Mortgage Blog

Redraw Facility - Paying extra pay’s your loan down:   Not necessarily, if you have a redraw facility attached to you’re home loan and you pay extra funds into it, the extra funds sit in the redraw and are available for you to redraw.

The extra funds paid into the account do impact on the amount of interest you pay but the extra funds are not actually being paid off the principle of the loan. If you want to pay extra off the principle you need to contact your Bank or Lender and increase the actual monthly repayments.

 Assets are the same as income:   No matter the strength of your assets (for instance how much property you own or gold bricks you have hidden under the mattress), what makes the difference is your capacity to repay the loan through ‘regular substantiated income’, such as payslips and group certificates.When it comes down to servicing, a Bank or Lender will only lend as much as people can afford to repay. The amount of income earning capacity you have, will ultimately determine how much you can borrow. It’s the credit card balance, not the limit that counts:  When it comes to credit cards it’s not about the balance on your card or cards, it’s the total credit available that counts. Having a large range of credit does not necessarily equate to a good credit history. The same applies to ‘Lines of Credit’.

A fixed rate is always safer than a variable:  Every home loan is different – so too are the needs of each individual and family. What is important to remember is that fixed rates are calculated by capital markets over the period you sign on for, whether that be for three, five or seven years. If variable rates go down during this fixed period, you could end up paying a higher interest rate compared to the standard variable.  

When making the decision to fix, it is worth reviewing your budget, mortgage plan and strategy. Once a loan is fixed, if you suddenly decided to sell your home and or want to change back to a variable loan, you will be faced with break costs which can amount to thousands of dollars. Making your repayments minimum and monthly is the best strategy:  Not true. In fact, the interest on a home loan is calculated daily and is charged monthly, so the more regularly you make repayments, the less interest you pay over the life of the loan.    

A bad credit history doesn’t matter if you eventually pay it off:  Your credit history, records any missed or defaulted payments on such things such as credit cards, interest free contracts and mobile phone plans. A patchy credit history can haunt you – even if it is very old or just a one off small amount. There are two major credit reporting agencies that record all of these debts and lenders consult these agencies before they complete your loan application.

100 per cent home loans = no money upfront  Most people think that a 100 per cent home loan means that they do not have to pay any money upfront – however, this is not true. A 100 per cent home loan does cover the property purchase price, but does not extend to the additional upfront fees involved in buying a home such as legal fees, Lenders Mortgage Insurance, purchase & mortgage duty. Cheapest is the best:  A ‘cheap as chips’ interest rate may be a good incentive to sign on the dotted line, but beware – in many cases these loans may have higher fees and less flexibility, costing you more money over the life of the loan. A standard variable loan at a slightly higher rate with flexible features, such as the ability to make additional and lump sum repayments, can save you more money in the long run.

Personal debts can be rolled into a new home loan:  So you have a car loan and credit card debts, and you want to roll all of these into your home loan?  Makes sense, as the interest rate on your mortgage will be lower than your current rate.  But, first home buyers are not usually able to just throw all their debts together like this.  Usually you have to build up equity in the property and then use this equity to service the additional debt.

Start by paying just the minimum amount:   Many first home owners pay only the minimum monthly repayment, as they adjust to the new financial commitment.  However, at the start of the loan you are really only paying interest so by paying more than the minimum, you quickly reduce the amount of interest and principle on the loan.  As interest is calculated daily, repaying twice a month instead of once per month can also save you thousands in interest.

Refinancing saves you money:   Perhaps you have just bought your first home, and you are enjoying all the benefits of your own home.  Your first time mortgage is going well, but perhaps you fixed your rate six months ago and now rates are coming down, or maybe you want to switch to a different lender.  Refinancing sometimes costs money. In the way of exit fees for existing home loans, and settlement fees for the new loan.  However, the market is quite competitive currently and some lenders are giving all the power to the home owner.  Shopping around and refinancing your home loan can save you thousands over the life of you loan, but can also end up costing you more, so talk your possible choices through with your mortgage broker before making your decision.  Mortgage Insurance protects the borrower:  More commonly known as Lender’s Mortgage Insurance, this form of insurance protects the lender, not the borrower. The less deposit you are able to pay at application, the higher the premium you pay to compensate risk. Generally if you have more that a 20% deposit you are not required to pay Lender’s Mortgage Insurance.  

 

 

 

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Article from: Jason Bryce
November 24, 2007 12:00am
heraldsun.com

THEY claim to act responsibly, but lenders still aim at the young, the uninformed and those already deep in debt, writes Jason Bryce.

Kasey* from Boronia has an addiction that is affecting her work, her health, her relationships, in fact every aspect of her life.

It is not shady drug pushers that have hooked her on a downward spiral with limited opportunities for escape, it has been some of Australia’s biggest, richest, most respected ASX-listed companies.

Kasey is addicted to credit. When she sees advertising offering her money, she applies.

At just 23, Kasey has racked up more than a quarter of a million dollars of debt. Her minimum monthly repayments outstrip her income by almost $500.

“I’m kind of addicted to finances (sic). Now I’m up s–t creek without a paddle.”

Now that her repayments are more than her income, you might think the financial institutions would stop lending her money, but you’d be wrong.

Just last month, she applied to GE Money for another personal loan of $7000. Not only was the $7000 approved, she was offered $10,000.

“I answered all their questions honestly and told them about all my other debts and my income,” says Kasey. “When I was on the phone to them, I was actually kind of thinking to myself. ‘God, I hope they don’t approve this’.”

Of course no one forced Kasey to take on all that debt; she has got herself into this situation. But there is no doubt that she has been actively encouraged all the way.

Even if Kasey didn’t tell the whole truth about her finances when she applied for that last loan, a quick scan of her credit reference file would have indicated that she has applied for many credit cards, personal loans and a big mortgage very recently. Just that information should have rung alarm bells.

She is a classic preferred customer of the debt pushers — she has a property (a small flat) that can be sold if everything else fails, and she is addicted to debt to fund spending.

Kasey might be in big financial trouble at just 23, but at least she isn’t officially bankrupt, unlike Matt*.

Matt, 25, is a shop assistant from Reservoir, the eldest of four children. He has used credit cards and personal loans to help his single mother with family expenses. Matt entered into a debt agreement (under part nine of the Bankruptcy Act) with his creditors in April 2006 after he ran up $47,000 in unsecured debt to ANZ, Citibank and GE.

His debt agreement means he is legally insolvent. The agreement remains on his credit reference file for seven years.

You might think that no lender would touch an insolvent person, but you would be wrong.

Recently, Matt was approved for a CreditLine card he applied for at The Good Guys in Thomastown. Matt’s debt agreement has now failed and he is filing for full bankruptcy.

GE Money corporate affairs manager Geoff Lynch says: “We would not knowingly extend credit to customers receiving unemployment benefits, who are insolvent or who, for any other reason, are over-extended.”

However, Mr Lynch says, sometimes genuine mistakes are made in the approval process.

“GE Money is a responsible lender and we take that obligation very seriously. It is certainly not in our interest to have customers default on their repayments.”

It may not be in a lender’s interest to have their customers default, but it is also not in their interest for customers to be paying back their cards and loans quickly.

Carolyn Bond, co-chief executive of the Consumer Action Law Centre, says: “Lenders are targeting the people who struggle a little bit to pay off the balances.

“The people who can’t pay their credit card off, but don’t default completely, are the most profitable customers for the lenders.”

The number of defaults and bankruptcies is skyrocketing despite the long economic boom. The number of Victorian bankruptcies and insolvencies is four times higher now than at the peak of the last recession, in 1989-90.

To reduce debt problems, lenders say they need access to more information about us in our credit reference files. GE Money is one lender that has been at the forefront of this debate, pushing for comprehensive credit reporting reform.

Mike Cutter, GE Money’s president and chief executive for Australia and New Zealand, told banking industry newsletter The Sheet in July: “We want full positive credit reporting because it tells lenders how people are managing their existing credit accounts.

“That is the best indicator of whether a person is able to take on more credit.”

The current system of credit reporting includes all applications for credit made in the past five years, bankruptcies, insolvencies, and usually any previous defaults.

That’s more than enough information to raise questions about Kasey and Matt’s ability to repay, even if they lied about their finances when applying.

Also undermining the arguments of the lenders in this debate is the fact that many institutions are approving credit to distressed borrowers more than once.

A good example is retrenched storeman Jacek*, from Narre Warren.

In addition to two mortgages, a big personal loan and credit card all from St George Bank, he has two American Express cards and two Commonwealth Bank credit cards. He also has two car loans and three other credit cards.

Even if St George, Amex and Commonwealth didn’t get enough information from his credit reference file to inform their decisions, they definitely did know what they themselves had lent him in the past, and his atrocious record of paying that credit back.

“Increasingly lenders are targeting people with debt already and people with equity on their homes,” says Carolyn Bond “There is nothing in their current lending practices to indicate that more information would produce more responsible lending.

“I have concerns that more information in credit reference files might create more debt marketing opportunities,” she says. “A person might apply for $5000 for example, then the lender sees they have a lot of other debt and says, ‘Do you want $100,000 to consolidate all that?”‘

Many people in the industry of debt consolidation, refinancing and debt assistance agree that lenders have well and truly headed down-market.

Donna Elliott, a mortgage broker and debt administrator based in Malvern, says: “The theory is that you can afford it if you can cover the interest — that way the lender can get a full whack of interest each and every month.

“Sometimes they work on the premise that a person only needs to repay 3 per cent of their total outstanding balance each month.”

Once they are in debt and feeling the stress of high repayments, Elliott says people are less likely to make clear decisions and plan sensibly.

“A lot of people with debt problems are suffering severe stress or depression,” she says. “They become very reactive and don’t make clear decisions.”

Dave* is an unemployed courier from Geelong trying to overcome a gambling problem he paid for with credit cards. Dave says he has been depressed since he lost his job and marriage, and readily admits that he did lie when applying for his numerous cards.

“It’s definitely a two way street,” he says. “I have been really stupid, but they encouraged me all the way. I was never asked to prove my income.

“Loneliness and depression sent me to the TAB. Now sometimes I think, ‘What’s the point of living?’ There’s a lot of people going through the same feelings as me.”
Kasey is in just that situation now.

“People say to me, ‘You are 23 — how can you have health problems from stress?’ But they don’t know the trouble I have got into.

“Now I have a stomach ulcer, I suffer from depression and anxiety, I’m secluded and my relationships are suffering,” she says.

With a good job and salary, Kasey should be enjoying the best times of her life.

Instead she is suffering from the same kind of symptoms that a drug addict might have. She is addicted to debt.

*Cases-names have been changed.

Phone: 1300 735 161

www.mrsmortgage.com.au

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SOURCE: Lesley Parker - The Age 12 Jun 2008