Securing a mortgage

Welcome to part II of our Ask a Broker series with Mark Polatkesen, Director and Senior Broker with Mortgage Domayne. He gives us the lowdown on finance basics like loan types, interest rates, repayments, and approvals.

What are the common types of loan structures that come into play when buying property?

There are a huge range of lenders and products out there and each lender can package their finance product slightly differently. But to boil it down into simple terms, there are fundamentally two major ways to borrow and pay back mortgage finance: fixed and variable home loans.

Fixed means that the loan comes with an interest rate that is set for a specified period of time, usually between one and three years. This means you have certainty around your repayments over that period, and you can budget accordingly. Variable means the monthly loan repayments fluctuate according to the headline cash rate, which is set by the Reserve Bank. If that rate goes down, you’ll pay back less; if it goes up, you’ll pay back more.

Generally, you can’t make extra payments on a fixed loan, but you can on a more flexible variable loan. You might also get a redraw facility on a variable loan that allows you to access any extra payments you’ve made in case you need that cash for a rainy day.

Do I have to pick one or the other?

No. Many lenders these days will structure a split loan for their customers, with some portion of the loan on a fixed rate and the rest on a variable rate. This is useful if you think that rates might go up at some future point, but you also want to maintain the flexibility of making extra payments to pay some of the loan off faster. The amount to fix versus the amount to make variable is a personal decision that needs to be made based on your own circumstances and goals. Ask a broker or lender to model different scenarios before you sign on the dotted line.

What’s an offset account?

When you take out a loan, some lenders will provide you with a savings account that’s attached to the loan. Any money you hold in that account will go towards offsetting your repayments. For example, let’s say you have a mortgage of $200,000 and you accumulate $10,000 of savings in your offset account. The bank will end up charging you interest on the balance of $190,000. So, having an offset account is a great way to minimise interest and give you a good reason to save extra pennies whenever you can.

What do I need to consider when applying for finance to buying land or build a new home?

The first is that some lenders don’t allow a fixed rate on a construction loan. The reason is because construction loans have what we call progress payments, meaning you need to pay your builder at each of the 5 big stages of construction: base stage, frame stage, lockup, fixing and completion. At each stage, the builder sends a progress invoice which increases your total loan value.

Because of these multiple payments being released, most banks won’t allow you to fix that portion of the loan. The good news is that you can split the loan as mentioned above and borrow the land component on a fixed rate with the construction on the variable rate.

With that said, there are a handful lenders out there that will allow you to fix both the land and construction loans but that is fairly unique. If that’s something you want to investigate, engage with a broker as they’ll be able to point you in the right direction as to which lenders might offer that kind of product.

What kind of repayments can I expect?

That’s a hard question to answer. It’s dependent on how you structure your loan and the interest rates that are prevalent at the time. The following amounts are a rough guide based on say, a 3% interest rate on a 30-year loan term:

• $650,000 loan = $2,740 minimum monthly repayment
• $750,000 loan = $3,162 minimum monthly repayment
• $850,000 loan = $3,583 minimum monthly repayment

Bear in mind that interest rates are dynamic and for the most accurate calculations talk to your broker or bank manager for the most up to date numbers based on your personal situation.

What are pre-approvals, when should I get one, and how are they different from formal approvals?   

When there isn’t a property involved yet, but you want some certainty to go out and make an offer, the banks can provide a pre-approval. Basically, they assess your savings, documentation, and application and issue an approval subject to certain conditions being met. How long a pre-approval is valid for can differ from bank to bank, but common timeframe is three to six months.

It’s worth noting that this can impact land purchases if the title date, and therefore settlement, is greater than six months. It’s always good to speak to a broker that’s actively working in the home and land space, because they’ll keep an eye on things. If there are changing circumstances at play, they can pinpoint that upfront and make sure that they’ve got a plan prior to the settlement taking place so that you’re not delayed in any way.

A formal approval is pretty much as it sounds. Once the bank is completely satisfied with your application, vetted your land and building contracts, and conducted a valuation they’ll issue you, as the borrower, a letter of offer that outlines that they agree to lend you the money on a certain list of terms, allowing you to get on with buying the property you want.