What is an interest only loan?

An interest only loan is a loan where you are just paying off the interest, not reducing the total loan amount or principal.  Usually with an interest only loan your interest only period is limited (typically from 1 – 5 years or based on the fixed rate of the loan).

At the end of the interest only period you may then need to start making principal and interest payments, meaning your repayments will increase.

Interest only loans are often used for investment properties or for short term finance.

What is an offset account?

An offset account is a bank account linked to your mortgage that can be used to reduce the interest you pay on the loan.

Basically an offset account enables you to put all of your surplus cash into an account that reduces your loan by reducing the outstanding balance during the month. This is called daily reducible interest. Interest is calculated daily, and charged monthly.

If you put as much of your available cash as possible into an offset account and keep that cash there for as many days as possible each month you will reduce your home loan repayments over time if the repayments are interest only.  The cash sitting in the offset account is reducing the interest incurred on your home loan repayments “off-setting” the cost of the loan.

What is redraw?

A redraw facility lets you borrow money you’ve already repaid on a loan and are generally only available on variable interest rate loans.

With a redraw you can choose how you repay a loan.

For example, say your minimum monthly loan repayments are $1000. If you pay $1200 each month for a period of 6 months you’ll have paid an extra $1200 on top of what you had to pay.

A redraw facility allows you to access that extra $1200 if you need to.

A redraw facility can benefit you by allowing you to pay off your loan faster as any money goes straight against the loan.

Redraw facilities may come with extra transaction fees charged for withdrawing or depositing money where the bank processes a manual transaction. Typically though, most loans now have free electronic redraw that allows you to access your available funds via your internet banking to your nominated account.  There are often also limits on the number of times you can redraw over a given period.

Am I eligible for the First Home Owner’s Grant (FHOG)?

If you or your partner have not owned property in Australia before, you may be eligible for the first home owners grant. The grant will vary dependant on state and also purpose e.g. NSW provides incentives for people looking to build their first home. A grant of up to $15,000 may be available, and in some circumstances, more.

What is Lender’s Mortgage Insurance (LMI)?

Lenders Mortgage Insurance is a way that borrowers can access finance with a smaller deposit than is usually required.

The premise of Lenders Mortnage Insurance is that the lender is protected against a loss, should you default on your loan and the security property sales results do not cover the outstanding cost of the loan.

What costs should I factor in when purchasing a property?

There are many associated fees and expenses beyond the purchase price of your property that need to be account for: These include:

• Legal contracts
• Property title checks
• Credit checks

Mortgage fees and costs

• Property valuation – An independent valuer often chosen by the lender, needs to determine the value of your land and improvements.
• Mortgage registration – Your Mortgage deed needs to be registered with the government (Land Titles Office)
• Mortgage stamp duty – The government charges stamp duty to register your mortgage. This cost has been abolished in NSW for residential securities, but may be applicable in other states.
• Lenders mortgage insurance – If you don’t have 20% of the purchase price of the property, the lender will require you take out lenders mortgage insurance to cover the risk that you might default on your repayments. However this cost may be capitalized on top of the loan and may not be required to be paid from your available funds.

Property fees and costs

• Building inspection fees – It is wise to have your property inspected for any structural problems or pests (e.g. termites).
• Stamp duty – Governments charge stamp duty to transfer the ownership of a property from one party or entity to another.
• Registration of transfer fee – The new owner of the property needs to be registered at the Land Titles Office.
• Legal fees – You generally need to pay a solicitor or conveyancer to handle the transfer of ownership of the property on your behalf. There will be other requirements such as cheque directions, title searches and contract review that will also be part of the process. In most instances the lenders legal fees will also be a cost associated with the borrowing and come from your total available funds.
• Home & contents insurance – Most homeowners insure their home and contents against a range of threats: burglary, fire, storm, etc. You need to insure the home while you have a mortgage. This will be a requirement for all lenders when there is a standalone property involved.
• Life or income protection insurance – Borrowers should consider protecting the primary income earner while they have a mortgage.
• Utility costs – Connecting electricity, gas and telephone can be costly and generally involves the lodgement of security deposits.
• Council rates – Your local council charges rates to cover garbage collection and a host of other services. This may be payable at settlement or in advance.
• Body corporate fees – If you buy an apartment, body corporate fees are charged, and some fees can be significant – particularly if the building is in need of a major work (e.g. concrete cancer, security upgrade, new hot water system, etc)
• Maintenance costs – Don’t forget to make provision for regular maintenance on your home – even if you decide not to undertake significant renovation.

(source: MFAA)

Can you help with financing a commercial property purchase?

Yes, at First in Finance we can look after all your finance needs and have extensive experience in arranging finance for Commercial Property.

What is a Self Managed Superannuation Fund (SMSF)?

Self-managed super funds (SMSFs) provide a way of saving for your retirement. The difference between an SMSF and other types of fund is that the members of an SMSF are usually also the trustees. This means the members of the SMSF run it for their own benefit and are responsible for complying with the super and tax laws.

There are however strict regulations and reporting requirements.  SMSF’s are regulated by the Australian Taxation Office.

With a SMSF you make the investment decisions for the fund and you’re responsible for complying with the law. It’s a major financial decision and you need to have the time and skills to do it. There may be better options for your super savings. Either way you should consider professional advice.

Your SMSF needs to be set up correctly so that it’s eligible for tax concessions, can receive contributions and is as easy as possible to administer. You’ll need to work out the structure of your fund, create a trust deed and appoint your trustees, among other things.

As an SMSF trustee, you can accept contributions for your members from various sources but there are some restrictions, mostly depending on the member’s age and the contribution caps.

You need to manage your fund’s investments in the best interests of fund members and in accordance with the law. The SMSF’s investments must be separate from all personal and business affairs of fund members, including your own.

Generally your SMSF can only pay a member’s super when the member reaches their ‘preservation age’ and meets one of the conditions of release, such as retirement. The payment may be an income stream (like a pension) or a lump sum, depending on the circumstances. There are significant penalties for releasing super benefits without meeting a condition of release.

At some point you may need to wind up your SMSF. This could happen if all the members and trustees have left the SMSF or all the benefits have been paid out of the fund. You’ll need to deal with members’ benefits and finalise your reporting responsibilities.

As a trustee you have a number of administrative obligations – for example, you need to arrange an annual audit of your fund, keep appropriate records and lodge an annual return with us. Failing to meet your obligations may result in penalties.

What is a reverse mortgage?

A reverse mortgage allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.

While no income is required to qualify, credit providers are required by law to lend you money responsibly so not everyone will be able to obtain this type of loan.

Interest is charged like any other loan, except you don’t have to make repayments while you live in your home – the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want.

You must repay the loan in full (including interest and fees) when you sell your home or die or, in most cases, if you move into aged care.

When is the best time to refinance my mortgage?

In the past the past, most people who took out a mortgage and continued with the same mortgage and lender until they had paid it off. These days, people refinance their mortgage much more frequently. The average duration of a home loan in Australia now is just 4-5 years. Here we look at some of the reasons people in Australia refinance their home loan.

Lower rate

The most common reason for people to refinance their mortgage is to get a better deal. But be careful you don’t become interest rate-fixated. When you refinance your home loan, you need to consider fees and charges as well as the interest rate. You often have to pay charges for exiting your current home loan, plus charges for taking out the new mortgage. You need to be sure that in refinancing your home loan that you’ll be better off in the long run after taking into account all costs.

To take advantage of market conditions

In an ever changing market it can sometimes be advantageous to refinance at the right time in the market to take advantage of a lower interest rate, a particular product or an investment opportunity (eg. property or shares, subject to advice from your financial adviser).  First in Finance can assist to make sure it is the right decision for you and your personal circumstances.

Greater flexibility

Many people only discover the full details about their mortgage when it’s too late. They try to do something and get told by their lender that either they can’t do it, or they will incur a hefty charge if they do. An example is a redraw facility – the ability to pay extra money into a mortgage and then redraw it later. This feature is not possible with a basic home loan; so many people refinance their mortgage to give themselves this sort of increased flexibility.

Renovation or Construction

If you carry out renovations, it often makes sense to refinance your mortgage and take out a construction loan so you only pay interest as building progresses and payments for the renovation or construction are made. Once construction is over, it might make sense to refinance your home loan again so that you consolidate the total amount you owe into a loan that minimises your interest bill, while giving you a degree of liquidity.

Home equity

Over time you may have built up significant equity in your home, including through a combination of principal repayments and / or an increase in the market value of your home.  Refinancing may enable you to access this equity for other worthwhile purposes.

Defaulting

Some people find they have borrowed more than they can comfortably repay, and they are in danger of defaulting. There’s no shame in that. But don’t suffer in silence. If you’re having trouble making your mortgage repayments, talk to First in Finance about refinancing your home loan to make it more manageable

How do I pay off my mortgage sooner?

Assuming you have a mortgage that lets you pay extra, you should pay more and pay as often as you can. Subject to the terms of your loan and your circumstances, making additional repayments can help you repay your loan quicker and save you money, by lowering your outstanding balance of your loan, and as a result the amount of interest you will have to pay will be lower.

For example, the interest charged on a $350,000 Home Loan at a rate of 5.04% over 30 years with monthly repayments of $1,887 is over $329,000. By paying off an additional $100 a month, you’ll reduce the interest bill by $40,875 and your loan term by 3 years and 2 months. You could look at making repayments weekly or fortnightly rather than monthly. Over 30 years the savings seriously add up.

Consolidate your debts to make it easier to achieve your goals

You’re generally paying a higher interest rate on small loans (e.g. car and personal loans) and your credit cards, so it makes sense to eliminate those debts first. Put a plan in place to reduce interest costs and financial stress by refinancing and restructuring your mortgage.

Flexible mortgages

Most debt-retirement strategies depend on you being able to pay off more of your mortgage sooner. Read the fine print or talk to us to see if you have the flexibility you need to reduce your interest charges.

Introduce a mortgage offset facility

Most lenders will allow you to use a transactional bank account to hold savings that will offset the interest you are paying on your mortgage, typically known as a mortgage offset facility.

Generally how this works is that for every dollar in the transactional bank account, it will offset against the outstanding balance in your loan account and reduces the amount of interest payable on the loan.

For example, if you have a loan with an outstanding balance of $500,000 and you deposit $250,000 in the offset account, the interest calculated will then only be based on the net outstanding balance, being $250,000 in this example. However, if you are using some of the funds in the offset account and the balance is fluctuating, then the interest benefit will vary from time to time.