UNDERSTANDING LENDER’S MORTGAGE INSURANCE

As a mortgage broker I see a lot of clients who are wanting to get into the property market, but they don’t have a huge deposit. They may have been renting for a while, or are first home buyers who have been saving but keep seeing property prices rising, so rather than waiting longer to build their savings they want to buy now. The way lenders are able to assist borrowers in these cases is by taking out Lender’s Mortgage Insurance (LMI).

What is LMI?

Lenders Mortgage Insurance (LMI) is insurance that a lender takes out to insure itself against the risk of not recovering the outstanding loan balance if you, the borrower, are unable to meet your loan payments and the property is sold for less than the outstanding loan balance. 

In layman’s terms, if a borrower cannot meet their loan repayments and no other resolution is found, the security property may need to be sold to cover the outstanding loan amount. In this situation, sometimes the house is sold for less than the amount of the loan balance, leaving an amount still owing. If this happens, you as the borrower are obliged to repay that outstanding amount of the loan. The LMI insurer will cover the loss for the lender in accordance with the LMI policy. Where there is a shortfall, the LMI insurer may then ask you, the borrower, to repay this directly to them, rather than to the lender.

When would LMI be required?

Where you don’t have a large deposit (usually 20% of the property price) but have managed to save at least 5%, a lender will apply to a Lender’s Mortgage Insurance provider to cover your loan. LMI reduces the risk of loss to the lender if you have difficulty meeting your loan repayments, making it more likely that they will lend the money to you to buy a property even though you don’t have a 20% deposit.

LMI therefore allows home buyers to get into the property market a lot earlier than would be possible if everyone had to save at least a 20% deposit.

Who Pays for LMI?

The cost of LMI is variable, as premiums are calculated based on the overall risk in the proposed loan. A borrower who has a 5% deposit and needs to borrow 95% of the property purchase price, will pay a higher premium than someone who has a 10% deposit to contribute, as there is a higher risk to the insurer when a borrower needs to borrow a higher percentage of a property value.

As the LMI premium is a cost of providing finance, the lender passes the cost of the LMI premium on to the borrower. They can pay the premium at settlement of the loan through their savings, or by adding the cost of LMI to their loan which will result in a higher loan and repayment amount.  

How do I avoid needing LMI?

There are a couple of ways to avoid having to pay for LMI on your loan.

  1. Save at least a 20% deposit.
  2. For first home buyers, access some of the Government assistance schemes such as the First Home Loan Deposit Scheme, the New Home Guarantee or Single Parents Guarantee Scheme.

There are other avenues that some lenders also have available, such as Family Guarantees where parents can assist their children get into the property market by providing their home as further security. Some lenders also have specific policies relating to applicants who are professionals in certain industries where they may waive the LMI requirement, even when they only have a 10% deposit.

Common Misconceptions with LMI

When speaking with borrowers who have taken a loan and paid for LMI there is some lack of understanding as to who LMI protects. They are often surprised to learn that LMI protects the lender and it in no way provides any protection to the borrower. Only the lender can make a claim under a LMI policy.

Lenders Mortgage Insurance is also not the same as Mortgage Protection Insurance, which is another type of insurance cover that can protect a borrower from defaulting on their loan should they lose their income.

LMI is a tool to help buyers get into the property market earlier than they otherwise could, as saving a 20% deposit is very difficult with the increase in costs of living combined with rises in the property market. At SHL Finance we have helped a lot of our clients improve their situation by working with them to achieve their financial goals, and we would love the opportunity to help anyone wanting to buy but are unsure whether they can. Please call Reece on 0478 021 757 should you want to find out how we can help you.

Reece Droscher
Director
Mobile 0478 021 757
Email reece@shlfinance.com.au
www.shlfinance.com.au

A close-up of a clock

Description automatically generated with low confidence

2/23 Ringwood Street Ringwood Vic 3134

WHY ARE FIXED RATES INCREASING?

Over the last 2 years interest rates have been at their lowest level in our country’s history. Since the start of the pandemic in 2020 until September last year, fixed rates of less than 2% were offered by lenders for 2 and 3 year fixed periods. For anyone who decided to lock in a rate during this time, it seems you have made the right call.

Since September interest rates offered on fixed rate loans have steadily increased, with some rates offered increasing by more than 1%, even though the RBA has stated that they are not planning to increase the cash rate until early 2023. So what are the factors that have caused lenders to increase fixed rates when the variable rates offered have not changed?

The main cause of fixed rates increasing is inflation, not locally but from overseas. Banks and other lenders source their money from a number of different areas, with a large proportion from overseas banks. In the US, for example, inflationary pressures that are the worst in 40 years due to the pandemic will see the Federal Reserve increase rates for the first time since 2018 from April 1st. As the cost of money from these sources has increased, the extra costs are being reflected in the rates offered by lenders here.

While fixed rates are increasing the variable rates offered by some lenders have continued to fall, as the RBA’s cash rate has not changed as yet. Currently you are able to obtain variable rates lower than 2% with a number of lenders. However inflation is also an issue for us locally, so there is an expectation that the RBA will need to increase rates sooner than the stated 2023 timeline. This is of particular concern for anyone with a variable rate Home Loan, as budgets may already be stretched with the increased living costs impacting households.

If you weren’t lucky enough to have your rate fixed earlier in the cycle and currently have a variable loan, now would be the perfect time to review your position with a Mortgage Broker, who can recommend a loan structure that would be the most suitable for your particular financial circumstances.

At SHL Finance we are helping our clients navigate their way through the changing Home Loan market to ensure they are in the most suitable products that meet their needs. We would love the opportunity to help you. Please call Reece Droscher on 0478 021 757 or email reece@shlfinance.com.au.

Advice given in this article is general in nature and is not intended to influence decisions about investing or financial products. You should always seek your own professional advice that takes into account your personal circumstances before making any financial decisions.

CREDIT SCORE – WHAT IS IT AND WHY IS THIS IMPORTANT WHEN APPLYING FOR A LOAN?

A common reason why applications submitted to lenders get declined is because of an applicant’s credit score. A credit score is typically a number between 0-1,200 and is made up of several criteria – credit conduct history, the amount of credit enquiries, the type of enquiries made and the length of time the applicant has had access to credit. The higher the score, the more credit-worthy you will appear to lenders. So how does this affect your ability to borrow money? To understand this we will look at each criteria in detail.

CREDIT CONDUCT HISTORY

The most important element to a good credit score is the repayment history on any existing loans or credit cards. This gives the lender a very good idea whether the applicant has been able to manage their finances effectively. Since the introduction of comprehensive credit reporting last year lenders are armed with more information on an applicant’s repayment history than ever before. If there is any history of late or missed payments this will now be captured and will negatively affect the credit score. Late or missed payments take around 30 days to be reported to the credit agency who manages this information, but this stays on your record for seven years, so poor repayment history may affect your ability to access finance for a long time.

THE NUMBER OF CREDIT ENQUIRIES

How often you apply for credit will also have an effect on your credit score. Lenders lodge an enquiry on your credit report whenever you apply for certain types of credit, such as a Home Loan, Personal Loan and credit card. The numbers of enquiries, particularly where you lodge several applications with different lenders for the same transaction, may indicate that you are desperate for funds or have been declined by other lenders. Large numbers of enquiries will have a negative impact on your score.

THE LEVEL OF DEBT

The amount of debt you have available, when compared to your income level, is considered when determining your credit score. Lenders use a calculation, known as DTI (Debt to Income Ratio) to work out whether an applicant can afford to repay a new loan. This also takes into account existing credit limits that an applicant may have but also may not be fully utilizing.

 For example, having a credit card with a $20k limit means the lender has to consider the effect on an applicant being able to afford the repayments on a new loan, even though the applicant may not owe anything on the credit card. Because the applicant is not fully utilizing the card the credit score will not necessarily be affected adversely, but if the applicant was regularly maximizing the credit limit and slowly paying the debt down the lender would see this as a red flag when it comes to affording any new debt repayments.

Lowering your debt levels by paying loans off or reducing available credit limits will improve your credit score.

THE TYPE OF CREDIT ENQUIRIES

The use of buy now, pay later services like Afterpay and Zippay has been increasing significantly since they entered the Australian market. What a lot of people do not quite understand is that these facilities are a type of credit, and some of these providers will conduct an enquiry on your credit report to determine whether to provide you with a purchasing limit. Having a number of these enquiries on your report may have an effect on your credit score, particularly if there are any missed  or late payments that are reported.

Having multiple buy now, pay later facilities can also be a red flag to a lender, especially if they are being utilised regularly and significant payments are being made to cover the debt.

Similarly, accessing any interest-free deals with retailers such as Harvey Norman will generate another credit facility which can negatively impact your credit score if not managed correctly.

THE AGE OF CREDIT HISTORY

The length of time an applicant has had access to credit may also have an impact on the credit score. If an applicant has had a credit facility for a number of years and has maintained a regular repayment schedule, with consistent on-time payments, this will provide the lender with surety that the applicant can manage their finances well and make payments. This will impact positively on the credit score.

HOW DO I IMPROVE MY CREDIT SCORE

There are a few ways in which you can help to improve your credit score, therefore increasing your chances of having an application for finance approved. These include:

  • Make sure your repayment history is clear of late or missed payments.
  • Avoid submitting multiple applications for finance.
  • Do not max-out credit card limits.
  • Understand your budget and regularly review your credit facilities.
  • Cancel any unused credit you may have. Get rid of any old, repaid credit cards that you may have accumulated over time.
  • Regularly check your credit report to ensure there are no enquiries made that you are unaware of. There are many service providers offering the ability to access free credit checks so a simple Google search will help you find out how to access your score.

At SHL Finance we are always looking to help our clients improve their financial well-being. If you would like to find out whether you could be eligible for a new Home Loan, Investment or Personal Loan, please contact Reece Droscher on 0478 021 757.

Reece Droscher
Director
Mobile 0478 021 757
Email reece@shlfinance.com.au
www.shlfinance.com.au

WHAT LENDERS LOOK FOR WHEN ASSESSING YOUR HOME LOAN APPLICATION

Applying for a Home Loan can be a nervous time for any prospective borrower. Whether you are hoping to buy your first home or your fifth, the process to get that final approval can be a difficult and frustrating experience. With greater regulation and the requirement to adhere to Responsible Lending Obligations, lenders are required to be more prudent than ever when assessing a new loan application. To help understand the process I have listed below the things a lender will look at to determine whether you are a suitable borrower.

SECURITY

One of the first boxes you need to tick off with a lender is what security you are providing to satisfy the lender’s credit policy. They look at the type of property, the property value and your intended use of the property.

There are different policies in place depending on whether you are securing your loan with a fully detached house, an apartment in the city or some vacant land. For example, if you were buying a house in the suburbs most Banks would lend you up to 95% of the property value. However, if you were buying vacant land with the intention to build a house in the future you would generally be limited to borrowing 90% of the security value.

Your intended use of the property is also subject to different rules. Finance to buy an investment property will be restricted to a maximum of 90% of the property value with most lenders.

Also, certain property types can also create challenges to obtain finance, such as large acreages, hobby farms and properties in regional areas. Some lenders will not accept these types of properties, so it is important to know up front where you can apply to give yourself the best chance at a positive outcome.

REPAYMENT CAPACITY

Employment stability, the security of your source of income, demonstrated consistency of earnings and a good repayment or savings history are the key indicators of an applicant’s ability to repay a loan. For the majority of applicants who have their applications declined it is the capacity to repay requirement that a lender believes has not been met to their satisfaction.

Generally, a lender will prefer an applicant who is employed full-time and has been in their role for at least six months, so not on probation with their employer. They are earning an income which is sufficient to meet the proposed loan repayments, have demonstrated a history of meeting their previous loan repayments on time or have shown a willingness to save a deposit by allocating a consistent amount into their savings. This is just about the perfect scenario for a lender assessing a loan application.

Unfortunately a lot of applicants fall into other categories which are treated differently due to their income sources. People who are self-employed, those in sales roles who earn commissions or bonuses, and casual employees may be looked at as potentially riskier borrowers, so their applications are assessed differently.

For self-employed borrowers there is a delicate balance to negotiate. For a lot of people running their own business they look to minimize the amount of tax they pay, so they maximize their expenses to reduce their taxable income. However, when applying for a loan they need to show their last two years tax returns to demonstrate that their income level is sufficient to cover the new loan repayment. They may have shown unblemished loan repayment history and have ample security to provide, but without being able to show a consistent level of income which is high enough to satisfy the lender, they will not get their application approved.

Borrowers in commission-based roles are also required to show consistency of commissions received, before a lender will consider that income as being a secure source that can be relied upon to repay the loan. Lenders have different policies applied to this income type, however most will require at least twelve months history of commission earnings before they are prepared to rely on this income.

Similarly casual employees are also generally required to have been in their roles for at least twelve months before they would be considered as a suitable borrower, as they have less employment security than those in permanent full or part-time roles.

LIVING EXPENSES

One of the more recent changes to how lenders assess applications has been the verification of an applicant’s living expenses, and how they are accounted for to determine whether the loan is affordable. The lender requires an applicant to declare what they spend at the supermarket, on clothes, rates and utilities, transport, recreation, pets, etcetera. The lender is looking for anything that could impact negatively on the applicant’s ability to repay the loan they have applied for.

It is important to be as accurate as possible when declaring living expenses, as lenders will request account statements to verify the information. Any discrepancy between what has been declared in the application and what is illustrated in the statements will need to be addressed with the lender, which causes delays in getting a positive response.

CREDIT REPORTS

The recent introduction of comprehensive credit reporting has given lenders much greater information on an applicant’s credit history than ever before. With most lenders now participating in comprehensive credit reporting any current loans or credit cards an applicant has will be visible to the lender. They will also be able to see the conduct on those credit facilities, so any missed or late payments in your history, particularly in the last 24 months, will be looked at negatively and will impact on your credit score, thus reducing the chances of getting an approval.

Before applying for any finance I would suggest obtaining a copy of your credit report, as you can see whether there are any old credit facilities that you thought were closed but are still open, giving you the opportunity to clean these up.

EQUITY

Equity represents the applicant’s investment in the transaction. Whether you are buying or refinancing you need to be able to demonstrate you have sufficient equity to be able to satisfy the lender. This category is related to the Security requirement as you need to have a minimum deposit (equity) before being considered for a loan.

In the past you generally needed to have demonstrated an ability to save a minimum 5% plus the applicable purchase costs before being considered for a loan. However these requirements have been relaxed for borrowers, particularly first home buyers and applicants who have been renting. If you have access to a deposit through other means, such as a gift from parents or an inheritance, these are also acceptable sources of deposit.

The amount of equity required will differ depending on the transaction proposed. As mentioned in the Security section if the proposed loan was to buy land or an investment property, you would need to contribute a minimum 10% deposit, so there is a greater equity requirement than buying a home to live in.

CAPITAL

Capital represents the applicant’s net worth, the value of your assets minus the liabilities. Effectively the lender will look at personal assets like cars, savings in your bank accounts, investments such as shares and any property that you own, and deduct things like credit cards, personal loans and any other loans or credit facilities you have at the time of submitting the application. The value left is your net worth.

The lender considers this as it demonstrates an applicant’s ability to accumulate assets. It works in conjunction with other aspects mentioned earlier, such as credit history, as the willingness to repay debt should assist improve an applicant’s net worth.

An applicant’s life stage will also influence whether an applicant passes the Capital test. A young applicant would not be expected to have accumulated as many assets when compared to a middle-aged applicant. Where an older applicant does not have a significant net worth it may indicate that they spend too much and haven’t allocated any money into savings or buying other assets. This will have a negative impact on their ability to obtain finance.

It is important to emphasise that not all lender policies are the same.  Different lenders may place a greater importance on some of these areas than others, which is why working with a Mortgage Broker to help guide you through the process, and ensure you are recommended to the most suitable lender to meet your individual circumstances, can give you the best opportunity to get your application approved.

At SHL Finance we are ready and willing to help you achieve your Home Loan finance goals. Please call Reece Droscher on 0478 021 757 to discuss all of your Home Loan needs.

IS NOW THE BEST TIME TO FIX THE RATE ON YOUR HOME LOAN?

As a mortgage broker one of the most common questions I receive from clients is whether they should fix the interest rate on their Home Loan. Since the commencement of the COVID pandemic there has been a surge in clients locking in at least some of their Home Loan into a fixed rate to take advantage of the very low rates on offer in this market, in some cases well under 2%.

Now, with commentary from the Reserve Bank indicating that they may be looking to increase the cash rate a lot earlier than expected due to inflation, most lenders have started to lift their advertised fixed rates, particularly in the popular 2 and 3 year fixed rate products. At the same time some of their variable rate products have started to come down, with Banks trying to encourage more customers into these products, anticipating that there may be several rate rises from the Reserve Bank in the future.

Given the current interest rate uncertainty is now the best time to fix the rate on your Home Loan? There are advantages and disadvantages to locking in your interest rate which would determine if fixing your rate is the best option for you.

Advantages

  1. Security

When you fix a rate on your Home Loan you are guaranteed that the rate will not change for the period you have fixed for. This means your repayments will also remain unchanged which is helpful for household budgets.

  • Potential Money Saver

If you are able to fix your rate at the right time you will save money on interest, potentially thousands of dollars. For example, if you were to fix a rate today you could lock in for as low as 2.09% for two years with some lenders. These same lenders have variable rates at 2.69%, and if those variable rates do not reduce below 2.09% over that two year period the benefits of fixing at the lower rate would be substantial. 

  • Some Flexibility

Most lenders will allow borrowers to make additional repayments when they have a fixed rate loan without incurring a penalty. It is most common for any extra repayments to be capped at a maximum $10,000 per year.

Some lenders also offer the ability to have an offset account linked to the fixed rate loan to help reduce interest costs further, although these are generally only partial offsets usually 40%. For example if you had a $1,000 balance in an offset account only $400 of that balance would be offsetting your loan.

Disadvantages

  1. Penalties may be payable for early repayment

If you become dissatisfied with your lender, decide to sell your home or you simply want to take advantage of better deals elsewhere, when you are locked in to a fixed rate you could be charged a substantial interest penalty to break the contract. A complex formula is used to determine what the loss to the lender would be if the fixed rate contract is broken which is outlined in any Home Loan Contract. This penalty could offset any benefit you received by locking in originally.

  • Most flexible features are unavailable

Flexible features that are standard on most variable rate loans are either not available or offered with reduced benefits on a fixed rate loan. Offset is typically not available, or only offered as partial offset which reduces the effect it has on interest saving, and redraw is also not available on fixed rate loans.

  • Potential to lose on the interest rate bet          

Fixing a rate is effectively betting that the fixed rate will be lower than the variable rate for the time you choose to lock in for. In a volatile interest rate environment, where variable interest rates are dropping, if you have a fixed loan your rate will not reduce. The inflexibility of the fixed rate which is great in stable environments can be a curse at other times.

  • Potential for higher repayments once the fixed rate expires

A large number of borrowers have fixed their rates at historically low rates for the next few years. Once these rates expire the new interest rate may have increased significantly during this period, so their loan repayments could be much higher than what they have been used to paying. Borrowers could be in for a rude shock in the next 2-3 years.

Split Loans

If you can’t decide which option is the best one for you it is possible to hedge your bets. Lenders also offer a split loan option which means you can have a portion of your loan at a fixed rate and the balance on a variable rate. By splitting your loan you retain the flexible repayment features of a variable rate loan, as well as having some of your loan locked away securely on a fixed rate for a few years.

It is always a great idea to speak with a mortgage broker who can guide you through the process, advise you on which loan structure would suit your needs best and recommend the most suitable lender to meet your requirements.

At SHL Finance we are available to speak with you at any time. We are already proactively helping our clients negotiate a better rate with their current lender, reviewing their existing loans and discussing ways to potentially save clients thousands of dollars. We would love the opportunity to help you too. Please call Reece Droscher on 0478021757 to discuss your options.

STATE AND FEDERAL INCENTIVES FOR FIRST HOME BUYERS

One of the greatest challenges for State and Federal Governments is housing affordability. Trying to help the younger generation by their first home, or help people get out of the rental cycle, has been a focus for some time. There have been several initiatives announced by both levels of government over the last few budgets to make it easier to get into the property market, with most of them centered around helping first home buyers, which are outlined below.

FIRST HOME LOAN DEPOSIT SCHEME      

The First Home Loan Deposit Scheme (FHLDS) is an Australian Government initiative to support eligible first home buyers to build or purchase a first home sooner. The Scheme is administered by the National Housing Finance and Investment Corporation (NHFIC).

Usually first home buyers with less than a 20 per cent deposit need to pay lenders mortgage insurance. Under the Scheme, eligible first home buyers can purchase or build a new home with a deposit of as little as 5 per cent (lenders criteria apply). This is because NHFIC guarantees to a participating lender up to 15 percent of the value of the property purchased that is financed by an eligible first home buyer’s home loan.

In a recent Federal Budget announcement, the scheme was expanded by a further 10,000 places from July 2021 for new homes only. This includes building a new home or buying a new home off the plan.

There are property price thresholds in place which vary for metropolitan and regional areas, however you can check your eligibility for the scheme by going to the website http://www.nhfic.gov.au.

FAMILY HOME GUARANTEE (SINGLE PARENTS)

This is another Federal Government program which provides eligible single parents with dependants the opportunity to build a new home or purchase an existing home with a deposit of 2 per cent, subject to the individual’s ability to service a home loan.

From 1 July 2021, 10,000 Family Home Guarantees will be made available over four financial years.

The Family Home Guarantee is aimed at single parents with dependants, regardless of whether that single parent is a first home buyer or previous owner-occupier. Applicants must be Australian citizens, at least 18 years of age and have an annual taxable income of no more than $125,000. 

Again, property price thresholds apply and are the same as those under the First Home Loan Deposit Scheme. Please check your eligibility to participate in the scheme through the website www.nhfic.gov.au.

FIRST HOME SUPER SAVER SCHEME

This initiative has been around for some time and is another way for first home buyers to boost their deposit and help them get into a property sooner. To participate you are a first home buyer wanting to either:

  • live in the premises you are buying, or intend to as soon as practicable, or
  • you intend to live in the property for at least six months within the first 12 months you own it, after it is practical to move in.

You can apply to have a maximum of $15,000 of your voluntary contributions from any one financial year included in your eligible contributions to be released under the FHSS scheme, up to a total of $30,000 contributions across all years.

It is important to note that eligible contributions do not include the employer super contributions under the Super Guarantee, only voluntary contributions made by you. Further information can be found under the Australian Taxation Office website.

STAMP DUTY CONCESSIONS

The State Government has announced further concessions on Stamp Duty for first home buyers and an expansion to the concessions available for people purchasing properties off the plan. In some instances the discount is as much as 100% , and the property threshold to qualify for these concessions has also increased up to $1million.

The new rules take effect from July 1, 2021, and the full detail of the expansion of the tax cut benefits are outlined on the Victorian State Revenue Office website.

As not every Financial Institution is participating in these schemes it is best to speak with an expert to get the best advice. If you are potentially eligible to participate in any of these government initiatives, please give the team at SHL Finance a call. We can guide you through the eligibility criteria, the application process and ensure you receive all the assistance available to you.

Reece Droscher
Director
Mobile 0478 021 757
Email reece@shlfinance.com.au
www.shlfinance.com.au

Why Should You Use A Mortgage Broker?

Why Should You Use a Mortgage Broker?

It’s time, time to take control of your finances and stop paying Loyalty Tax to the bank. You want to refinance your home loan to get a better rate, but where do you go? The bank down the road looks like they have a good rate but you’re self employed and had heard it was difficult to get a home loan. You may be right, but how do you know that you’re getting the best option available to suit your needs? That’s how a Mortgage Broker can help you.

Finding A Lender To Suit You

A Mortgage Broker can help you filter out the Lenders that don’t suit your personal situation. Asking your friends or on a Facebook group will only provide you with the lender that is right for that person, and it probably only suited them at the time they applied. If they were to apply again six months later, they may find they are better off with a different lender altogether. Each Lender’s credit policy is different and while one lender may be happy to lend to the self-employed, others prefer PAYG. Some will lend for properties in regional areas, others only suburban.

Time or Features – what’s more important?

Time can also be a factor when deciding which lender to go to. If you are looking to purchase a house, you may need a lender that is approving loans quickly. If you are refinancing, that may not be an issue and having the right rate and product features is more important. Mortgage Brokers are in touch with the lenders every day and know which ones are fast movers and which ones are taking a bit longer.

Fast Refi

If you are refinancing and time is of the essence, after all you want to be paying the lower rate as quickly as possible, there is a product called Fast Refi. Often it is your current lender that can hold up the process and delay settlement meaning they get to receive your repayments a little longer. Lenders who do Fast Refi bypass asking your current lender to transfer the title of your property before releasing the money to pay out your current loan. They simply pay the money and then go after the title. Not all lenders have this option but your Mortgage Broker will know.

Medical Practitioners/Professional Packages

Did you know that if you are in a certain occupation, some lenders will offer you extra benefits? Things such as no Lender’s Mortgage Insurance on loans over 80% LVR or no fees. Some of these occupations include Doctors, Nurses, Paramedics and Dentists as well as Financial Planners, Accountants, Lawyers and Vets. If you think you might be eligible for this type of loan, a Mortgage Broker will know which Lenders offer this.

BID – Best Interests Duty

Mortgage Brokers are required to always put your needs first and to consider each loan based on your personal requirements. This means you can be confident that, even in the long term, the loan you get will be in your best interests and will have taken into consideration your current plans as well as future ones. If you simply walk into a bank, even if they know their product isn’t the best one for you, they can only offer you their product, which could cost you dearly.

As a mortgage broker we act in your best interests. A lender has no obligation to do so.  At SHL Finance we have always acted in our clients’ best interest and would love the opportunity to help you too. Please call Reece Droscher on 0478 021 757 or Jodie Moore 0402 513 213 should you want to discuss your finance requirements.

FINANCE SOLUTIONS FOR THE SELF-EMPLOYED

FINANCE SOLUTIONS FOR THE SELF-EMPLOYED

For people who work for themselves being able to obtain finance to buy a home, grow their business or purchase another asset can be a very challenging exercise. For a lot of self-employed there is a delicate balance between showing the Bank enough income to be able to repay a loan and claiming as many expenses against their income to reduce the amount of tax they pay.

Lenders also deem self-employed applications to potentially represent a higher risk as their income is not as predictable as someone in stable employment with a consistent income stream. It may also be difficult for some self-employed applicants to produce the financial information to satisfy a lender’s requirements.

With the changing nature of the employment market seeing more people opting to work for themselves by either starting a new business or contracting their services to another party, lending money to the self-employed is also changing. New providers in the lending market are trying to make it easier for self-employed applicants to access credit. Outlined below are some of the options available for those self-employed people who may fall outside the traditional lending options provided.

LOW-DOC LOANS

Low Documentation (Low Docloans are available for potential borrowers who are self-employed and don’t have access to the documents required to obtain a traditional mortgage. Usually borrowers cannot provide financial statements and tax returns to verify their income, so the lenders rely on other documentation provided by the applicant to determine whether they can afford to borrow the amount requested. The applicant would provide a declaration stating their level of income which would be supported by other forms of verification. This includes lodged BAS, trading account statements or a letter from the accountant for the business confirming the income declared is accurate.

The level of information required may vary between providers, and these types of loans are available for owner-occupied, investment and commercial properties.

These loans usually have a slightly higher interest rate than standard loans where full documentation has been provided, and not all lenders provide this option as part of their suite of products. The amount of property equity you would need to have to secure this type of loan will also be greater than a standard loan. But, if your circumstances mean you don’t fit the traditional type of borrower, this can be a good option to consider, particularly for Home Lending.

CASH-FLOW LENDING

Cash-flow lending is usually a short-term loan that self-employed applicants might use for any business purpose. This can mean covering a temporary cash-flow shortfall, investing in new equipment or purchasing another business. The loan amounts are small, in most cases less than $100k, and in a lot of cases no security is required.

Where traditional business lending requires the applicant to provide two years of financials and tax returns, cash-flow lending looks at things differently. The revenue performance of the business is used to determine the eligibility to borrow.

The cost of these loans can be quite high, above 10% per annum before you factor in fees and charges, as these are primarily unsecured loans so the risk to the lender is higher. But cash-flow lending is also one of the fastest ways to inject funds into a business. Some of the providers suggest that they can have funds available within 48 hours of receiving an application, and the number of providers in this market is growing, even including some of the major Banks who have developed a product to cater for these types of requests.

Where a self-employed applicant can meet the requirements to obtain finance through traditional means then usually this is a less costly approach to take, although potentially more inconvenient. Lenders are risk-averse businesses so the more information a self-employed applicant can provide to verify their income is stable and secure the better. If, however you are in a situation where that is not possible, at least you know there are options available.

If you would like to know any more about these products and whether they may be a suitable option please call me at SHL Finance on 0478 021 757, or come in and see us at 2/23 Ringwood Street Ringwood.

Reece Droscher

Managing Director of SHL Finance Pty Ltd

Best Interest Duty

WHY DEALING WITH A BROKER IS IN YOUR BEST INTEREST

For anyone who is looking to obtain Home Loan finance for a new purchase, refinance their existing loan or complete some renovations to their home, there is a choice to be made on who you engage to arrange the loan for you. Do you go directly to the financial institution to obtain the finance, or do you engage a broker to arrange this for you? Since the Royal Commission into the banking sector was completed a number of recommendations have been implemented by the government regulators to address misconduct within the banking and financial services industry. Once such recommendation was implemented on January 1st this year – Best Interest Duty.

BEST INTEREST DUTY ONLY APPLIES TO MORTGAGE BROKERS, NOT TO BANKS

Best Interest Duty (BID) creates the obligation for mortgage brokers to act in the best interests of consumers and, where there is a conflict, to prioritise consumers’ interests when providing credit assistance. The majority of mortgage brokers have always acted in their client’s best interest when providing advice, the introduction of BID now legislates it. However, what has now been created is a clear difference in obligation when dealing with a broker as opposed to dealing directly with your Bank. Mortgage Brokers must act in their client’s best interest, the Bank does not have this obligation.

This is because Mortgage Brokers have access to products and services from many providers, so understanding their client’s requirements and objectives in seeking advice is the basis for making a recommendation on a Home Loan. A Bank lender has one suite of products to offer, so they don’t have the same obligations as a broker and can act in their employer’s interests, not the interests of the customer.

It is another major reason to deal with a Mortgage Broker rather than going to a Bank directly. Mortgage Brokers have a legal obligation to act in their client’s best interests, providing them with comfort that the recommendation the broker has made is the most suitable to meet their requirements and objectives.

HOW DOES A BROKER APPLY BID WHEN RECOMMENDING A PRODUCT

There are a number of factors which may determine what product a broker will recommend to their clients as the most suitable to meet their particular circumstances, while acting in their best interests.

  1. Price – this will always be a major factor in recommending a product to a client, however is not the only factor. Price includes the interest rate, any Establishment and on-going fees, and mortgage insurance costs if applicable. Recommending the cheapest product on the market may not be in the clients best interest as their circumstances may not meet the policy of the lender. Every client’s requirements are different.
  2. Credit Policy – does the proposed transaction meet the policy of the lender? Lenders all have different criteria when considering a finance application, so the broker needs to be aware of each policy to ensure they do not recommend an unsuitable loan.
  3. Response Times – is the transaction time-sensitive? Will the lender be able to approve and fund the loan in the time required by the client?  This needs to be considered to ensure the broker acts in the clients best interest.
  4. Product Features – does the product have the features the client may require? Features like 100% offset, a secure rate, redraw.
  5. Conflict of Priority Rule – any conflicts of interest between the client and broker must be satisfied in the client’s favour. So when considering the best product to recommend the BID legislation states ”the conflict priority rule means that you must not recommend a product or service of a related party that would create extra revenue for yourself, your credit licensee or another related party, unless doing so would also be in the consumer’s best interests”.

In practice, if a broker has two products that would benefit their client, however lender A has an annual fee and offers the broker a higher commission payment, the broker must recommend lender B, even though lender A is still a great fit for their client. This satisfies the conflict priority rule.

Brokers must exercise judgement in the relevance of these factors when making reference to the client’s individual circumstances. So in satisfying BID the client can rest assured that their broker has spent a significant amount of time ensuring the product recommended is the most suitable and best to fit their requirements and objectives.

As a mortgage broker we act in your best interests. A lender has no obligation to do so.  At SHL Finance we have always acted in our clients’ best interest and would love the opportunity to help you too. Please call Reece Droscher on 0478 021 757 should you want to discuss your finance requirements.

WHY THE FESTIVE SEASON IS A GREAT TIME TO REVIEW YOUR FINANCES

As the Christmas and New Year period approach we are focused on spending time with family, perhaps getting away for a well-earned break and preparing to put a difficult 2020 behind us. This time of year is a great time to relax and enjoy being with our loved ones, but it is also a time where a lot of us find ourselves in a difficult financial predicament due to over-indulgence with spending. That’s why the festive season is a great time to review your finances and help yourself into a better position going in to 2021.

I have listed below some areas where taking the time to review your finances could have a major impact on saving you money.

CREDIT CARD DEBT

The most common problem we have once Christmas is over is looking at our credit card statement and wondering how it managed to get so out of control. Should you find yourself in this situation there are a number of potential solutions to help get your credit card debt back under control.

  1. Consolidate your credit card debt into a Personal Loan or Home Loan. By consolidating your debts you will have a set term to repay the amount owing at an interest rate which is generally much lower than what your credit card costs. However this may also mean you are paying the debt back over a long term, so you need to be disciplined to ensure you repay the debt quickly. You don’t want to still be paying off the kids 2020 Christmas presents 5 years from now. Set yourself a maximum two year term to repay the debt in full.
  2. Reduce your available credit limits. Once your credit card repayment arrangements are in place reduce your available limits to ensure you cannot get yourself into this position again. By having a small limit you will be able to manage the repayments more comfortably and clear the debt without further assistance.
  3. Look for balance transfer deals. A number of lenders will offer either low or even zero interest rates on balance transfers of credit card debt. These offers usually come with a time limit to repay the amount owing in full. On the surface this is a great way to manage paying your accumulated debt, however there are potential traps that you should avoid. If you are able to access a balance transfer deal you should cut up the card, so you are unable to use it and add to the level of debt. You can then set up a budget to repay the amount owing within the agreed term.

AFTERPAY/ZIPPAY ACCOUNTS

Many people are unaware that these types of buy now/pay later options come with a credit limit, and also now appear on your credit records. Banks treat them exactly like a credit card when assessing finance applications, so minimising their use will ensure your credit score is not negatively affected.

If you do get into a predicament with these types of accounts then the tips to helping with credit card debt will also apply here.

REFINANCE TO A BETTER HOME LOAN

Now is also a great time to review your Home Loan to make sure your lender is providing you with the most suitable loan to suit your needs. During the year we are generally so busy with life in general that reviewing what is usually our largest expense is put in the too hard basket. By taking some time now to see whether your current Home Loan is the best option you could save yourself thousands of dollars in interest and several years in time taken to repay your loan.

BUDGETING   

To avoid getting yourself into a financial predicament in the future set a realistic budget to keep a track of your spending and, most importantly, stick to it. Why most budgets fail is that we place unrealistic expectations on ourselves. By setting realistic goals we are more likely to achieve them. Being consistent and putting smaller amounts into savings on a regular basis is more effective than making larger deposits at random. Your spending habits will also be aligned to your savings goals, but don’t be too hard on yourself if you have a period where you are unable to reach your savings goals due to unexpected expenses. Things happen.

At SHL Finance we would love the opportunity to discuss your finance requirements with you. Please call Reece Droscher on 0478 021 757 to find out how we could help you save money or improve your financial situation.

On behalf of the team here at SHL Finance I wish you a happy and safe Festive Season and look forward to connecting with you again in the New Year.

Reece Droscher

SHL Finance.

0478 021 757