split Rate Home Loan gives you some of the benefits of both Fixed Rate and Variable Rate loans. You won't save as much as a full Variable Rate loan if interest rates fall, but neither will you be as exposed if interest rates rise.
Q.How much should I borrow?
A. As much as you can comfortably repay
It's not that hard to work out your borrowing capacity. Every Lender and Finance Broker has an online Home Loan Calculator that answers the question, "How much can I borrow?". Working out how much you should borrow can be a little more difficult.
How much can I borrow?
The factors that Lenders take into consideration in determining your borrowing limit are:
Stability of income
- How much do you clear?
- Will you have one salary or two?
- Do you have other sources of income?
Other loan repayments
- Are you in full-time work?
- How long have you been with your employer?
- Are you self-employed?
Total credit card limit
- Do you have a car loan? HECS debt? Credit card debt?
- A high limit can decrease your borrowing capacity
Number of dependants
- A bad credit history won't help - but you should be honest
Term of the loan
- Are you taking out a 15-year or 30-year loan?
- When rates are higher, your borrowing capacity will be lower
In determining your borrowing limit, some lenders use what is called the debt-service ratio - the ratio of loan repayments to your gross income. For single income earners, this ratio should be around 35%, and for double income earners, the ratio around 40%. However there are other methods that lenders use to assess serviceability so this is more a guide only.
See our calculator tool How much can I borrow ?
See our calculator tool What can I afford to borrow ?
What you should take into account
The Lender's main concern in determining how much you can borrow is "Can they repay the loan?". They may not take into account a host of other personal matters - but you should.
You know more than the Lender about the security of your income. How safe is your job?
You might not have children now, but are you planning to? And if so, will this mean going from two salaries down to one?
If you have a highly paid job, you can borrow more. But, if you don't like your job, or it's highly stressful, taking out a large Mortgage can have long-term lifestyle implications.
You might be able to afford to service a large loan, but only if you have no social life whatsoever. You need to consider whether that's a trade-off you're happy to make.
Property ownership has become a preoccupation for Australians. But, there are other financial goals to consider - like providing for your retirement. And money isn't everything. Will taking out a large Mortgage mean you'll never fulfil your dreams? Only you can decide
That's why the question should not be 'How much can I borrow?', but 'How much should I borrow?'. And only you can ultimately make that decision. To learn more, talk to Puzzle Finance today
Q. What are the extra costs of buying a home?
A. Application & establishment fees, stamp duty plus more.
When taking out a Mortgage, many people forget to consider the associated fees and expenses. Here are some of the extra costs that you'll need to consider when you take out a Home Loan.
Home Loan application fees
Most Lenders charge a Home Loan application fee. This can range from loan to loan, and covers:
Lenders generally charge a Mortgage establishment fee - a fee for setting up a Mortgage.
- Legal contracts
- Property title checks
- Credit checks Mortgage fees and costs
- Mortgage establishment fees
A third party often chosen by the Lender, needs to determine the value of your land and improvements.
Your Mortgage deed needs to be registered with the government.
The government charges stamp duty to register your Mortgage.
If you don't have 20% of the purchase price of the property, the Lender will require you take out Lenders Mortgage Insurance to cover the risk that you might default on your repayments.
- Lenders Mortgage Insurance
Property fees and costs
It's wise to have your property inspected for any structural problems or pests (e.g. termites).
Governments charge stamp duty to transfer the ownership of a property.
The new owner of the property needs to be registered at the Land Titles Office.
- Registration of transfer fee
You generally need to pay a solicitor to handle the transfer of ownership of the property on your behalf.
Most homeowners insure their home and contents against a range of threats: burglary, fire, storm, etc. You need to insure the home while you have a mortgage.
- Home & Contents insurance
Borrowers should consider protecting the primary income earner while they have a mortgage.
- Life or income protection insurance
Connecting electricity, gas and telephone can be costly and generally involves the lodgement of security deposits.
Your local council charges rates to cover garbage collection and a host of other services.
If you buy an apartment, body corporate fees are charged, and some fees can be significant - particularly if the building is in need of a major work (e.g. concrete cancer, security upgrade, new hot water system, etc)
Don't forget to make provision for regular maintenance on your home - even if you decide not to undertake significant renovation.
Q. What's the secret to buying my first home?
A. Saving for it.
Saving for a Home Loan or Mortgage isn't easy but it has to be done. So here are some savings tips for First Home Buyers to help get you into the property market.
How much should I be saving?
One of the first rules of saving is to set a goal. But what should that goal be? Different people have different needs, but a rough guide is that you should be saving 10% of your pre-tax income. Not saving anything like that? Read on.
What are you spending?
To help with saving, you need to know what you're currently spending. And not just on the big items like rent, utilities and groceries. Get yourself a notebook and every time you spend money, write it down everything for at least a month but preferably longer. You'll be surprised where your money goes.
What do you really need to spend?
If you're a typical First Home Buyer, you probably haven't been exercising a lot of financial restraint to this point. Invited out to dinner? You go. See shoes you like? You buy. Take lunch to work? Are you kidding? There's nothing wrong with that, but if you really want a home, you're probably going to have to start making some sacrifices. Look through your spending record and decide what you're willing to give up. You might decide, for example, that life would still go on if you didn't spend $1500 a year on coffee.
Get rid of credit card debt
You probably used to pay your credit card off every month. But then one month you couldn't quite manage it and things snowballed from there. That credit card debt is killing you. It is expensive money and you need to eliminate it. Consider transferring the debt to a new card that gives you an interest-free grace period, and save like mad to get your balance down to zero as soon as possible. Then consider the old trick of keeping your credit card in a cup of water in the freezer.
A savings history
If you've spent everything you've earned - and then some - don't be surprised if the Mortgage market doesn't put out the welcome mat. Lenders like to see proof that you can save. So start putting something aside every month and you'll be surprised how quickly it adds up - and how much more popular you'll be among the Lenders.
Q. What should I be aware of when taking out a Mortgage?
A. Loans that seem too good to be true.
If you think you've found a Home Loan that sounds almost too good to be true, unfortunately, it probably is.
Here we look at some of the traps you should look to avoid in taking out a Mortgage.
In the Mortgage market, you come to expect certain things. e.g If you have a small deposit, you'll pay more over the term of the loan; that having a bad credit history is going to cost you; that certain loans have certain interest rates, etc. So if you're offered a Home Loan that seems much better than normal, look closely at the fine print. Free lunches are as rare in Home Loans as they are elsewhere in life.
Interest rate fixation
Most people looking for a Mortgage are preoccupied with finding the lowest interest rate. But have you considered all the fees and charges, and the account flexibility you need? You need to consider the entire cost of the loan - not just the interest rate.
Ignoring Mortgage fees and charges
Don't ignore any fees or charges linked to a Home Loan; you never know how your circumstances may change.
Upfront fees for taking out a loan and monthly fees are pretty easy to understand. But, are there other fees that you may incur? Will you be able to pay extra if you have a sudden windfall? Will you be charged if you decide to move or refinance your Home Loan? Can you increase your Mortgage Repayments?
Lack of Flexibility
Different loans have different levels of flexibility i.e EFTPOS, internet banking, Redraw Facility. Ensure your Home Loan has all the features you want and don't get locked into a Mortgage that will cost you to change if you change.
Some property developers offer "vendor financing". This may seem attractive because you don't have to deal with a Lender, or because they're willing to give you a loan when others won't. But be careful you're not paying above market rates - for the property or your Mortgage.
Get specialist help
The mortgage market is extremely complex, and getting what's right for you is not as simple as finding the lowest interest rate. You need specialist help - the sort of help you get from Puzzle Finance.
Q.How do I pay off my Mortgage sooner?
A. Pay more, more often.
Want to pay off your Mortgage early? Then make bigger Mortgage Repayments, more frequently. You'll own your own home sooner and save a bundle on interest.
Act now - you pay most interest up front
Most Mortgages are structured so that you pay off most of the interest in the early years. If you are serious about wanting to reduce the interest you pay on your Home Loan, you'll act now.
Get rid of car loans and credit card debt
You're generally paying a higher interest rate on small loans (e.g. a car) and your credit cards so it makes sense to eliminate those debts first. So, put a rein on your credit card usage and then tackle your Mortgage.
Make sure you're paying off the right Mortgage
When you entered the Mortgage market, you might not have been as well informed as you are now. Or the market might not have been as competitive. Stay in contact with Puzzle Finance. They can let you know if there is a new Home Loan product that will save you money over the term of the Mortgage.
Most debt-retirement strategies depend on you being able to pay off more of your Mortgage sooner. Read the fine print or talk to your MFAA member to see if you have the flexibility you need to reduce your interest charges.
Pay more and pay often
Assuming you have a Mortgage that lets you pay extra, you should pay more and pay often. The interest charged on a $300,000 Home Loan at a rate of 7.15% over 30 years with monthly repayments is over $420,000. By paying off an additional $50 a month, you'll reduce the interest bill by $39,000 and your loan term by 2 years and 4 months. You could look at making repayments weekly or fortnightly rather than monthly. Over 30 years the savings add up. To learn more, talk to Puzzle Finance today.
Want to explore paying off your Mortgage early ? Use our Extra Repayments Mortgage Calculator
Q. When would I refinance my mortgage?
A. Whenever it makes financial sense to do so.
Heard about mortgage refinancing?
In the past, most people who took out a Mortgage doggedly continued with it until they had paid it off. These days, people refinance their Mortgage much more frequently. The average duration of a Home Loan in Australia now is just 4-5 years.
Here we look at some of the reasons people in Australia refinance their Home Loan.
Mortgage Refinancing Reasons: lower rate
The most common reason for people to refinance their Mortgage is to get a better deal. But be careful you don't become interest rate-fixated. When you refinance your Home Loan, you need to consider fees and charges as well as the interest rate. You often have to pay charges for exiting your current home loan, plus charges for taking out the new mortgage. You need to be sure that in refinancing your Home Loan that you'll be better off in the long run after taking into account all costs.
Mortgage Refinancing Reasons: more flexibility
Many people only discover the full details about their Mortgage when it's too late. They try to do something and get told by their Lender that either they can't do it, or they will incur a hefty charge if they do. An example is a Redraw Facility - the ability to pay extra money into a Mortgage and then redraw it later. This feature is not possible with a Basic Home Loan, so many people refinance their Mortgage to give themselves this sort of increased flexibility.
Mortgage Refinancing Reasons: renovation
If you carry out renovations, it often makes sense to refinance your Mortgage and take out a construction loan so you only pay interest as building progresses. Once construction is over, it might make sense to refinance your Home Loan again so that you consolidate the total amount you owe into a loan that minimises your interest bill, while giving you a degree of liquidity.
Mortgage Refinancing Reasons: home equity
Over recent years in the property market houses have appreciated at a significant rate. e.g. a home you bought for $300,000 five years ago, might now be worth $500,000. Refinancing your Mortgage with a Home Equity Loan might let you tap into that extra $200,000 equity.
Mortgage Refinancing Reasons: defaulting
Some people find they have borrowed more than they can comfortably repay, and they're in danger of defaulting. There's no shame in that. But don't suffer in silence. If you're having trouble making your Mortgage repayments, talk to Puzzle Finance about refinancing your Home Loan to make it more manageable – our business is to help you.
Q. Why should I have a regular Home Loan Health Check?
A. Because things change: interest rates, products and you
Just because you've spent ages making sure you have the right Mortgage, it doesn't mean it will always be right for you. Contact your Puzzle Finance regularly for a Home Loan Health Check to see if refinancing your mortgage would suit you.
Mortgage Refinancing Reasons: you change
Over time, your personal and financial situation may change. You may get a pay rise, or decide on a sea-change. You might go from a safe corporate salary to the more uncertain income of the self-employed. You might want to start a family, or need to finance their education. As your needs and priorities change, you'll probably find the right Home Loan product for you will change, and you'll need to refinance your Mortgage.
Mortgage Refinancing Reasons: rate rise
In stable economic conditions, a variable interest rate might look more attractive, while in more volatile periods you could prefer the predictability of a fixed interest rate. Refinance your Home Loan to suit the economic times.
Mortgage Refinancing Reasons: new products
In the past, there was limited innovation in the Mortgage market. But now competition between Lenders is fierce and new products are constantly emerging that might suit your situation better. Puzzle Finance can keep you up-to-date with new Home Loan products that might make it worthwhile to refinance your Mortgage. Talk to Puzzle Finance today
Q. What are some other Mortgage Refinancing options?
A. Bridging Loan, Construction Loan & Equity Loan.
Many people refinance their Home Loan because they're looking for a lower interest rate, lower payments or more flexibility. If that is your goal in refinancing, then you have a wide range of products to choose from. However here we can look at some specific home loan refinancing options people use to deal with some common situations.
- Bridging Loan
- Construction Loan
- Equity Loan or Line of Credit (LOC)
- All In One Account
If you want to buy a new home, but you have not yet sold your existing home, you could use a Bridging Loan to tide you over. The maximum you will be allowed to borrow during the bridging period is generally limited to 80% of the combined value of both properties. Bridging Loans tend to be at a higher interest rate than normal loans. But when you have sold your original home and repaid that Mortgage, you can revert to a loan product with a more favourable rate.
Construction Loan or Renovation Loan
With a normal loan, you borrow the whole amount up front - and start paying interest from day one. The advantage of a Construction Loan or Renovation Loan is that you only draw down money as you need it to make progress payments. This can significantly reduce your interest payments.
Equity Loan or Line of Credit (LOC)
A Line Of Credit, Equity Loan or Equity Line allows you to borrow up to a certain limit - either all at once or in smaller amounts. The advantage is that you only begin to pay interest when you "draw down" these amounts. Equity Loans give you a great deal of flexibility but you will tend to pay a higher interest rate than for a normal loan.
At present, you might have separate savings, cheque, credit card and Mortgage accounts. The All-in-One Account, as its name suggests, brings all those accounts into one. The advantage of this Home Loan refinancing option is that money that normally sits in low-interest savings or cheque accounts can reduce your outstanding Mortgage - which is being charged interest at a much higher rate.
These are just a few of your Mortgage Refinancing options and Puzzle Finance can discuss some others with you.
Q. If rates rise, should I move to a Fixed Rate Mortgage?
A. Not necessarily.
From the moment you take out a Mortgage, you'll take a much keener interest in Australian interest rates.
Should you be on a Variable Rate Mortgage or a Fixed Rate Mortgage? Let's look at your Home Loan refinancing options as interest rates rise and fall.
When interest rates drop
If you took out a Variable Rate Mortgage, you were effectively taking a view that interest rates in future would be steady or fall. So when the Reserve Bank announces a quarter or half point drop, you'll be feeling pretty clever. But how should you respond?
Live it up?
If your interest rate falls, you could simply lower your repayments and enjoy an improved lifestyle. That's very tempting but not necessarily the way to go.
Pay off more
It might be smarter to take advantage of the lower interest rate to pay off more of your loan. Remember, Lenders tend to load the interest on the earlier years of a loan, so paying more now could significantly reduce your interest charges over the term of the loan - if rates remain low.
When interest rates rise
If you have a Variable Rate Mortgage, an interest rate rise is not great news. However, as always, you have options.
Refinancing to a Fixed Rate Mortgage
The instinctive response for most people when they hear rates have gone up is to switch from a Variable Rate to a Fixed Rate Mortgage. That's understandable. Unfortunately, Lenders in a climate of rising rates will make you pay for that interest rate certainty. Also, you don't have the flexibility of paying off your Mortgage sooner with a Fixed Rate Mortgage. There is another option.
Increasing your Mortgage Repayments
Mortgage Refinancing is generally about one thing: reducing the overall cost of your Home Loan in the long term. If you're going to be paying a higher interest rate, one way to reduce the interest charge is to reduce the amount you owe by actually increasing your monthly repayments - if that's possible.
For help with reviewing home loan products and options, contact Puzzle Finance today.
Q. What should I do if I can't make my repayments?
A. Talk to the right people, at the right time
It can be stressful if you find yourself unable to meet your mortgage repayments and you're in danger defaulting. But you're not the first person to face difficulties, and there is almost always a solution. You just need to talk to the right people at the first sign of difficulty.
Talk to your Lender
You probably won't want to talk about your mortgage situation. But the problem won't solve itself and avoiding matters won't help. Remember: your Lender doesn't want to foreclose your loan - it's no fun for them either. So call and let them know what's happening.
Talk to your other creditors
If you're struggling with your mortgage repayments, chances are you're maxed out on your credit cards as well. You need to talk to these people too - and any other creditors. Again, it is in their interests for you to find a solution. But you need to keep people in the loop. In these situations, silence is anything but golden.
Talk to Puzzle Finance
Refinancing your mortgage in a way that suits your current situation may help. But you're probably not the best person to find a solution. You need to talk to a mortgage specialist and that means Puzzle Finance – we can contact the lender on your behalf, at your request and upon your consent
Talk to a Financial Counsellor
If the situation is becoming overwhelming and you are really in danger of defaulting, you may need to consider speaking to a financial counsellor or your Accountant.
Q. Where can I get finance for a small business?
A. Talk to Puzzle Finance
Many people in Australia dream of running their own small business but four out of five never do it. If you've got a good idea, develop a business plan, then talk to Puzzle Finance about your Small Business Finance options.
Your Small Business Finance or Commercial Finance options include:
How much money does your business need ?
- Business Loans
- Commercial Loans
- Lines Of Credit
- Home Equity Loans
- Franchise Funding
- Venture Capital
A lot of small businesses fail not because they're offering a poor product but because they run out of cash. How much money do you need for your business? Not just to pay for set-up costs but to cover your living expenses while you get established? Don't even think about going into business until you've done a detailed business plan and cash flow projection. Otherwise you're planning to fail.
Business Finance vs Commercial Finance ?
Both Business Finance and Commercial Finance are generally secured by either commercial or residential property. However, Business Finance is probably more associated with Small Business or SMEs (Small to Medium Enterprises). Commercial Finance tends to relate more to the financing of Commercial Property.
Business Loans are where the finance is for business purposes and the interest cost associated with the loan is tax deductible against the profits of the business. Small Business operators provide security by way of residential or commercial property.
A Commercial Loan is where the finance is for the purchasing of a Commercial Property, Commercial Property development or business purchase.
Similar lending requirements apply to both Business and Commercial Loans. Commercial Loans are secured either by Commercial or Residential Property. With larger corporate borrowers, lenders can rely purely on the assets of the company as loan security e.g. trade debtors.
Lines Of Credit
With a Line Of Credit, you're given a borrowing limit by the Lender and you draw down money - up to that limit - as you need it. The advantage of a Line Of Credit is that you only pay interest as you draw down money. The disadvantage is that the rate of interest may be higher.
A Line of Credit should be "fully fluctuating". ie It should only be used as a short term financing option rather than for the purchase of major commercial plant or equipment.
Home Equity Loan
Many people have limited cash reserves but have built up equity in their homes. That is, their homes are worth more than they still owe on their Mortgages. You can tap into this equity to help finance your business or investment by taking out a Home Equity Loan.
Start-ups versus existing businesses
If you're thinking of running your own business, you should be aware that it's generally easier to get Business Finance for an existing business rather than a start-up. Lenders tend to view start-up businesses as inherently risky whereas an existing business has a track record they can review. However, there are Business Finance options for start-ups.
Franchise Finance or Franchise Funding
To meet an emerging need, new Business Finance products have come onto the market to help people buy Franchises. Lenders can be more inclined to provide Franchise Finance because, while your business might be new, it could be based on a proven formula.
Venture Capital (VC) describes where a Lender gives you funds in return for a stake in your business. The further your idea is from fruition, the less likely the Venture Capital or VC firm will be to give you the money, and the more equity they'll want in return.
Talk to Puzzle Finance about Small Business Finance
Q. How can I improve the cash flow of my business?
A. Consider Factoring, Trade Finance, Leasing and more.
If you're running a small business, one of the biggest problems you face is cash flow.
Here we look at some of the ways in which you can improve the cash flow of your business, including:
Overdrafts - traditional but declining
- Credit cards
- Factoring, Debtor Finance or Invoice Finance
- Trade Finance or Stock Finance
- Car Leasing
- Equipment Leasing
The traditional way for a business to improve their cash flow was to run an overdraft. However, you're charged a fee to get an overdraft and ongoing fees to maintain the facility. Also interest rates on overdraft facilities tend to be higher than for residential home loans. With more flexible Business Finance products emerging, overdrafts are becoming a less popular way to address cash flow issues.
Credit cards - expensive money
Credit cards are easy to get, easy to use, and can be a good way to finance and monitor employee business expenses. However, they are generally not the most economical way to deal with cash flow problems. The interest rates on credit cards tend to be higher than for residential home loans, and you can quickly get in over your head. There are other specialised ways to improve your cash flow.
Factoring, Debtor Finance or Invoice Discounting
You've done the work and sent the invoice but you don't have the money. This is particularly frustrating when your debtors don't pay on time - which is most of the time.
With Factoring (also known as Debtor Finance, Invoice Factoring, Invoice Discounting or Invoice Finance), a Lender gives you a percentage of the invoice (usually 80%) in cash, then the remainder when the invoice is paid. This service incurs a charge but can save your bacon in cash flow terms. Beware that if the debtor ultimately does not pay the invoice, you must repay the Lender all the money you've been advanced.
Trade Finance, Stock Finance, Export & Import Finance
If you've bought stock, it can be some time before the finished goods are sold and this can have serious cash flow implications - particularly for importers and exporters.
With Trade Finance (also known as Stock Finance, Inventory Finance, Export Finance or Import finance), the Lender gives you a percentage of the money against the stock you've purchased. Again, you pay for the service but it can make all the difference in cash flow terms. Lenders are much less inclined to loan money for stock sitting in the warehouse than they are for confirmed orders.
Car Leasing & Equipment Leasing
For many small businesses, leasing cars, computers and equipment is preferable to outright purchase because it improves your cash flow.
Q. What is Equity Finance and Venture Capital ?
A. Possible ways to expand without borrowing.
Dealing with growth can be challenging for a small business and generally cash flow is an issue. Business Loans or Lines Of Credit are options, but here we look at a possibility that doesn't involve interest or repayments
Equity Finance - The challenge of growth
Businesses don't always close their doors because no one wants their product or services. Sometimes small businesses fail because demand for their product exhausts their cash flow. The secret is to plan ahead and look at external sources of money.
Business Loans & Lines Of Credit - the burden of repayments
If you need extra cash, you could take out a Business Loan or Line Of Credit. However, they can be difficult to get without bricks and mortar security. What's more, you might not be able to meet the monthly repayments. In this situation you might want to look at Equity Finance.
What is Equity Finance?
Equity Finance (also known as Equity Funding, Venture Capital or Private Equity) is where a private investor gives you funds in return for a share - or equity - in your business.
The benefits of Equity Finance
With Equity Funding, you don't pay interest and you don't make monthly repayments. The investor is speculating that they'll get a return on their money when your business increases in value. Not having regular outgoings can be a huge advantage for a small business - particular with a start-up enterprise.
Giving up 100% ownership
Many entrepreneurs are reluctant to relinquish any stake in their business. However, having a smaller share of a larger entity can sometimes be worth more than 100% of not much. Seek professional and legal advice before entering into any Equity Finance deal. To learn more about Equity Finance, contact Puzzle Finance today.
Q. Why would I lease my company cars?
A. It might improve your cash flow.
Many small business operators choose to lease rather than purchase their company cars because it's better for their cash flow. Some of the common Vehicle Finance options include:
- Car lease
- Operating car lease
- Novated lease
- Chattel Mortgage Finance
- Hire Purchase
If you take out a Car Lease, the Lender agrees to rent the vehicle to you for a set period for an agreed (generally monthly) amount. If the vehicle is entirely for business purposes, the lease payments are completely tax deductible.
Operating Lease vs Finance Lease - what's the difference?
With a Car Lease, you have two options: an Operating Lease or a Finance Lease. At the end of a Finance Lease, you pay a Residual lump sum - an agreed value of the depreciated cost of the vehicle - and assume ownership. At the end of an Operating Lease, you return the goods and do not have to pay the Residual payment and the Lender retains ownership.
Operating Lease vs Finance Lease - which is right for me?
Choosing between an Operating Lease and a Finance Lease depends on your situation. An Operating Lease is effectively a rental arrangement with no liability to you at the end of the term, whereas a Finance Lease has a residual amount that is your responsibility whether you retain goods or return them to the lender. There is also an accounting difference, with Operating Leases being off balance sheet while Finance Leases are recorded on the business balance sheet.
Fully Maintained Car Leases
With a Fully Maintained Car Lease, the ongoing vehicle maintenance charges are included. You can also include tyres and fuel and you pay a higher lease rental.
Under a Novated Lease, an employee makes an agreement with the Lender for the finance of a vehicle. The employer then takes the repayments out of the employee's pre-tax salary. If the employee changes jobs, they take the car with them.
Commercial Hire Purchase
Commercial Hire Purchase is like a Car Lease in that you pay "rent" over the repayment term. The difference is that you gain equity as you make payments and title passes to you with the last repayment. A Commercial Hire Purchase agreement can be structured with or without a "Balloon" payment ie an additional lump sum payment to be made at the end of the lease.
Chattel Mortgage Finance
Chattel Mortgage Finance is a car loan that allows a business using the "cash" method of accounting for the Goods & Services Tax to claim back the GST on the vehicle purchase price in their next Business Activity Statement.
Q. Why invest in property ?
A. It's a safe path to wealth generation.
Investment properties have many benefits when building long-term wealth. If you take the time and select your investment properties well – for example, to meet the demands and lifestyle expectations of the changing demographic – property can deliver good returns for long-term investors and provide a secure income stream for retirement.
Will an investment loan be any different to my existing loan?
There are few differences between what you need to do to borrow for a property you'll live in and for one you'll rent out. Some lenders charge a higher interest rate for investment properties because their risk may be higher. But this may not necessarily be the case.
Can I use the equity in my home as a deposit?
If you have owned your own home for a few years, you could have built up quite a bit of equity in your property.
Equity is the value of an asset not subject to any lender’s interest. For example, a property worth $600,000 with a mortgage loan of $250,000 has equity of $350,000. Instead of finding a cash deposit to buy an investment property, you can use this equity as the deposit.
What fees and charges should I consider?
When you buy a property, costs such as establishment fees, solicitor fees and stamp duty add up to several thousand dollars. Instead of trying to find cash to pay these fees, take them into account in your borrowings. That means you don't need thousands upon thousands of dollars in savings to get started.
What’s negative gearing?
A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation – exceeds the income it produces. Simply put, your investment must make a loss before you can claim a tax benefit.
Aside from negative gearing, there are a host of other things to consider too for successful property investments
What’s positive gearing?
You can also positively gear a property. This occurs when the investment income exceeds your interest expense (and other possible deductions). Note that you may be subject to additional tax on any income derived from a positively geared investment.
You should also consider any other costs for successful property investments.
Q. What is Lenders Mortgage Insurance (LMI) ?
A. A cost involved when obtaining a property with a smaller deposit.
Lenders Mortgage Insurance (LMI) is one of the most popular ways to achieve the dream of home ownership sooner for borrowers that do not have a large deposit.
Many lending institutions require borrowers to contribute a 20% deposit before they will agree to provide a loan. This is largely to protect against the risk associated with providing the borrower with the loan in the event that they default.
By using LMI, lenders are able to pass on this risk to a mortgage insurer, which in turn enables them to offer the same loan amount but with a lower of a deposit, typically 5% of the purchase price.
LMI should not be mistaken for Mortgage Protection Insurance, which covers your mortgage in the event of death, sickness, unemployment or disability.
LMI protects lenders against a loss should a borrower default on their home loan. If the security property is required to be sold as a result of the default, the net proceeds of the sale may not always cover the full balance outstanding on the loan. Should this be the case, the lender is entitled to make an insurance claim to the Mortgage Insurer for the reimbursement of any shortfall, calculated in accordance with the terms of the insurance policy and the Lender may seek recovery of those funds from you, the borrower.
Q. What are Break Costs ?
A. An economic loss incurred by the lender but passed on to you
When a Lender provides the borrower a fixed interest rate loan, the Lender obtains the funds for the loan through a transaction at wholesale interest rates.
What are Break Costs ?
Break costs are an amount equal to a reasonable estimate of the Lender’s loss arising as a result of the borrower breaking the loan when it is at a fixed rate.
The lender suffers a loss when wholesale market interest rates fall between the start of the fixed rate period and the time the borrower breaks the fixed rate period.
The borrower breaks a fixed rate period on the loan when, during the fixed rate period:
When are Break Costs payable ?
- the borrowers prepays the loan in part or in full; or
- the total amount owing becomes immediately payable because the loan is in defaul
Break costs are payable on a fixed interest rate loan when wholesale interest rates have fallen AND:
- the borrower prepays all of the total amount owing on your loan before the end of the fixed rate period; or
- the borrower makes extra repayments beyond the agreed threshold as set out in your loan agreement (varies Lender to Lender); or
- if the total amount owing on the loan becomes repayable immediately during a fixed rate period because the loan is in default.
Why Are Break Costs necessary ?
When the borrower break your fixed rate period, the Bank has to break its wholesale interest rate arrangements and, if wholesale market interest rates have dropped, this causes a loss to the Bank.
How are Break Costs calculated ?
Lenders will calculate break costs using the break costs method set out in their respective General Terms and Conditions of the loan agreement. The break costs method estimates the Lender’s loss, but may not necessarily reflect any actual transaction that the Lender may enter into (either before or at the time of the break).
Break costs are calculated on wholesale market interest rates. Those rates may not be the same as the fixed interest rate for the loan or other fixed interest rates that apply to other products of the Lender. They may be lower or higher.
Warning: Break costs can be high and the formula is complex. It’s best that the borrower ask the Bank for an estimate of the break costs and seek independent financial advice before prepaying any amount on the loan during a fixed rate period. Prepaying refers to any extra repayments above & beyond any agreed threshold set out in the Lenders loan agreements & terms and conditions, or repaying the loan in full before the expiry of the fixed rate period.
The following examples are a guide to the impact of break costs on a home loan:
Original loan amount $100,000
Original loan term 36 months
Fixed interest rate period 36 months
Fixed interest rate in your contract 9% per annum
Repayment method interest only
Month Broken Break cost Amount prepaid
12 $1,843 $100,000
18 $1,409 $100,000
24 $ 958 $100,000
Original loan amount $100,000
Original loan term 25 years
Initial fixed interest rate period 36 months
Fixed interest rate in your contract 9% per annum
Repayment method principal and interest
Month Broken Break cost Amount prepaid
12 $1,801 $98,884
18 $1,373 $98,288
24 $ 930 $97,664
THE FOLLOWING ASSUMPTIONS IN THE BREAK COST CALCULATION EXAMPLES:
The precise mathematical method of calculation should be contained or referred to in your loan agreement.
- The loan is repaid in full at 12, 18 and 24 months
- all wholesale interest rates fell by 1% per annum between the date the fixed rate period started and the date of the break;
- there were no previous partial prepayments on the loan;
- only the required monthly repayments were made -- there were no arrears or additional repayments on the loan;
- the loan is repaid immediately after the repayment due on the date of full prepayment
- fees and charges that may be added to the loan balance are not taken into account;
- there is an equal number of days in each month (that is 365/12 days in each month).
Q: What is involved with the application process ?
A: It varies for each case but here's the typical process
Step 1: Interview
During the initial meeting with you, Puzzle Finance will conduct a detailed fact find that will enable us to better understand your current financial position and objectives. We will discuss & present various finance options for your consideration. Once a not-unsuitable finance option has been identified, the loan application process and submission to the selected lender will get underway. Part of the process will be to verify all of your information and conduct a preliminary assessment to ensure it meets the criteria of the lender.
Step 2: Loan application process
To support you application, proof documentation will be required - documentation requirements will vary depending upon the type of finance being sought, and the basis of your employment:
Step 3: Assessment
- Drivers Licence
- Your two most recent and consecutive payslips showing YTD figures (if PAYG)
- Copy of employment contract and/or a letter from your employer (if Contractor)
- Most recent Payment Summary (group certificate)
- If self-employed, the last two years full tax returns
- ATO Tax Assessment Notices
- Centrelink Statements if you receive government payments
- Proof of existing and/or proposed rental income (if applicable)
- 3 months recent statements for all savings accounts (if mortgage insured loan)
- Copy of superannuation statements, share certificates and evidence of other investment assets
- Copy of sale contract on purchase or sale
- Statutory declaration if any part of the deposit is a gift, stating it is non-repayable
- Rates notice on any existing properties
- Most recent statement for all credit/store cards, personal loans, leases and other consumer loans
- Copy of loan statements for 6 months on any existing mortgages (if refinancing)
- Copy of contract of sale for property being purchased
- Copy of plans, specifications and fixed price contract (building loans)
- Details of any extra expenses (maintenance, child care, private school fees)
The lender will assess your application to determine whether you meet their policy requirements. This process includes verification of your income and employment and a credit reference check. Assessment times vary from bank to bank but allow up to 5 days – Puzzle Finance will provide a more accurate timeframe once the application has been submitted
Step 4: Conditional Approval
If the lender is satisfied with the application, they will issue a Conditional Approval which should be conditional only for a satisfactory security valuation. From time to time, additional documentation may be requested to cover off any area of the assessment that is unclear or not supported by documents at hand, however this is more the exception than the rule. A valuation is now ordered (where required) and can take the form of a few different methods; full walk-though inspection, kerbside inspection, electronic valuation, relying upon a rates notice or contract of sale
Step 5: Lenders Mortgage Insurance (LMI)
Once the valuation has been received, along with any other supporting documentation requested, the lender will then submit your application for Lenders Mortgage Insurance assessment (if applicable). Some Lenders will seek LMI conditional approval as part of their initial assessment and then seek formal LMI approval upon receipt of a valuation report.
Step 6: Unconditional (full) approval
The lender will issue Unconditional or Formal Approval for the finance once final assessment has been carried out – this may only be a matter of reading the valuation report and being satisfied with it’s content. The lender will then instruct either an internal or external legal department to prepare and issue the Mortgage Offer documents – Puzzle Finance will go through the documentation with you to ensure all parts are correct and discuss any aspect of the loan for which you may have a question/s.
Step 7: Loan settlement
Once the mortgage offer documents have been signed and returned to the lender, your solicitor or current Lender will liaise with the new lender to schedule a settlement date. The first repayment on your new loan will usually be required one month after the settlement date. In some instances, an appointment at your local branch will be arranged to enable new transaction accounts and/or other products be arranged. Puzzle Finance will discuss this with you before arranging any appointment on your behalf.
Step 8: Insurance
There are two types of insurance that you need to consider
Most lenders will want to see that the security property has sufficient building insurance prior to settlement based on the estimated replacement value noted in any valuation report conducted by the lender. The lender must be noted as an ‘Interested Party’ within the building insurance policy.
- Home building and contents insurance
- Risk Protection insurance (Income Protection, Life, TPD, Trauma)
During the finance application process we will also highlight the need for you to review your Risk Protection Insurance. Some superannuation funds provide this type of cover as an optional part of your super plan so its a wise idea to review your cover. We have a professional duty of care to discuss these types of cover.