Mortgage Secrets

An informed decision, is a good decision!

Through this reportwe hope to stimulatethought and to detailpoints that home loanborrowers shouldconsider as part of their lender/broker and loan selectioncriteria.It's reported that inAustralia there arecurrently in excess of 300 lenders and or mortgage managersand over 12,000mortgage brokers.In Australia today, in excess of 40% of all home loans arearranged by mortgage brokerswith that figure following overseastrends and growing each year.Based on the trends in other countries, Australia couldreasonably expect to see inexcess of 60% of home loansarranged through mortgagebrokers.To add to the confusion there areseveral hundred different loanproducts for borrowers to choosefrom.With this great diversity in bothlenders and loan products camethe rise of the largely unregulatedand often maligned mortgagebroking industry.After years of branch closures andreductions in face to face servicemany banks realized that their traditional clients were leavingthem. Now as they compete witheach other and the plethora of non-bank lenders and mortgagebrokers to get their share of loansplaced, accurate information cansometimes be the victim.It is essential that every personconsidering a mortgage shouldmake an informed decision not just about the loan product that'sright for them but also who theywill approach to arrange that homeloan.

E X P O S E D

Never before have Australian borrowers had so much choice when it comes to the selection of a home loan and with that range of choices can come confusion and misinformation. In this report we expose many Australian mortgage secrets and myths as well as giving some practical tips on the best way to secure your next mortgage.

All I want is the lowest rate!

Does that seem like a logical way to determine which loan product you'dchose? Unfortunately, it's not that simple. After all you wouldn't buy a car basedon the lowest price. Just like cars, mortgages come in many models with lots of features.For example, on paper a lender offering a one year low rate (Honeymoon rate)would have the lowest rate. However, when you look at some of the restrictionsthat may apply to that loan it may in fact be a more expensive loan.The loan may for example only allow monthly payments. It may prevent youfrom making lump sum payments and it may not have things like re-draw or lineof credit facilities. It may also have higher account keeping charges and a noncompetitive rate in the second year.

In this report we try to explain that "there is no such thing as a free lunch" just as the loan with the lowest rate may in fact be the most expensive loan for you.

CONTENTS

All I want is the lowest rate: 1Are non bank lenders safe: 2Secret Commissions:2Insurance rip off:2Know the process:3Which loan type:3What are the real costs:3Property valuations:4Why do banks say no:4Broker v Bank:5Choosing a broker:5How do brokers get paid:6Accountability and Fraud:6Bait and Switch:7Doubtful withdrawals:7Dealing with a broker:7Know your credit history:8Repayment penalty:8Recommendations:8

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In NSW, Victoria and Western Australia, Mortgage Brokers are required todisclose all commissions and benefits they will receive as a result of doing your home loan application.

The same laws do not apply to bank staff who may receive a commissionas a result of doing your home loan application!Many bank staff also receive commissions for insurance products they sellyou.It was argued by consumer groups that the recommendations of brokerscould be influenced by commissions being paid. Surely the same rulesshould apply to bank staff.

TIP:If you're considering a bank loan ask the bank staff "how muchcommission are your making as a result of the loan you'rerecommending?"

Are non-bank lenders safe?

Traditionally Australian's haveapproached the "family bank" whenthey needed a home loan. Thingsstarted changing about 15 years ago asa number of non-bank lenders startedappearing.Some argued that this new style of lender would neither last or offer comparable loan products. Well, notonly have they lasted but many alsooffer loan products more competitivethan the big five banks.These new lenders are often funded byorganisations such as PermanentTrustees or Perpetual Trustees who areas "safe as houses" so don't be put off a lender just because they aren't one of the big five because there are somegreat loan products out there.

TIP:If you're considering a loanthrough a bank, talk to your mortgage broker and see if they can getyou a better deal through a non-bank lender.

Secretcommissions?

Insurancerip off?

When you take out car insuranceyou get a 1 year policy not a "life of the car" policy. Yet when you get ahome loan it will most likely haveLenders Mortgage Insurance or LMIand LMI is for the "life of the loan".LMI provides protection for thelender should they lose money onyour home loan.Given the average home loan isabout 3 to 5 years and 99.99% of borrowers fully discharge their mortgage how can insurers getaway with this.

Consider this example.

You borrowsay $350,000 and you'll pay about$5,000 in LMI. 3 years later yourefinance with another lender or perhaps sell that property and buyanother and again you'll payanother $5,000 in LMI.LMI should be a normal part of theday to day operation of the lender'sbusiness and paid for by them asthey do other insurances. Thosecosts are then amortized acrosstheir product range just like allcosts. Having the borrower paythese costs simply encouragesloose lending practices with highLVR loans being given to borrowerswho simply shouldn't have them.Some lenders don't pass on LMI if you borrow less than 80% of your properties value but may have other "early discharge" fees instead.These lenders advertise that theydon't charge for LMI and thencharge you and exit fee of anythingup to 5% if you payout your loan toosoon.Early discharge fees are normallyon a sliding scale with the fullamount payable in the first year.

TIP:Double check your exitcosts for any loan you'reconsidering.

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Know the process!

They say information is power and that certainly applies to the process of obtaining a mortgage settlement. The borrower

’

s broker should explain the approval and settlement process as well as keeping the borrower informed along the way. In simple terms consider these time lines:

Conditional approval:

Anywhere from 1 to 2 daysdepending on the lender.

Valuation:

Allow 4 days fromthe date they were instructed.Where the valuation is for apurchase, consent has to beobtained from the vendor and thetenant, if there is one, to getaccess to the property.

Unconditional approval:

Allow5 days from the date thevaluation is provided and allsupporting documents havebeen received by the lender.Lenders cannot provide anunconditional approval unless allsupporting documents havebeen provided and found to besatisfactory.

Settlement:

This can varydramatically. It the loan is simplyfor a refinance with the samelender then settlement can occur more quickly.If however you're buying aproperty the settlement date isusually set by the vendor.As a rough guide, assuming allthings go as planned a mortgagefor a property purchase shouldsettle within 8 weeks and arefinance with the same lender within 4 weeks.If you have a need for an urgentsettlement you should discuss itwith your broker.

TIP: Your loan application willbe processed far quicker if you supply all requiredsupporting documents as theyare requested.If your loan is to consolidatedebts such as credit cards or personal loans, contact thosecompanies and confirmpayout figures. Don't guessas some lenders may havedischarge fees that may leaveyou short.

Which loan type?

The Australian mortgage market may be small but there are more loanproducts than there are days of the year.

For example:

Standard variable, honeymoon, fixed interest, interest only,Line of Credit, lo doc, no doc, Reverse Mortgage,professional pack and private loans to name just afew.When considering what loan type best suits,borrowers should avoid simply adopting the approachof “we want the lowest interest” loan.

Borrowersshould compare features not just rate.

For example, a low rate honeymoon loan may notallow extra repayments and may have higher monthlyon-going fees.Whereas a competitive variable rate may allow all of that plus have re-drawfacility with internet and ATM support. There are substantial benefits inbeing able to make weekly payments.Your mortgage broker can explain which loan type best suits your personalor financial circumstance and has the loan features you require.You should be very cautious when considering any loan with a honeymoonrate. Where such a rate is being considered borrowers should assess costsand payments for at least 24 months

after

the end of the honeymoon period.......... remember there’s no such thing as a free lunch. The lender isn'tgiving you a low rate just so they feel good about it.

TIP:Don't just consider the costs of getting the loan, look closely atthe costs you're required to pay when you pay back the loan.

What are therealcosts?

As with any major purchase there are many costs associated withobtaining a home loan. All borrowers should ensure that their mortgagebroker provide a detailed list of costs. While some of these costs maybe estimates, they should be sufficient to allow the borrower to gain anunderstanding.Some of the costs associated with a mortgage include:Application fee, valuation fee, lenders legal fees, Lenders MortgageInsurance (LMI), redraw fees, on-going fees, stamp duty and earlydischarge or exit fees. These are just some of the fees a borrower mayface.

TIP:Ask your broker to get you a list of all known entry and existcosts for any loan you're considering. Watch out for high exitcosts if you don't intend having a loan for more than 5 years.

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