There may be more choice out there, but securing a home loan is a tough process.
If you plan to apply for a home loan soon, you’ll need a strategy to deal with tighter lending conditions. Since the start of the year, the banks have become much more stringent.
Letters of offer to provide money to buy property are harder to obtain, use-by dates are strict and there are no guarantees that older lending offers will be renewed.
Whether you’re buying an investment property or a place to live in, it’s imperative to keep a tight focus on financing options. Get advice about what you can and should borrow (they are never the same) and consider these factors:
Know the real value
The banks’ more cautious approach to lending, coupled with a flat real estate market, is having a trickle-down effect on valuations. Valuers are reducing their valuations on some bricks-and-mortar securities. This is making bankers and home buyers more nervous, so it’s crucial to know the approximate market value of properties you intend to buy.
Paying for a pre-purchase valuation is often worth it. You should, at least, research the median prices of specific areas.
Focus on equity
People misunderstand the concept of equity at their peril. Equity is how much cash you have once you’ve paid for the debt on a property, the sale costs and capital gains tax in the case of investment properties. There is also ”borrowable equity”, or equity used for financial leverage.
Many investors rely on the equity in their home to leverage property investments, believing that the capital growth of a well-chosen investment property will outpace the interest they have to pay. If you know how much equity you have and how fast it’s growing, you’ll strike superior loan deals.
Consider all lenders
Talk to the banks, non-banks, credit unions and mortgage brokers. Using a broker means someone else does the legwork of the loan application, but it’s critical that the broker offers a panel of lenders and depth of choice. Brokers are paid by commission and get paid only when you sign on for a loan.
Although commissions from lenders have become more uniform in recent years, you don’t want to be steered towards the wrong product. Interview at least two brokers and ask: how do you get paid and why is this loan best for me?
Go for the offset
An offset account, rather than a redraw mortgage, is the best option for investors. Offsets should be embraced by more owner-occupier borrowers, too. With an offset, the balance of your account is deducted from your loan account before the interest on the loan is calculated, so less interest is charged.
Because your offset account balance is used to reduce interest, no tax is payable and you reduce your tax liability. If a redraw facility on an investment property loan is used to pay for private purchases, it will shrink the amount you can claim as a tax deduction.
Take a reality check
The finance industry has experienced seismic changes in the past 25 years. Not long ago, you had to demonstrate loyalty to a bank before you could apply for a home loan and dress up in your Sunday best to be grilled by the branch manager. The growth of new banks, non-banks and mortgage brokers has taken some of the hassle out of the process.
It’s also led to the creation of loans with all kinds of bells and whistles. Yet it’s crazy to pay for features you don’t use or need. The most valuable loan feature hasn’t really changed – it is having the option to put spare cash into a mortgage and to pay off the loan as quickly as possible.