Home Loan Advice

2011 June 3

For most people, buying a home is the most important investment they will ever make. Choosing the right home loan is one of the key elements in making the right investment in a family home or an investment property.

Among the items to take into account when considering a home loan are the loan type and the amount of money that you should borrow

What Loan Type Is Best For Me?

Choosing the right loan type will depend on your specific situation and budget. Generally you can choose either a fixed or variable interest rate loan. Sometimes it can be difficult to decide on which of these loans is best for your situation. In such cases, you should consider seeking home loan advice from professionals. Making the right loan choice can not only help save you money, but can also help you avoid the possibility of future default and even foreclosure.

Fixed Rate Loans

A fixed rate home loan involves a fixed interest rate and monthly repayment for a set period that usually lasts from one to 10 years. One of the drawbacks of fixed rate mortgages is that if you repay the loan in full before the fixed rate period ends, you will have to pay an early exit penalty known as “break cost” or “economic cost.” To avoid paying this penalty, you should make sure that you follow the repayment schedule.

Variable Rate Loans

Variable rate mortgage loans come in two types, the standard variable loan and the basic variable loan. The standard variable rate loan offers a varying interest rate that can increase or decrease during the repayment period. The professional package is often taken together with the standard variable loan, which is popular with investors who have more than one property. 

The basic variable rate mortgage is designed for borrowers who are looking for just a single home without any plans on buying additional property in the future. The interest rate can increase or decrease during the term of the loan, but the basic variable rate comes with a loan discount included. 

Equity And Line Of Credit Loans

You can use your equity or line of credit to obtain variable rate loans. Line of credit loans often do not require set repayments up until you reach your credit limit. Sometimes you make be required to make a monthly payment at least equal to the amount of accrued interest from the previous month.

Line of credit and equity loans are good for making renovations to your home and for other types of investments.

Combination Loans And Split Loans

One of the best options for a combination or split loan is to take the loan together with a professional package. The professional package is designed for investors that have multiple loans that can be of various types and it combines the rates together in a single annual package fee.

A split loan refers to a mortgage that is partly of variable interest rate and partly of fixed interest rate. The split loan, thus, offers some of the advantages of both the variable and fixed rate types of loans. You will not have to worry as much about interest rates going up with the fixed interest rate, and you can make extra payments with the variable interest rate.

Can Non-Citizens Obtain Home Loans?

Australia allows permanent residents and temporary residents to obtain mortgages and buy property in the country. 

Generally, banks will only cover about 80 percent of the property value for expatriates that are purchasing homes. However, those who have lived in Australia for more than 12 months and that are willing to pay a higher deposit can often find a bank that will cover up to 90 percent of the property value.

Permanent residents and expatriates who are married to Australian citizens or permanent residents can usually obtain mortgage loans for up to 95 percent of the home value. 

People on temporary visas that will not be staying in Australia for more than 12 months are required to obtain approval from the Foreign Investment Review Board (FIRB). Spouses of Australian citizens and most others on temporary visas who will be staying for more than 12 months will not need FIRB approval.

In addition, temporary residents are not eligible for first home owners grants or other government benefits. However, if you have a spouse or partner visa and you will be purchasing property with your spouse or partner as joint tenants, then you can qualify for the First Home Owners Grant (FHOG).

How Much Should I Borrow?

Banks will often give you quotes on how much you qualify to borrow for a home loan. Generally though, this maximum amount is more than what you should prudently consider for your mortgage loan. 

The maximum amount that you qualify for can be taken as the amount that you will be able to pay while maintaining a generally low standard of living given your income. A good rule is to only consider loans that do not require repayments of more than about 35 percent of your gross income. 

However, for borrowers who are frugal and who have lower tax rates, they can prudently consider repayments up to about 40 percent of their gross income. 

For example, if a person were to make $80,000 a year with a desire to maintain a generally higher living standard, then the annual repayment should be no more than $28,000 ($80,000 X 35%) or $2333 a month. In order to figure out what repayment rate is right for you, the best option may be to seek advice from a professional mortgage expert who can work through the details of your present and future budget.

Seeking Mortgage Advice For Investments

If you are a real estate investor, it is generally best to seek professional advice to optimize your chances for success.

Generally, it is best to seek standalone loan structuring rather than structures that depend on cross collateralisation. 

A cross collateralisation investment involves a secondary loan that is secured with your owner occupied family home. The obvious danger here is that you could lose your family home if you are unable to satisfy the terms of the secondary loan.

In a standalone structure, you first obtain a second loan using your line of credit on the family home. This second loan is used as a deposit for the investment property loan. In this way, the investment property is secured solely by the investment property itself and not by your family home.

Property Ownership For Couples

Husband and wife can benefit by allowing the highest income earner to hold title to the home for tax purposes. However, if you plan on owning the property for a long time, you can lower your future capital gains taxes by jointly owning the home.

Get more information on home loan types.

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