Home Loan Advice
This is where Mortgage Experts can really add value for a potential borrower. We know that interest rate and fees are important when making a decision on which lender or provider to go with. We also know that we can really help you by providing good and practical home loan advice that goes beyond just comparing products.
Some common examples of where we can offer home loan advice are outlined below..
What is an appropriate level of borrowings for your situation?
Mortgage Experts is happy to provide qualified home loan advice to all our existing and future customers. When considering what is an appropriate loan amount, it should be remembered that lenders are obliged to assess the maximum amount that they will lend you in a given scenario. This is the highest amount that they will lend you - NOT the recommended amount! That said every situation is different and in some cases lenders may seem overly conservative as well.
An issue when borrowing over the last 20 years or so is that most lenders assumed a very low general living cost in their calculation when deciding on how much to lend you. This figure was often less than people actually needed to maintain a decent living standard. Since the inception of the responsible lending legislation many lenders have been asking borrowers to estimate their monthly living costs. So while this is good in theory we now have the absurd situation where disclosing your true living costs can mean you disqualify yourself from getting a loan amount that you think is reasonable! There is no easy solution to this problem as lets face it everyone is different. When we give home loan advice we always aim to help you work out what is an appropriate level of debt for your unique circumstances.
As a general rule of thumb, in our opinion you should not commit to loans that will require repayments of greater than say 35% of your gross income. However this mortgage advice is just a guide as everyone is different. Factors such as your frugality, your marginal tax rate, and your future plans all have a bearing. In some cases, we think up to around 40% can be feasible for some frugal borrowers.
If you are worried about taking on too much debt and want genuine home loan advice, contact us for a no obligation discussion.
Example of our 35% rule of thumb borrowing limits:
John earns a salary of $85,000 gross (before tax) per year and was wondering how much he should borrow without over stretching himself. He has no other debts.
- 35% of gross income = $29,750 pa.
- Therefore John’s maximum repayments should be no more than $29,750 pa or $2479 / month.
- Working backwards John should not borrow more than say $372,700 (assuming interest rates of 7% pa and a loan term of 30 years).
What loan type is best?
When providing mortgage or home loan advice about what loan type is best for our clients, we typically start with a fact finding questionnaire to determine their risk profile and the likely hood of changes to their circumstances in the future.
Fixed versus variable interest rates?
We generally give home loan advice about whether a fixed rate or variable rate loan is best based on feedback from our clients. If our clients think they may struggle if interest rates go up considerably, then we will discuss the option to fix the interest rate of their loan. When giving home loan advice we will also normally recommend clients fix only some of their loan. We rarely recommend fixing their whole loan as it means they generally lose the flexibility that comes with having some of the loan as a variable rate.
Basic variable or standard variable?
Basic loans are best for borrowers looking for just one loan now and who are unlikely to need additional loans in the future. Standard variable rate loans (usually taken in conjunction with a professional package) suit borrowers with multiple loans and multiple properties. They can also suit borrowers who just want all their banking under one roof. When giving home loan advice we will always try and ascertain our client’s future needs so we recommend a loan that is suitable for now and the future.
Line of credit loans, are they a good idea?
Line of credit loans can be very useful. We generally recommend their use for the following:
- Non structural renovations.
- For investment purposes, such as the purchase of shares. Care is needed to not have mixed use through the account however.
- For investors needing a buffer to smooth out cash flow fluctuations.
- If the lender allows it as a much cheaper than normal business overdraft.
Interest offset accounts, are they a good idea?
We are big fans of offset accounts and if we can secure one for a borrower where they don’t have to pay a higher interest rate for the privilege we would normally advise they take one.
What is the best loan set up for investors?
When giving loan advice to investors our biggest consideration is the proposed structure that will be used. Please see our dedicated loan structuring for investors page for a more. We have a brief outline below.
If at all possible we always recommend that investors choose a stand alone structure rather than tying their properties together via what is called cross collateralisation. This way the investor has far more control.
Stand alone example:
- Loan 1: $400,000 existing owner occupied loan secured by family home.
- Loan 2: $100,000 new line of credit loan facility secured by family home and to be used as the deposit for the new investment purchase.
- Loan 3: $350,000 loan for new investment property purchase. Loan is secured solely by the investment properly.
Security for loans 1 & 2 is the family home while security for loan 3 is the investment property. If the investment property is sold the loan 3 will be repaid and the surplus sale proceeds are then controlled by the borrower. No reassessment of loans 1 and 2 are required and new loan offers for loans 1 and 2 are not required. Loan 2 is still tax deductible as the purpose of the funds is to acquire an income producing asset.
A common misconception is that the security for the loan determines the tax deductibility of a loan, this is not correct it is the purpose the loan funds are or were used for that determines if the loan is tax deductible.
Cross collateralisation example:
- Loan 1: $400,000 existing owner occupied loan secured by family home.
- Loan 2: $450,000 loan secured by family home and new investment property.
Security for loans 1 and 2 are both properties meaning the lender can dictate on the sale of either property what happens to the sale proceeds. Also a complete loan restructure including loan reassessment, valuations on the remaining properties and new loan offers will normally need to be arranged. While sometimes easier for borrowers to understand and easier for lenders and other brokers to arrange the exit is where it can get very messy.
In whose name should we buy / own the property?
Generally speaking when giving general home loan advice we recommend that it is most tax effective to have the property owned in the name of the highest income earner. However there are other considerations such as when the property is to be sold. If it is planned that the property will be held until after retirement it may be best to owned in joint names so as to minimise future capital gains tax. We don't give tax advice but we can advise you on what questions you should be asking of your tax professional.
Loans to Trusts and companies, is it worth the extra hassles?
While we can't give you tax advice we can certainly discuss trusts and company set ups in general and how lenders currently view them. We have a good laymans understanding of how they work and how they can be used. We can also advise if terms and conditions when taking out a loan to a trust or a company will be different than a normal loan.
There are many more areas where we can value add and offer you home loan advice! Contact us today.
Disclaimer: All home loan advice and mortgage advice above is general in nature and is not meant to be financial or tax advice. Please seek your own independent financial and taxation advice before relying on the information on this site.