Tuesday, February 6, 2007

How to secure a mortgage and first homebuyers grant

(Click image to enlarge)

Last month we started looking at the many young Australians entering the real estate market. Last month we discussed what to look for in a property, this month we will look at how to secure a mortgage and how the first homebuyers grant works. This is a very large area to cover for a short article but I will give you websites that you can use to follow up where I leave off.

How much can I borrow?
Each bank or lending institution uses slightly different lending criteria. The two main requirements however are:
• Your annual income and monthly repayment capacity
• Deposit to loan ratio. How much of the purchase price you are borrowing

The lender will calculate an approximate amount of how much you can borrow. For your own budget though, most people aim to spend no more then one third of their gross monthly income on mortgage repayments.

http://www.echoice.com.au/ has a good basic loan calculator.

What is a mortgage broker?
A mortgage broker arranges financing for borrowers with a variety of lenders. They often help locate the best loan for you and arrange the paperwork and contact required for the chosen loan. A mortgage broker does not make the loan, but receives payments for his or her services, often payment is paid by the bank as a percentage of the loan. It is best to check each broker’s commission schedule to ensure advice is impartial. A mortgage broker is probably a very good idea for the first home buyer as they can explain things better then most lenders, they often come to your place of business or home and can have access to special deals and rates.

Example of mortgage brokers are:

Loan Facilities and Definitions for a Good Loan

AAPR - The average annual percentage rate (AAPR) or true rate or mortgage comparison rate. Summaries interest payments, fees and expresses in one rate. It is designed to reflect the total annual cost to a borrower of a loan.

Accelerated Payment - The option to make repayments higher then the minimum required to pay off the home loan faster.

Amortisation Period or Home Loan Term– Regular monthly loan repayments of the principal and interest based on a schedule that will allow you to own your home at the end of a specific time period such as 15 or 30 years.

Basic Rate - Applied to loans commonly called 'No Frills Loans' which are generally cheaper than Standard Variable Rate Loans but do not have features such as a redraw facility or mortgage offset.

Standard Variable Rate - The rate for a 'premium' home loan product with features such as redraw.

Redraw Facility – The ability to make additional repayments on your mortgage, and then have access to the additional repayments if you need to. Know the conditions attached to the redraw facility such as minimum amounts and fees for using it.

Establishment Fees –Fees which may or may not be charged to set up a loan.

Exit Fee - Fee imposed by lenders when the loan is paid off before the end of it's term.

Fixed-rate mortgage - The interest rate and loan repayments are fixed for an agreed term, regardless of any market interest rate variations.

Official Cash Rate - The interest rate set by the Reserve Bank of Australia on the first Tuesday of each month is used to influence general market interest rates.

Principal – The amount borrowed from a lender on which interest is.

Further definitions can be found at www.realestateguide.com.au/xinc/definitions.cfm

First Home Buyer Loans
The Federal Government's First Home Owner Grant scheme (FHOG) was introduced in July, 2000. The tax free payment of up to $7000 was established to encourage home ownership and is on-going with no end date yet specified. The grant is not means-tested or restricted by a properties purchase price.
To be eligible to receive the FHOG you must meet the following criteria at the time of settlement, or completion of construction of the home:
- Applicants must be a natural person over 18 years old and not a Company
- At least one applicant must be a permanent resident or Australian citizen
- You must not have received a FHOG in any State or Territory of Australia
- You must not have owned residential property, including investment, either jointly, separately.
- At least one owner must occupy the home as their principal place of residence for at least 6 months continuously within the first 12 months

The grant is paid by electronic funds transfer to a nominated account when the buyer becomes entitled to possession of the home under a contract to purchase (usually on settlement), or after construction and when the building is ready to live in. Many lenders are authorised to administer the scheme and can organise earlier payment.

The Victorian First Home Bonus was introduced in 2004 and is in addition to the $7,000 FHOG.
New contracts entered before June 2007 receives a $3,000 bonus.

To be eligible to receive the First Home Bonus, applicants must satisfy all FHOG eligibility criteria as well as ensuring the amount payable under the contract is less then $500,000.

You can apply for the FHOG and the First Home Bonus at either the State Revenue Office (SRO) or an approved financial institution or through a mortgage broker. Only one application form is required and can be obtained from either the SRO or a financial institution. Applications forms and the supporting documentation are then lodged when applying for a loan.

Further Useful Websites

http://www.consumer.vic.gov.au/ – Advice, simple steps, Victorian regulations
http://www.yourmortgage.com.au/ – Calculators, advice, mortgage broker locators
http://www.sro.vic.gov.au/ – Details of the Federal Governments FHOG

Join us next month for the final chapter of entering the investment market with simple tricks of the trade of how to better your rental and capital return.

Good Luck!