NOT looking to move house this year, but you want more from a mortgage? You are not alone. For first home buyers, home loan affordability has reached its highest level in more than a year, property industry experts say. House prices will likely remain weak for the next year. So, it's a good market for first home buyers who can afford to enter the market.
Those with an existing mortgage may decide to refinance to save money or to get the features they want.
Some home owners may find it difficult to sell a property. If so, you may decide to stay put, and make cosmetic changes or undertake extensive renovations.
Others may decide to buy an investment property cheap using their home equity. So, in all these situations, Wealth tells you how to get more out of a mortgage:
Expect a discount There are also lower rates than the "average standard variable" available at some non-major banks that are not dependent on how much you borrow.
Looking at a random list of lenders' interest rates from loan watcher InfoChoice, standard variable rates range from 6.2 per cent to 7.32 per cent. That's a more than one per cent interest rate difference for a standard loan.
For example, New Loan has a 6.7 per cent Bank Beater home loan, which allows unlimited redraws and extra repayments with no ongoing monthly fees, while super fund bank Members Equity has a 6.7 per cent standard variable loan with similar features.
"If you did go for a cheaper loan with a non-bank, you could then find a fixed-fee transaction account from your regular bank like ANZ's Access Advantage Account for $5 a month; or, if you are a non-Queenslander with a Suncorp account you can bank in other states on foreign ATMs for no charge," according to Denis Orrock, general manager InfoChoice.
To avoid being charged bank fees for making loan repayments from a major bank to another lender, consider using direct debit (where your lender debits your account costing you nothing) versus you making periodical payments (where you organise payments from your end but they cost $5 each adding up to $300 a year if you make weekly repayments).
'Professional' package or stand-alone Qualifying for a "professional package" may be based on your occupation or your salary, but mostly it depends on your ability to service the debt, which simply means your income.
"With the average Australian home loan now $262,000, most people qualify for a discount," Orrock says.
The package fee wraps in fee-free banking on own-bank ATMs, monthly account keeping fees, credit card annual fees, and flexibility such as loan switching, general insurance and margin lending discounts.
"How valuable all of this is to you depends on your use of the package," Orrock says.The drawback is that paying package fees is expensive if you have just one property and don't have enough equity and/or cashflow to buy another.
So, unless you can use a major bank's package well, you could save thousands of dollars in interest and fees by choosing a stand-alone loan with another lender which charges a lower interest rate, has nil package fees, and allows you to run normal transaction accounts with them plus access a low rate credit card.
The tables opposite show the savings generated by taking a lower interest, stand-alone loan with a second-tier bank like HSBC, Suncorp, or BankWest - minus package fees. The exercise involves using the $300 + package fee as a hypothetical extra loan repayment to a rival lower interest loan - to show savings generated over the loan term. Savings of up to $40,000 are possible. Check if there are ongoing loan fees but there aren't any with the three lenders used in this comparison example.
Multiple properties "In a package, you can expect savings on loans beyond the first property, including nil loan application fees on subsequent properties, possibly nil valuation fees, nil annual gold credit card fees and possibly reward program joining fees," according to Ian Jordan, general manager with mortgage broker, The Mortgage Store.
Standard vs basic variable An alternative is a "basic variable" loan that is less flexible. For example, it may limit redraws and will not have an offset account.
Yet, basic rates at the majors sit around 6.7 per cent so are worth a look.
Try to establish the features you really need. A redraw is handy as it allows you to redraw extra repayments for emergencies or renovations and so on.
An offset account allows you to have a tax effective savings account linked to your home loan where interest earned is set against your mortgage. It is useful but not necessary.
Use a low fixed rate "Fixed rates are still just under standard variable so it's still a good time to fix - but it may not be for much longer," says Jordan.
So, if you are feeling pressured, consider a fixed rate. Note that you may need to pay a fee - $500 or $600 not uncommon at a major bank - to "lock in" the rate you want till it is processed.
Or hedge your bets and split your loan in whatever proportions you wish. For example, 60 per cent variable and 40 per cent fixed. For example, National Australia Bank's three-year fixed home loan rate is 6.62 per cent, far less than the 7.32 per cent standard variable rate; Westpac's is 6.75, non-bank RESI's is 6.72 per cent and ANZ 6.65 per cent.
Lisa Montgomery, manager consumer advocacy at non-bank RESI, cautions that fixed rates are inflexible. "Some allow extra repayments, but only up to a set dollar limit." You cannot usually redraw on a fixed mortgage. And, if you repay it early expect to pay "economic cost" fees, plus early repayment penalty fees.
Renovate or construct? If you believe you will undertake a major renovation down the track, having a loan with a linked construction option is useful. Some major banking packages offer this option as a standard feature.
Some stand-alone loans don't so you may need to refinance to undertake an extensive renovation. Usually, you will need a construction loan to build a new house on a block of land or to undertake major renovations on an existing property that require council approval.
"Replacing a kitchen or bathroom is cosmetic so you can use your redraw facility if you have made extra repayments, but adding a second storey, knocking down walls and so on is considered major renovation," according to Andrew Parsons, head of product at Wizard.
"As a rule of thumb, if you need council approval, you should always consult your lender."
The idea with a "construction loan" is you can draw down on the loan to pay builders and tradesmen, but you only have to make interest only repayments until work is complete. After that, you must pay principal and interest. "This is handy for people who say borrowed $400,000 to finance their purchase of a property, then need another $200,000 to finance major works on it," says Parsons. "They can't borrow more than $400,000 initially, but the valuer assesses the works as they progress, allowing a borrower to draw down funds as 'value' is built up."
Under a construction loan, a lender will usually demand that the borrower and the builder enter into a fixed-price contract.
"This can save the borrower a lot of money versus them getting a mate to do it without a contract for cash -- with major cost over-runs the result."
A halfway measure is a renovation loan.
For example, Wizard Home Loans's Renovation Rescue package allows for a $10,000-$100,000 line of credit, free cheques, a MasterCard and discounted renovation supplies. St George, Aussie Home Loans, and Mortgage House also offer loan deals for renovators.
With house prices stagnant in states like NSW and Victoria, but booming in Western Australia, prospective home buyers face very different conditions from the hot markets of a few years ago.
First, if you are borrowing more than $150,000, you should be paying less than the average 7.32 per cent standard variable rate. If you are borrowing $250,000 or more, expect a bigger discount. Those are typical "package" discounts available at major banks.
Major banks offer discounts via a package - where the customer gets a 0.5 to 0.7 per cent discount off the regular rate, but then must take gold credit card/s and transaction accounts plus pay a hefty package fee.
Banking packages have the most value for individuals or households with multiple properties or those who have all their business with the one bank.
A standard variable loan usually denotes a fully featured loan with a redraw facility and an offset account.
Three-year and five-year fixed home loan rates are still below the average 7.32 per cent standard variable rates. This means they remain good value.
A recent Datamonitor report commissioned by mortgage insurer Genworth found nearly 40 per cent of home owners planned to undertake some type of "home improvement" in the next year, inspired by TV programs such as Better Homes and Gardens, Backyard Blitz and Changing Rooms. "In some cases, home improvements are seen as a better option to 'trading up' as high property prices prevent the purchase of a larger property," the report says.
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