Guarantors provide support for people to buy their first home, making buying a home achievable, especially with how expensive house and land prices are in Australia.
By simply using a security guarantor this can save you having to come up with a deposit and also saves having to pay Lenders Mortgage Insurance (see below).
The Security Guarantor support is classed as a Limited Security Guarantee, which means the lender will only take a charge over the property provided for the amount required, usually up to 20% of the purchase price.
Policies on this type of support vary greatly between lenders and some require the guarantor to show servicing of the guaranteed amount and all require the guarantors to obtain legal and financial advice.
This type of product can be used for purchases where siblings or friends are co-borrowers and would like to have their own loan. This can also alleviate tension between borrowers and minimise personal borrowing exposure.
Interest Only Payments
Most lenders will offer borrowers the ability to make interest only payments on their loan for a set period. That means that the monthly repayment has no principal reduction component, and the outstanding loan balance will remain unchanged during the term of the interest only period.
Generally the terms offered by the lenders are between 1 –5 years, but some lenders may offer up to 10 years. After the initial interest only period, the loan will revert to the normal amortised repayments over the remaining term of the loan.
Lenders Mortgage Insurance (LMI)
Lender’s Mortgage Insurance is an insurance policy obtained by the lender, but paid for by the borrower. It is for the protection of the lender, and not the borrower.
The LMI policy protects the lender against any losses where:
- the borrower defaults on their loan;
- the lender sells the security property; or
- there are not adequate funds to cover the outstanding loan and any fees and charges that may have accrued.
LMI is usually taken by the lender when the value of the loan requested exceeds 80% of the value of the security property.
The LMI premium is based upon a sliding scale depending upon the loan to value ratio (LVR) – the higher the LVR, the higher the premium. LMI premiums can be substantial, and must be factored into the overall cost of borrowing to ensure that there is not a shortfall of funds when it comes to settle a loan transaction.
LMI will normally not cover penalty interest, early repayment penalties, LMI premium, physical damage to property and fees and charges not directly related to costs incurred by the lender in order to recover the debt.
LMI companies may refund a portion of the LMI premium if the facility insured has been fully repaid within 12 months of advancement of funds.
LMI is available for both owner occupied and investment loans. In addition to the borrower needing to satisfy a lender’s criteria, they must usually also meet the requirements of the mortgage insurer.
In many cases, an application may meet the lending guidelines of the lender, but fail to meet the mortgage insurer’s guidelines, in which case the lender will decline the loan.
Loan portability allows the borrower the option of keeping their existing loan arrangements, but changing the property that secures it. For example, a borrower may sell their current home, and purchase a new home, and simply transfer the existing loan to the new home.
Mortgage Offset Account
A Mortgage Offset account allows the borrower to have any savings or credit balances in their transaction account to be offset against their loan facility when interest is calculated. Offset accounts are offered by most lenders which offer normal transaction type accounts.
Most lenders will offer 100% offset, which means that any credit balance in the account will offset the outstanding balance of the loan facility. The mortgage offset account itself does not earn any interest. However, benefit in that the interest on the loan charged is calculated on the net outstanding balance, after reducing the outstanding balance by the amount deposited in the offset account.
For example, if a borrower had a loan with a balance of $100,000, and an offset account with a balance of $10,000, then interest is calculated on the net balance of $90,000.
As mortgage offset accounts are regulated by the Financial Services Reform Act, providing advice on these accounts to consumers may only be done by via the holder of an Australian Financial Services License (AFSL).
Loan redraw feature allows a borrower to withdraw any additional funds that they have paid of their loan facility over and above the normal minimum repayment.
For example, if a borrower has been paying an additional $500 per month of their loan, after 12 months, the borrower would be able to redraw $6,000.
Split Accounts or Combination Loans
Most lenders allow borrowers to split their loan into a number of different products. For example, a borrower may elect to take a combination of a fixed and variable rate loans in order to minimise the potential effect of an interest rate rise, while still maintaining the flexibility of a variable rate loan.