3 Great Tips to Health Check Your Mortgage
For decades Australians have had an affinity for property. Owning your own home is the Australian dream. Investment properties have been the key to wealth since your Grandparents were children and not much has changed since.
Over the last six years in Melbourne alone, we have seen strong growth in housing prices. At the end of 2014 the median house price in Melbourne was $637,000. At the end of 2019 it was $860,000 growing steadily, year on year.
Plus, interest rates are the lowest we have seen in a long time. We haven’t seen the RBA raise the cash rate since November 2010 and it doesn’t look like much will change for a while.
With all of these things considered, there hasn’t been a better time to make sure your mortgage is the right one for you. These three tips will help you get on the front foot and get the most out of your home or investment property.
1. Get to know your credit score
Understanding your credit score and the risk you are to a lender might seem like a daunting task, but it is much simpler than you think. Plus, once you understand your position it can give you great confidence when speaking to your lender and make sure you get the best deal. While there are many factors that impact the final outcome for a mortgage application, your credit score is a key indicator.
Firstly, how does your credit score work?
Your credit score is a number that is generated based on many factors collected and interpreted by credit reporting agencies like Equifax and Dun & Bradstreet. The smaller the number the higher the risk, the bigger the number the lower the risk. So in this instance, bigger is better! An Equifax score ranges from 0 - 1200. 0 being very bad and 1200 being exceptional.
Key things that impact your score:
- Personal information such as your age and how long you have lived at your address. If you bounce around a lot it might not look as strong as someone who is a bit more stable in their living situation.
- Adverse listings, defaults, court judgments and bankruptcy (these can seriously impact your score and ability to lend money).
- The amount of credit enquiries you have on your file - it is OK to apply for credit, however, if you have excessive enquiries, it can impact your score.
- The type of credit you apply for. Think of it as applying for a payday loan vs a mortgage - they are very different products for very different situations.
- The age of your file. New files traditionally have lower scores due to a lack of data.
- Positive reporting - Positive reporting is quite new in Australia. It is an indication on how well you have made payments on your loans in the past. Everything from post-paid phone bills to existing or previous mortgages.
Once you have a good understanding of how your score is calculated, it is time to find out what your score is! You can pay to get your score instantly, however, credit reporting agents are required to provide you your score for free once a year. To get a copy, go to the Equifax website and you can apply to get your free copy. There are also paid options available to help monitor your score.
From here, just make sure you do what you can to keep it in good shape. A few tips are: focus on paying your bills on time, don’t make too many applications for credit and continue to reduce your total outstanding debt.
2. Understand the basics
Sometimes, some of the jargon and structures of a mortgage can be daunting. It makes it hard to know what's good or bad until you get to know the basics! Some of the key things you need to know and think about are:
An offset account is set up to help reduce the amount of interest you pay on your mortgage. Think of it as being a bit like a savings account, that instead of accruing interest it helps reduce the interest you pay on your mortgage. For example, if you have a $500K mortgage and you have $50K in your offset account, you will only pay your mortgage interest on $450K.
The comparison rate is a calculation of all fees and charges associated with taking out the loan, converted into an annual interest rate. For example, your interest rate might be 4% but when you factor in additional fees like account keeping fees for comparison, the rate might be 4.5%.
LVR or Loan to Value Ratio
Loan to value ratio or as it is commonly referred to as “LVR '' is the ratio or difference between what you are buying your home or investment for VS what the bank has received as a value. For example, using round numbers, if you buy a house for $500K and put in a $100K deposit, you will need circa $400K. If the bank gets a value on the property at $500K like you paid for it, the LVR will be:
Also, it is a good tip to use a broker or lender that knows your area. If you are buying a property in Melbourne it's always good to consider Mortgage Brokers in Melbourne. They not only know the lenders; they also understand the local market. Understanding the region and property can really help get the best deal over the line.
LMI or Lenders Mortgage Insurance
LMI or Lenders Mortgage Insurance is insurance the lender takes out on a loan to protect itself against the customer defaulting or not paying their loan back. It is there to protect the lender, not the borrower. It is included in the payments you make. Traditionally, it is only factored in if a deposit of less than 20% is provided by the borrower.
Capacity is a calculation to understand a customer's ability to repay their loan. It is a key indication to help the bank work out how much money you can borrow. It can be quite complex however, simply put, it is the difference between your total expense and your total earnings. The delta is thus your surplus capacity.
Capital gains is thrown around a lot, especially when you are talking about investment properties. It is essentially the profit you make on the sale of an asset. The difference between your purchase price and sale price is thus the capital gain you have made. It is very important as you have to pay capital gains tax on any capital gains you make.
It can be quite difficult to calculate as factors such as your current earnings and how much money you have spent on the property can impact the total. For more information you can read more on the ATO’s page about capital gains.
3. Speak to a broker
It doesn’t matter if it is your first loan, an investment loan or refinance, speaking to a broker is always prudent. Brokers have access to multiple lenders, have a deep understanding of the lenders and really focus on getting their customers the best deals. A few scenarios where a broker can help you are:
If you are self-employed, it can be more challenging to get approved for a mortgage. Not having a PAYG role and being able to provide payslips can really become challenging when you are speaking to a lender directly. Mortgage brokers spend their whole time, looking at, preparing and submitting mortgage applications. They know the lenders to go to and know how to submit an application to get you the best chance of being approved.
Understanding and protecting your income is also very important when you run your own business and looking at buying or refinancing your home. Insurance Expert John Barnes from ProfessionalIndemnityInsurance.com.au says “You should consider how you can protect your cash flow and assets. Products such as Professional Indemnity Insurance help protect assets such as your home if something happens while you are providing your professional services or advice. Protecting your cash flow and revenues means more money coming in the door and will help you get your next mortgage approved.”
Also, If you are already paying off your mortgage on your own, it can be a great idea to reach out to a broker to do a mortgage comparison. Depending on your situation, refinancing can help you reduce the total interest you repay and even shorten the time it takes to pay it off.
It doesn’t matter if it is your home or investment property. Checking you have the best mortgage can save you thousands. Don’t wait, check your mortgage today!
Are you looking for support in your next major financial decision? Chat to the experts from Mortgage Compare Plus for reliable and fast help.
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