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Mortgage Secrets
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E XP O S E
An informed decision, is a good decision!
Never before have Australian borrowers had so much choice when it comes to the
selection of a home loan and with that range of choices can come confusion and
misinformation. In this report we expose many Australian mortgage secrets and myths
as well as giving some practical tips on the best way to secure your next mortgage.
Through this report
we hope to stimulate CONTENTS
thought and to detail
All I want is the lowest rate: 1
points that home loan
borrowers should Are non bank lenders safe: 2
consider as part of Secret Commissions: 2
their lender/broker
Insurance rip off: 2
and loan selection
criteria. Know the process: 3
Which loan type: 3
It's reported that in
Australia there are What are the real costs: 3
currently in excess of Property valuations: 4
300 lenders and or
mortgage managers Why do banks say no: 4
and over 12,000 Broker v Bank: 5
mortgage brokers. each other and the plethora of
Choosing a broker: 5
non-bank lenders and mortgage
In Australia today, in excess of brokers to get their share of loans How do brokers get paid: 6
40% of all home loans are placed, accurate information can Accountability and Fraud: 6
arranged by mortgage brokers sometimes be the victim.
with that figure following overseas Bait and Switch: 7
trends and growing each year. It is essential that every person Doubtful withdrawals: 7
considering a mortgage should
Based on the trends in other make an informed decision not Dealing with a broker: 7
countries, Australia could just about the loan product that's Know your credit history: 8
reasonably expect to see in right for them but also who they Repayment penalty: 8
excess of 60% of home loans will approach to arrange that home
arranged through mortgage loan. Recommendations: 8
brokers.
To add to the confusion there are
several hundred different loan All I want is the lowest rate!
products for borrowers to choose Does that seem like a logical way to determine which loan product you'd
from. chose? Unfortunately, it's not that simple. After all you wouldn't buy a car based
on the lowest price. Just like cars, mortgages come in many models with lots of
With this great diversity in both features.
lenders and loan products came
the rise of the largely unregulated For example, on paper a lender offering a one year low rate (Honeymoon rate)
would have the lowest rate. However, when you look at some of the restrictions
and often maligned mortgage that may apply to that loan it may in fact be a more expensive loan.
broking industry.
The loan may for example only allow monthly payments. It may prevent you
After years of branch closures and from making lump sum payments and it may not have things like re-draw or line
reductions in face to face service of credit facilities. It may also have higher account keeping charges and a non
many banks realized that their competitive rate in the second year.
traditional clients were leaving In this report we try to explain that "there is no such thing as a free lunch" just
them. Now as they compete with as the loan with the lowest rate may in fact be the most expensive loan for you.
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Are non-bank Insurance
lenders safe?
Traditionally Australian's have
rip off?
approached the "family bank" when When you take out car insurance
they needed a home loan. Things you get a 1 year policy not a "life of
started changing about 15 years ago as the car" policy. Yet when you get a
a number of non-bank lenders started home loan it will most likely have
appearing. Lenders Mortgage Insurance or LMI
and LMI is for the "life of the loan".
Some argued that this new style of
lender would neither last or offer LMI provides protection for the
comparable loan products. Well, not lender should they lose money on
only have they lasted but many also your home loan.
offer loan products more competitive
Given the average home loan is
than the big five banks.
about 3 to 5 years and 99.99% of
These new lenders are often funded by borrowers fully discharge their
organisations such as Permanent mortgage how can insurers get
Trustees or Perpetual Trustees who are away with this.
as "safe as houses" so don't be put off Consider this example. You borrow
a lender just because they aren't one of say $350,000 and you'll pay about
the big five because there are some $5,000 in LMI. 3 years later you
great loan products out there. refinance with another lender or
TIP: If you're considering a loan perhaps sell that property and buy
through a bank, talk to your mortgage broker and see if they can get another and again you'll pay
you a better deal through a non-bank lender. another $5,000 in LMI.
LMI should be a normal part of the
day to day operation of the lender's
Secret business and paid for by them as
they do other insurances. Those
costs are then amortized across
commissions?
their product range just like all
costs. Having the borrower pay
these costs simply encourages
loose lending practices with high
In NSW, Victoria and Western Australia, Mortgage Brokers are required to LVR loans being given to borrowers
who simply shouldn't have them.
disclose all commissions and benefits they will receive as a result of doing
your home loan application. Some lenders don't pass on LMI if
you borrow less than 80% of your
The same laws do not apply to bank staff who may receive a commission properties value but may have other
as a result of doing your home loan application! "early discharge" fees instead.
Many bank staff also receive commissions for insurance products they sell These lenders advertise that they
you. don't charge for LMI and then
charge you and exit fee of anything
It was argued by consumer groups that the recommendations of brokers up to 5% if you payout your loan too
could be influenced by commissions being paid. Surely the same rules soon.
should apply to bank staff.
Early discharge fees are normally
TIP: If you're considering a bank loan ask the bank staff "how much on a sliding scale with the full
commission are your making as a result of the loan you're amount payable in the first year.
recommending?" TIP: Double check your exit
costs for any loan you're
Improve your house value considering.
If you're looking a refinancing or selling your house you can now get
software that guides you though techniques you can use to get a better
sale price or a faster sale or if your refinancing, get a better valuation.
www.improvemyhousevalue.com.au
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Know the process!
They say information is power and that certainly applies to the process of obtaining a mortgage
settlement. The borrower’s broker should explain the approval and settlement process as well as
keeping the borrower informed along the way. In simple terms consider these time lines:
Conditional approval:
Anywhere from 1 to 2 days
depending on the lender. Which loan type?
Valuation: Allow 4 days from The Australian mortgage market may be small but there are more loan
the date they were instructed. products than there are days of the year.
Where the valuation is for a
purchase, consent has to be For example: Standard variable, honeymoon, fixed interest, interest only,
obtained from the vendor and the Line of Credit, lo doc, no doc, Reverse Mortgage,
tenant, if there is one, to get professional pack and private loans to name just a
access to the property. few.
When considering what loan type best suits,
Unconditional approval: Allow borrowers should avoid simply adopting the approach
5 days from the date the of “we want the lowest interest” loan. Borrowers
valuation is provided and all should compare features not just rate.
supporting documents have
been received by the lender. For example, a low rate honeymoon loan may not
Lenders cannot provide an allow extra repayments and may have higher monthly
unconditional approval unless all on-going fees.
supporting documents have
Whereas a competitive variable rate may allow all of that plus have re-draw
been provided and found to be
facility with internet and ATM support. There are substantial benefits in
satisfactory.
being able to make weekly payments.
Settlement: This can vary Your mortgage broker can explain which loan type best suits your personal
dramatically. It the loan is simply or financial circumstance and has the loan features you require.
for a refinance with the same
lender then settlement can occur You should be very cautious when considering any loan with a honeymoon
more quickly. rate. Where such a rate is being considered borrowers should assess costs
and payments for at least 24 months after the end of the honeymoon period
If however you're buying a .......... remember there’s no such thing as a free lunch. The lender isn't
property the settlement date is giving you a low rate just so they feel good about it.
usually set by the vendor.
TIP: Don't just consider the costs of getting the loan, look closely at
As a rough guide, assuming all the costs you're required to pay when you pay back the loan.
things go as planned a mortgage
for a property purchase should
settle within 8 weeks and a FREE Mortgage Magazine
refinance with the same lender Get a free subscription to Australia's only on-line mortgage magazine.
within 4 weeks.
www.mortgageinsider.com.au
If you have a need for an urgent
settlement you should discuss it
with your broker. What are the real costs?
TIP: Your loan application will As with any major purchase there are many costs associated with
be processed far quicker if obtaining a home loan. All borrowers should ensure that their mortgage
you supply all required broker provide a detailed list of costs. While some of these costs may
supporting documents as they be estimates, they should be sufficient to allow the borrower to gain an
are requested. understanding.
If your loan is to consolidate Some of the costs associated with a mortgage include:
debts such as credit cards or Application fee, valuation fee, lenders legal fees, Lenders Mortgage
personal loans, contact those Insurance (LMI), redraw fees, on-going fees, stamp duty and early
companies and confirm discharge or exit fees. These are just some of the fees a borrower may
payout figures. Don't guess face.
as some lenders may have TIP: Ask your broker to get you a list of all known entry and exist
discharge fees that may leave costs for any loan you're considering. Watch out for high exit
you short. costs if you don't intend having a loan for more than 5 years.
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Property valuations
The property valuation is the key to any loan proceeding to settlement. In all cases a lender will instruct
their own "panel" valuer to value the security property in accordance with their own criteria. Because of
this most lenders will not accept a valuation commissioned by another lender.
The valuers who act for a particular When the valuer values a property valuation has been done you'll be
lender are called “panel valuers”. they take into account a wide range required to pay for another
Lenders will traditionally lend at of factors including: condition of valuation or if the same valuer is
either valuation or purchase price, the property, land size, comparable used the costs of assigning that
whichever is the valuation to the new lender.
lessor.
Valuation disputes: We all think
A good idea for that what we own is worth more
borrowers is to than it really is so be mindful of
buy a property this when the valuation report
report from a comes in. Valuers value
company like properties at arms length from any
Australian influence and base their valuation
Property on sales history and trends. If a
Monitors. Their borrower feels the need to dispute
Premium Home the content of a valuation report
Price Guide will they should take it up with their
cost $59.95 and mortgage broker who will then
shows represent their concerns to the
comparison per lender.
street rather than
just by postcode TIP: Before you start the
as some reports application process check
do. NB: These what's been sold recently in
reports are not valuations and your area and compare it to
should not be relied upon. properties locally, comparable your home. Then buy one of
recent sales and the market trend the reports mentioned above.
An opinion from your local Real This way you can make an
in the area ie are property prices
Estate agent is not a valuation and informed decision.
going up or down.
is nothing more than a price they
would like to sell the property for if As a matter of policy most lenders
you were to appoint them as your won't supply you a copy of it and if
agent. you change lenders after a
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Broker v Bank
The very first thing to understand is whether you do a loan through a broker or a bank, both are
businesses and both are doing your loan to make money. The essence of any decision making is having
enough information to make the right decision. The very first decision a borrower needs to make is
whether to go direct to a bank or use a mortgage broker?
BANKS: The Australian borrower has had a long so long as borrowers do their homework before
history of supporting their “family” bank however over commissioning a broker it should be a positive
recent years that has changed for a wide range of experience.
reasons. Conclusion: There is no doubting that by using a
Pros: mortgage broker you will have far greater loan
• Standard well publised loan products. product opportunities particularly if you don't fit
• Long lending history the standard bank mold.
See the selection of your broker as a long term
Cons: relationship whereby they can assist you with all
• Limited product range. your finance requirements both now and in the
• Frequent staff changes future.
• No requirement to disclose secret commissions
MORTGAGE BROKERS: Over recent years it
seems that there is a mortgage broker around every
corner and that the high level of competition has been
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a windfall for borrowers. However at times it has also
brought out the bad elements in the industry.
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It's often difficult to know if you'd qualify for a home
Pros:
loan. Well, a new web site takes all the guess work
• Larger range of loan products from
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• Regulated in NSW, Qld and WA. lenders listed and by completing a simple assessment
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Cons:
instantly profile matched against those products. This
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• No restriction on entry into the industry.
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There are many quality brokerage firms out there and
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How do mortgage brokers get paid?
The mortgage broking industry attracts many thousands of new brokers every year and unfortunately many find it
too difficult to continue. One of the greatest issues is payment to brokers. In the majority of cases a broker is paid
a "settlement commission" which is also referred to as an "upfront commission" because it's paid to the broker in
the weeks following the settlement of your loan.
Settlement commission: The settlement commission is traditionally
around the .7% of the loan amount settled. For example that would
represent $2,100 on a $300,000 loan. This is not paid by you, it's a
commission that's inbuilt into the interest rate. Claw-back: Unlike
any other business in Australia the broker can have the "Settlement
commission" taken back from them or "clawed back" if you were to
refinance within a certain period. Some lenders have a claw-back
period of 18 months. This effectively means that even though the
broker arranged your home loan for you to your total satisfaction and
to the lenders full requirements they could have done all of that for
nothing if you refinance away from the lender or pay-out your
mortgage.
Trail commission: On some loan products lenders will also pay the
broker a "trail commission" each month provided you've paid your
mortgage on time. The "trail commission" is around .25% per annum.
That would be a monthly commission of $62.50 for a $300,000 loan.
If you pay your mortgage one day late, the broker doesn't get the trail
commission. Not all lenders pay trail commissions.
Brokerage fee: Some lenders don't pay either settlement or trail
commissions and therefore the broker will charge a "brokerage fee".
This fee should be agreed to by you and fully disclosed in your initial
agreement with the broker.
TIP: For a mortgage broker to be successful in todays
competitive market place they need to maintain a quality
professional relationship with their clients and that's great for
you as a borrower. You have every right to expect a very high
level of ongoing service and support from your mortgage broker.
Take the 60 second home loan challenge, its FREE, Anonymous and Instant. Over 170 lenders.
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Take the 60 second home loan challenge, its FREE, Anonymous and Instant. Over 170 lenders.
www.myhomeloanapproval.com.au
Doubtful withdrawals
When a lender is assessing your mortgage application they'll examine how you conduct your financial affairs. They
do this by looking at your bank, loan and credit card statements. Where they see constant withdrawals from a
hotel, club or casino bells will ring as they will have natural concerns that you may have a gambling problem.
Seeing these withdrawls may be enough to have your loan application rejected or at least more closely examined..
TIP: If you have a number of these withdrawals in your statements be upfront and honest with your broker
so that they can best represent your position to the lender.
Take the 60 second home loan challenge, its FREE, Anonymous and Instant. Over 170 lenders.
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Note: The information contained in this report may vary from lender to lender so it is essential that all borrowers do their own
research and do not solely rely upon the information in this report. © 2007
Information sources: The Age Newspaper, Choice Magazine, Mortgage & Finance Association of Australia, Australian
Securities and Investment Commission, Australian Institute of Mortgage Brokers, Australian Prudential Regulation Authority,
Info-Choice, PMI, Mortgage Insurance Aust, Home Price Guide, Fox News.com.