Home Improvement

With the amazing capital growth in Australian property over the past few years many customers are using the equity they have achieved in their home to make improvements.

Call MBA today and we can arrange an obligation free valuation of your property so you can learn what possible equity may be available for you to leverage and make your home truly your castle.

Standard Variable

Standard variable home loans are the normal standard home loans that banks supply. These are funded by traditional bank sources such as deposits, etc.

Standard Variable home loans are usually structured with a 'honeymoon' interest rate such as 5.99% for 12 months then reverting to a standard rate.

Fixed Loans

Fixed loans are loans which have a fixed interest rate over a specified period. The terms of these loans are usually from 1 to 5 years although some lenders do have fixed rate periods up to 10 years. Loans can be principal and interest or interest only.

Whilst having some benefits including protecting against future interest rate rises, they can be extremely restrictive due to their nature. When you obtain a fixed rate home loan the lender goes to the money market and borrows the money over a similar period. Due to this fact additional repayments are usually not acceptable.

Also if interest rates fall and you wish to repay the loan in full there is usually a penalty as the bank would have to fulfill their obligation to the money market as they borrowed the money at a higher rate over the term.

To overcome the problems caused by fixed rate loans you are allowed to blend a loan. Please see below for an explanation of this term.

Blending/Split Loans

Blending is the ability to 'split' a home loan so a portion of the loan is under one structure and another portion of the loan is under another structure. Loans can be split as many times as a client wishes but most lenders will have a minimum dollar value for each split and an additional cost for each split is sometimes applicable.

In an example you may have a $200,000 home loan which they want to fix for 3 years. An option for you would be to have $150,000 in a 3 year fixed loan and $50,000 in a standard variable or equity loan. This situation would allow for you to have the security of the majority of the loan being fixed but the balance available for additional repayments, etc.

It must be remembered that not all loans can be blended. Usually loans which are securitised cannot be blended as the lender sells off the loan and the mortgage over the security. The lender cannot sell a portion of the mortgage as the buyer of the loan package wants total control over its security.

Redraw

Redraw is the ability for you to withdraw additional repayments made at a future date. Most redraw facilities have a minimum redraw amount (around $2,000) as well as having a cost associated with the redraw.

Redraw is not applicable to equity accounts as they operate in a different manner and redraw is an integral part of the loan.

Portability

Some loans have portability. This means that you can take the loan as you change properties. This feature of home loans is a marketing tool used by lenders and not much else.

Portability usually has a cost of between $200-300 along with a valuation fee which is about $150. These two costs alone are equal to a new establishment fee. The other cost is loan stamp duty which must be taken into consideration.

Mortgage Insurance

Mortgage insurance is an insurance policy that a lender will take out over the loan that ensures that the security is always of a value to pay out the loan.

Referred to variously as Mortgage Guarantee Insurance (MGI), Lenders Mortgage Insurance (LMI) or, among the securitised mortgage fund managers, Primary Mortgage Insurance (PMI), do not be put off by these different names - it's all the same thing and there are only a few companies offering the product to lenders.

It should always be remembered that even though you pay for this insurance, the insurance policy covers the lender and not the customer. If a lender claims on this insurance due to a default by the customer the insurance company WILL request that the client makes up any shortfall and will pursue all legal avenues in obtaining this money.

Most lenders mortgage insure their loans over an LVR of 80% but some use a lower LVR. Some lenders mortgage insure all their loans, generally as a requirement of securitisation.

Mortgage Reduction

Also known as mortgage acceleration, mortgage elimination and so on, this is the process by which, using an Equity Mortgage account, your entire income is credited to your mortgage account from which household expenditure is then met. Your mortgage account thus replaces your normal bank account.

In this way, every dollar earned becomes an immediate priSncipal reduction, unless and until it is spent elsewhere.

The strategy depends on the fact that all lenders calculate interest charges daily (although they usually debit them only monthly, in arrears). So the day-to-day balance of a mortgage account affects the interest charged just as much as the actual interest rate.

If you use a 55 day interest free credit card to pay as much of your expenditure as possible, they maximise the benefits of the strategy by keeping more of their money holding down the balance of their mortgage account for longer. The credit card "sweeps" a nominated bank account (usually your LOC Mortgage account) to repay itself every month.

The system is potentially very powerful, often cutting by half the term of a customer's mortgage. But it depends on the customer being very disciplined in their budgeting - or, for the rest of us, being provided with budget control and balance tracking assistance, ideally in the form of MORTGAGE MONITOR software.

Because there are now hundreds of "Mortgage Reduction Specialists" out there, often charging exorbitant fees for (in most cases) very little service, there is a danger that the entire concept will become tainted by unscrupulous operators who tend to oversell it.

This would be a shame as the strategy is sound and logical. Please remember that our own MORTGAGE MONITOR software has been independently audited for accuracy by actuaries and has been tested in the marketplace many thousands of times over the years. A genuine case of being the original and still the best!