Q&A Hub

What is an Offset Account?

An offset account is a transaction account linked to your home loan that can help reduce the amount of interest you pay and potentially pay off your loan sooner. It functions like an everyday transaction or savings account, where you can deposit your pay or save for specific purposes like holidays or renovations. The key benefit is that the money in the offset account reduces the principal on which interest is calculated, thereby lowering your interest payments. Unlike a regular savings account, the interest you save with an offset account is not taxed as income. However, offset accounts may come with fees, such as monthly or annual package fees, which you should compare against the interest savings. They offer more flexibility compared to redraw facilities but might have different associated costs. Before choosing a mortgage with an offset account, consider your need for regular access to funds and whether the potential interest savings outweigh the fees. Consult with your lender or financial adviser to determine if an offset account is suitable for your financial situation.

What is Redraw facility ?

A redraw facility lets you access extra repayments you’ve made on your home loan. You can withdraw the extra funds you put in. Redrawing funds will increase the interest on your home loan. Note that redraw is only available on eligible variable rate home loans; fixed rate home loans don’t allow redraw until the term ends. Some lenders could charge a fee for the redraw feature and it may take a few days to get the funds.

What is LVR and LMI Loans?

Loan to Value Ratio (LVR): LVR stands for Loan to Value Ratio, which is the amount you’re looking to borrow as a percentage of the property’s value. For example, borrowing $400,000 for a $500,000 property gives an LVR of 80%. A lower LVR is generally better as it poses less risk to the lender. If your LVR exceeds 80%, you may need to pay Lenders Mortgage Insurance (LMI). ( there are exceptions for certain professions. Please contact us for more information.)

Lenders Mortgage Insurance (LMI): LMI is insurance that protects the lender if you default on your home loan and the property is sold for less than the outstanding loan balance. However, you will still be liable for the shortfall. It is typically required when borrowing more than 80% of the property’s value. The cost of LMI varies based on the loan amount and LVR, and it’s a one-off, non-refundable fee paid at loan settlement. Some lenders may charge a ‘risk fee’ instead of the LMI fee.

How to Calculate LVR: LVR is calculated by dividing the loan amount by the property value and multiplying by 100. For example, a $450,000 loan on a $600,000 property results in a 75% LVR.

Avoiding LMI: You can avoid LMI by paying 20% or more of the property value as the deposit or having a parental guarantor property (terms and conditions apply). Some professions, like doctors and lawyers, may be eligible for LMI exemptions for LVRs up to 90%.

Will I save if I pay my Repayments Weekly or Fortnightly vs paying monthly ?

Switching from monthly to weekly or fortnightly mortgage repayments can save you money if your lender allows it. This is because home loan interest is usually calculated daily and added up over the repayment period. With monthly repayments, interest accumulates over about 30 days, but with more frequent repayments, you reduce the principal more often, thereby lowering interest costs.

One effective strategy is to make fortnightly payments equivalent to half your monthly repayment. Since there are 26 fortnights in a year, you’ll effectively make 13 monthly payments instead of 12, helping you pay off your loan faster and save on interest.

Similarly, switching to weekly repayments (a quarter of your monthly payment) results in 52 payments a year, again equivalent to 13 monthly payments. This increased payment frequency reduces the principal balance quicker, saving you interest over the loan term.

Home Loan Basics

1. Loan Types and Options:

• What types of home loans are available in Australia?
  • Answer: Common types include variable rate loans, fixed rate loans, split loans (part variable, part fixed), interest-only loans, and low doc loans.
• What is the difference between fixed-rate and variable-rate mortgages?
  • Answer: Fixed-rate loans have a set interest rate for a specified period (e.g., 1-5 years), while variable-rate loans have interest rates that can change based on the Reserve Bank of Australia’s (RBA) cash rate.
• What is an offset account, and how does it work?
  • Answer: An offset account is a transaction account linked to your mortgage. The balance in the offset account reduces the amount of interest charged on your loan.
• What is a line of credit home loan?
  • Answer: A line of credit home loan allows you to borrow money up to a set limit and only pay interest on the amount you’ve drawn down.

2. Eligibility and Requirements:

• What are the general eligibility criteria for obtaining a home loan in Australia?
  • Answer: Lenders typically look at your Aus permanent residency visa (or acceptable visa/ FIRB approval) ,  income, expenses, credit history, employment status, and the value of the property.
• What credit score do I need to qualify for a mortgage?
  • Answer: While there is no universal minimum score, a good credit score (usually above 750) improves your chances of approval and better interest rates.
• What documents are required to apply for a mortgage?
  • Answer: Commonly required documents include proof of income (payslips, tax returns), identification (passport, driver’s license), and details of your assets and liabilities.
• How does my employment status affect my loan application?
  • Answer: Stable and continuous employment (typically more than 6 months in current job) is favorable. Self-employed individuals may need to provide more financial documentation.

3. Interest Rates and Fees:

• How are mortgage interest rates determined in Australia?
  • Answer: Interest rates are influenced by the RBA’s cash rate, the lender’s costs, competition, and your credit profile
• What fees are associated with obtaining a mortgage?
  • Answer: Fees may include application fees, valuation fees, legal fees, and ongoing account-keeping fees. These can vary by lender.
• Are there any prepayment penalties?
  • Answer: Some fixed-rate loans have break costs if you pay off the loan early. Variable-rate loans typically don’t have prepayment penalties.

4. Application Process:

• How do I apply for a home loan in Australia?
  • Answer: You can apply through a lender directly, use a mortgage broker, or apply online. The process involves submitting an application, providing documentation, and undergoing a credit check.
• What is the pre-approval process?
  • Answer: Pre-approval gives you an indication of how much you can borrow, based on a preliminary assessment of your financial situation. It’s typically valid for 3-6 months.
• How long does it take to get approved for a mortgage?
  • Answer: Approval times can vary, but it generally takes 1-2 weeks for conditional approval and another 1-2 weeks for full approval, depending on the complexity of the application.
• What happens after I submit my application?
  • Answer: The lender will review your application, conduct a credit check, and possibly request additional information. Once assessed, you’ll receive conditional or full approval.

5. Down Payments and Insurance:

• How much of a down payment is required?
  • Answer: A minimum deposit of 5-20% of the property’s value is typically required. Larger deposits can result in better interest rates and avoid LMI.
• What is lender’s mortgage insurance (LMI), and do I need it?
  • Answer: LMI is required if your deposit is less than 20%. It protects the lender if you default on your loan.
• How can I avoid paying LMI?
  • Answer: By saving a deposit of 20% or more, or using a guarantor, you can avoid LMI.

6. Repayment and Amortization:

• How does the repayment process work?
  • Answer: You make regular (usually monthly) payments, which cover interest and principal. Payments can be fixed or vary depending on the loan type.
• What is mortgage amortization?
  • Answer: Amortization is the process of gradually paying off the loan through regular payments over the loan term, reducing the principal balance over time.
• Can I make extra payments to pay off my mortgage faster?
  • Answer: Yes, many loans allow extra payments  on Variable Home loans, without penalty, which can reduce the principal faster and save on interest. Check with your lender for specific terms.

7. Refinancing:

• What is mortgage refinancing?
  • Answer: Refinancing involves taking out a new loan to replace your current mortgage, often to secure a lower interest rate, better terms, or access equity.
• When should I consider refinancing my mortgage?
  • Answer: Consider refinancing if you can get a lower rate, need to consolidate debt, want to switch from a fixed to a variable rate (or vice versa), or need access to equity.
• What are the benefits and risks of refinancing?
  • Answer: Benefits include lower payments and better terms. Risks include break costs on fixed loans and the possibility of extending the loan term, increasing overall interest paid.

8. Special Programs and Assistance:

• Are there any first-time homebuyer programs in Australia?
  • Answer: Yes, the First Home Owner Grant (FHOG) and various state-based concessions like stamp duty exemptions and reductions are available.
• What government assistance programs are available for homebuyers?
  • Answer: Programs include the FHOG, First Home Loan Deposit Scheme, and state-specific grants and concessions.
• Can I get a mortgage if I have low income or bad credit?
  • Answer: Yes, but options may be limited. Specialist lenders and government programs might be available to assist.

9. Home Equity:

• What is home equity, and how can I use it?
  • Answer: Home equity is the difference between your home’s value and the remaining mortgage balance. It can be used for renovations, investments, or as security for other loans.

10. Borrowing power:

• How much house can I afford?
  • Answer: Affordability depends on your income, expenses, deposit, and interest rates. A common rule is that mortgage payments should not exceed 30% of your gross income.
• What factors should I consider when choosing a lender?
  • Answer: Consider interest rates, fees, loan features, customer service, and the lender’s reputation.
• How can I improve my chances of getting approved for a mortgage?
  • Answer: Maintain a good credit score, save a larger deposit, reduce debts, and ensure stable employment. Consulting with a mortgage broker can also help.