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Finance

Should I fix or keep my home loan as variable?

We get asked that question very often particularly when interest rates are low and rates seem to stay that way for some time. We are not fans of a fixed interest rates in general unless it’s being used for paying interest in advance as part of a tax strategy. The issue we find is that many people try to chase the interest rates and think the interest rates are low when the banks are trying to lock the interest rates away for their profits. Sometimes interest rates can change quickly be that up or down and as such we prefer to have variable rates. If you do decide that you want to fix your interest rate we recommend considering that you would have your interest rate fixed for 3 years and that at the end of that term you fix for another 3 years so that you are not getting in a position where you lock your rates for too long or too short and you are subject to variable rates of interest.

What is the benefit of an interest only loan?

We recommend having an interest only loan rather than principle interest to provide you with flexibility. Over the last few years we have had situations occur where clients have wanted to accelerate their repayments. So they have changed their repayments to a weekly or fortnightly principle and interest repayments. If the banks regard you as missing a number of payments rather than over a period of time, we had one client who missed payments for 3 weeks in a row and was regarded then as a bad debt because he missed 3 payments even though it was only 3 weeks. We recommend interest only because it provides that flexibility in the event that something untoward happens. We recommend clients pay off their debit, however we utilise offset accounts and other mechanisms in the event that you wish to pay it off early you still have access to those monies in the event that something happens. If nothing happens you still pay off your debt.

Can AustAsia Finance Brokers help with my loan?

Yes, AustAsia Finance Brokers which holds an Australian Credit Licence is able to assist you with your home loans. Because the way that we approach our home loan process with our clients as an integrated process we also not only consider whether you get the right interest rate and which bank to suit your needs, we also look at the tax structure. If you are buying an investment property for example, we get the best and most effective tax advantages for your loan. In many instances we look at the way your loan is structured and in the event your investment property at some point does not turn out the way you wanted it then your home may not be subject to any risk.

What is the advantage of an offset account?

An offset account is generally linked to a home loan so that it saves you interest. Where you would normally put money into a bank account and received interest on the credit balance, instead with an offset account you save interest against your home loan. Generally we like this strategy as the interest rate can be up to 4-5% as at January 2016 whereas your interest rates that you receive on cash investments is only around 1-2%. So it’s in your best interest to save a much larger amount. The other advantage of an offset account is that you have access to your money so if you win lotto or pay off your loan sooner, you still have access to that money but it is saving you interest. We have a number of clients that may have a loan for $500,000 and over the years they have saved up an offset account of $500,000.

What is the maximum that I can borrow for Commercial Property?

Commercial Property generally is regarded by Banking Institutions, as more risk than Residential Property. Under the loan to value ratio for a Commercial Property most banks will only lend 65% against a property or maximum 70%. Very few will go higher, some will go to 80% but they will usually want a second mortgage against other Residential Properties to assist and mitigate their risk.

What is a loan to value ratio?

A loan to value ratio (LVR) is the value of your loan compared to the value of your property for example; $400,000 loan secured by $500,000 property is an 80% LVR. If you have a higher LVR then the banks generally have a higher level of scrutiny over your servicing and over the type of property that you hold.

What is Lender’s Mortgage Insurance (LMI)?

LMI is a charge that banks put on you if you borrow more than 80% of the value of a property. The higher the loan and/or loan to value ratio, the higher the insurance premium. Lenders Mortgage Insurance is a one off premium that is charged at the convincement of the loan and it usually then forms part of the capital cost of your asset or of your finance. You do not pay it annually. It is there to protect the insurer in the event they have to call on your property because you haven’t paid your loan and they sell the property for less than the loan amount, then they call on the insurance.

It is important to note that the insurance company that underpins the insurance amount can chase you for the shortfall between the property and the loan value in the event that the bank sells the property for less than what you borrowed.