Mortgage Secrets



An informed decision, is a good decision!

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.
Through this report we hope to stimulate thought and to detail points that home loan borrowers should consider as part of their lender/broker and loan selection criteria. It's reported that in Australia there are currently in excess of 300 lenders and or mortgage managers and over 12,000 mortgage brokers. In Australia today, in excess of 40% of all home loans are arranged by mortgage brokers with that figure following overseas trends and growing each year. Based on the trends in other countries, Australia could reasonably expect to see in excess of 60% of home loans arranged through mortgage brokers. To add to the confusion there are several hundred different loan products for borrowers to choose from. With this great diversity in both lenders and loan products came the rise of the largely unregulated and often maligned mortgage broking industry. After years of branch closures and reductions in face to face service many banks realized that their traditional clients were leaving them. Now as they compete with

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

each other and the plethora of non-bank lenders and mortgage brokers to get their share of loans placed, accurate information can sometimes be the victim. It is essential that every person considering a mortgage should make an informed decision not just about the loan product that's right for them but also who they will approach to arrange that home loan.

All I want is the lowest rate!
Does that seem like a logical way to determine which loan product you'd chose? Unfortunately, it's not that simple. After all you wouldn't buy a car based on 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 restrictions that 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 you from making lump sum payments and it may not have things like re-draw or line of credit facilities. It may also have higher account keeping charges and a non competitive 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.

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Are non-bank lenders safe?
Traditionally Australian's have approached the "family bank" when they needed a home loan. Things started changing about 15 years ago as a number of non-bank lenders started appearing. Some argued that this new style of lender would neither last or offer comparable loan products. Well, not only have they lasted but many also offer loan products more competitive than the big five banks. These new lenders are often funded by organisations such as Permanent Trustees or Perpetual Trustees who are as "safe as houses" so don't be put off a lender just because they aren't one of the big five because there are some great loan products out there. TIP: If you're considering a loan through a bank, talk to your mortgage broker and see if they can get you a better deal through a non-bank lender.

Insurance rip off?
When you take out car insurance you get a 1 year policy not a "life of the car" policy. Yet when you get a home loan it will most likely have Lenders Mortgage Insurance or LMI and LMI is for the "life of the loan". LMI provides protection for the lender should they lose money on your home loan. Given the average home loan is about 3 to 5 years and 99.99% of borrowers fully discharge their mortgage how can insurers get away with this. Consider this example. You borrow say $350,000 and you'll pay about $5,000 in LMI. 3 years later you refinance with another lender or perhaps sell that property and buy another and again you'll pay another $5,000 in LMI. LMI should be a normal part of the day to day operation of the lender's business and paid for by them as they do other insurances. Those costs are then amortized across their product range just like all costs. Having the borrower pay these costs simply encourages loose lending practices with high LVR loans being given to borrowers who 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 they don't charge for LMI and then charge you and exit fee of anything up to 5% if you payout your loan too soon. Early discharge fees are normally on a sliding scale with the full amount payable in the first year. TIP: Double check your exit costs for any loan you're considering.

Secret commissions?
In NSW, Victoria and Western Australia, Mortgage Brokers are required to disclose 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 commission as a result of doing your home loan application! Many bank staff also receive commissions for insurance products they sell you. It was argued by consumer groups that the recommendations of brokers could be influenced by commissions being paid. Surely the same rules should apply to bank staff. TIP: If you're considering a bank loan ask the bank staff "how much commission are your making as a result of the loan you're recommending?"

Improve your house value
If you're looking a refinancing or selling your house you can now get software that guides you though techniques you can use to get a better sale price or a faster sale or if your refinancing, get a better valuation.

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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 days depending on the lender. Valuation: Allow 4 days from the date they were instructed. Where the valuation is for a purchase, consent has to be obtained from the vendor and the tenant, if there is one, to get access to the property. Unconditional approval: Allow 5 days from the date the valuation is provided and all supporting documents have been received by the lender. Lenders cannot provide an unconditional approval unless all supporting documents have been provided and found to be satisfactory. Settlement: This can vary dramatically. It the loan is simply for a refinance with the same lender then settlement can occur more quickly. If however you're buying a property the settlement date is usually set by the vendor. As a rough guide, assuming all things go as planned a mortgage for a property purchase should settle within 8 weeks and a refinance with the same lender within 4 weeks. If you have a need for an urgent settlement you should discuss it with your broker. TIP: Your loan application will be processed far quicker if you supply all required supporting documents as they are requested. If your loan is to consolidate debts such as credit cards or personal loans, contact those companies and confirm payout figures. Don't guess as some lenders may have discharge fees that may leave you short.

Which loan type?
The Australian mortgage market may be small but there are more loan products 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 a few. When considering what loan type best suits, borrowers should avoid simply adopting the approach of “we want the lowest interest” loan. Borrowers should compare features not just rate. For example, a low rate honeymoon loan may not allow extra repayments and may have higher monthly on-going fees. Whereas a competitive variable rate may allow all of that plus have re-draw facility with internet and ATM support. There are substantial benefits in being able to make weekly payments. Your mortgage broker can explain which loan type best suits your personal or financial circumstance and has the loan features you require. You should be very cautious when considering any loan with a honeymoon rate. Where such a rate is being considered borrowers should assess costs and 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't giving you a low rate just so they feel good about it. TIP: Don't just consider the costs of getting the loan, look closely at the costs you're required to pay when you pay back the loan.

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What are the real costs?
As with any major purchase there are many costs associated with obtaining a home loan. All borrowers should ensure that their mortgage broker provide a detailed list of costs. While some of these costs may be estimates, they should be sufficient to allow the borrower to gain an understanding. Some of the costs associated with a mortgage include: Application fee, valuation fee, lenders legal fees, Lenders Mortgage Insurance (LMI), redraw fees, on-going fees, stamp duty and early discharge or exit fees. These are just some of the fees a borrower may face. TIP: Ask your broker to get you a list of all known entry and exist costs for any loan you're considering. Watch out for high exit costs if you don't intend having a loan for more than 5 years.

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Property valuations
The property valuation is the key to any loan proceeding to settlement. In all cases a lender will instruct their own "panel" valuer to value the security property in accordance with their own criteria. Because of this most lenders will not accept a valuation commissioned by another lender.
The valuers who act for a particular lender are called “panel valuers”. Lenders will traditionally lend at either valuation or purchase price, whichever is the lessor. A good idea for borrowers is to buy a property report from a company like Australian Property Monitors. Their Premium Home Price Guide will cost $59.95 and shows comparison per street rather than just by postcode as some reports do. NB: These reports are not valuations and should not be relied upon. An opinion from your local Real Estate agent is not a valuation and is nothing more than a price they would like to sell the property for if you were to appoint them as your agent. When the valuer values a property they take into account a wide range of factors including: condition of the property, land size, comparable valuation has been done you'll be required to pay for another valuation or if the same valuer is used the costs of assigning that valuation to the new lender. Valuation disputes: We all think that what we own is worth more than it really is so be mindful of this when the valuation report comes in. Valuers value properties at arms length from any influence and base their valuation on sales history and trends. If a borrower feels the need to dispute the content of a valuation report they should take it up with their mortgage broker who will then represent their concerns to the lender. TIP: Before you start the application process check what's been sold recently in your area and compare it to your home. Then buy one of the reports mentioned above. This way you can make an informed decision.

properties locally, comparable recent sales and the market trend in the area ie are property prices going up or down. As a matter of policy most lenders won't supply you a copy of it and if you change lenders after a

Why do banks say NO!
There are many reasons why a bank could say no to your loan application. Here are some of them:1. Your income isn't high enough to comfortably make the loan repayments. Each lender has their own way of calculating that and for most loans the lender is required by law to be satisfied that you can repay the loan. 2. You haven't been in your current job long enough or you've been changing jobs too frequently. 3. You don't have a good savings record. 4. Your credit history isn't good. While some lenders are getting more flexible with isolated problems most still take a hard line. 5. You have too many enquiries from lenders on your credit history. 6. You are the director or a company which cannot provide tax returns. 7. The mortgage insurer declines your loan even though the lender recommends it. There are only 2 mortgage insurers in Australia and they have the final say on all loans that have LMI, not your lender. TIP: If any of the things mentioned above even slightly fit you, talk to your broker and explain your position. You are better off lodging your application with a lender who will approve it.

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Broker v Bank
BANKS: The Australian borrower has had a long

The very first thing to understand is whether you do a loan through a broker or a bank, both are businesses and both are doing your loan to make money. The essence of any decision making is having enough information to make the right decision. The very first decision a borrower needs to make is whether to go direct to a bank or use a mortgage broker?
history of supporting their “family” bank however over recent years that has changed for a wide range of reasons. Pros: • Standard well publised loan products. • Long lending history Cons: • Limited product range. • Frequent staff changes • No requirement to disclose secret commissions so long as borrowers do their homework before commissioning a broker it should be a positive experience. Conclusion: There is no doubting that by using a mortgage broker you will have far greater loan product opportunities particularly if you don't fit the standard bank mold. See the selection of your broker as a long term relationship whereby they can assist you with all your finance requirements both now and in the future.

MORTGAGE BROKERS: Over recent years it

seems that there is a mortgage broker around every corner and that the high level of competition has been a windfall for borrowers. However at times it has also brought out the bad elements in the industry. Pros: • Larger range of loan products from many lenders. • More customer service oriented • Regulated in NSW, Qld and WA. Cons: • Un-regulated in a Tas, NT, SA and Act. • No restriction on entry into the industry. There are many quality brokerage firms out there and

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Choosing a mortgage broker
There are a number of basic but key things a borrower can do to shortlist a good broker. Brokers should answer yes to each point:a. Are they a member of a professional industry body such as Australian Institute of Mortgage Brokers - AIMB or Mortgage and Finance Association of Australia MFAA or Finance Brokers Association of Australia - FBAA. b. Do they use an approved “Finance Broker Contract” which discloses fees and costs? c. Has their company been in business for more than 12 months and check out their website for information and testimonials. d. Do they conduct a thorough “needs analysis” before submitting a loan application. This is perhaps the most important point. Realistically it is impossible for any broker to assess which loan product is right for a borrower if they don’t take the time to complete a “needs analysis” with the borrower BEFORE an application is prepared. It is far to simplistic to say that every borrower wants the best interest rate. Clearly if that were the case there would only be one lender. The diversity of product features and the complexity of the borrower’s needs dictate that a “needs analysis” should be essential. e. Does the broker hold Professional Indemnity insurance? TIP: Talk to family and friends and get their recommendation.

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How do mortgage brokers get paid?
The mortgage broking industry attracts many thousands of new brokers every year and unfortunately many find it too difficult to continue. One of the greatest issues is payment to brokers. In the majority of cases a broker is paid a "settlement commission" which is also referred to as an "upfront commission" because it's paid to the broker in the weeks following the settlement of your loan. Settlement commission: The settlement commission is traditionally around the .7% of the loan amount settled. For example that would represent $2,100 on a $300,000 loan. This is not paid by you, it's a commission that's inbuilt into the interest rate. Claw-back: Unlike any other business in Australia the broker can have the "Settlement commission" taken back from them or "clawed back" if you were to refinance within a certain period. Some lenders have a claw-back period of 18 months. This effectively means that even though the broker arranged your home loan for you to your total satisfaction and to the lenders full requirements they could have done all of that for nothing if you refinance away from the lender or pay-out your mortgage. Trail commission: On some loan products lenders will also pay the broker a "trail commission" each month provided you've paid your mortgage on time. The "trail commission" is around .25% per annum. That would be a monthly commission of $62.50 for a $300,000 loan. If you pay your mortgage one day late, the broker doesn't get the trail commission. Not all lenders pay trail commissions. Brokerage fee: Some lenders don't pay either settlement or trail commissions and therefore the broker will charge a "brokerage fee". This fee should be agreed to by you and fully disclosed in your initial agreement with the broker. TIP: For a mortgage broker to be successful in todays competitive market place they need to maintain a quality professional relationship with their clients and that's great for you as a borrower. You have every right to expect a very high level of ongoing service and support from your mortgage broker.

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Accountability and fraud
Mortgage fraud and identity theft are growing at a rapid rate in Australia. What we as borrowers must do is question lenders about their "due diligence" procedures when they process mortgage applications. Those lenders who aren't thorough enough don't deserve your business. As borrowers we should not use any lender who doesn't take the preservation of our identity and assets seriously. No valuation: As unbelievable as
it may seem, there are some lenders out there who don't do a full property valuation if the LVR is below a given level. purchased one month and then sold for almost double within months under "flipping scams" that involve stolen identities. In an interview on A Current Affair a spokesperson for a major bank said that it simply wasn't possible to verify everything in a standard mortgage application ... time and costs didn't permit it. That position is unconscionable as it only serves to allow mortgage fraud and identity theft to grow. If you become a victim of identity theft it will have a huge negative impact on your life for many many years to come. Two faced: On one hand you have lenders taking shortcuts with verifying the authenticity of documents whilst on the other hand those same lenders will argue that we need to be more careful in protecting our identity. TIP: Ask your broker to explain any proposed lender's due diligence process. You want a lender to be strict with verification.

No employment verification:
There are also lenders who don't contact employers to confirm employment.

Sales history:

Most lenders don't check the sales history of the property being financed. There have been many examples of properties being

Bait & Switch
This trick is so old as the hills yet we all keep falling for it. This is how it works. You see an advert offering a great interest rate or perhaps with some great features or perhaps even guaranteed approval. Often these adverts are placed by brokers and targeted at people who can't normally get credit through conventional sources. They also are aimed at borrowers looking for the lowest rate in town. Having called the broker or lender to take up what appears to be a great offer you are seduced into believing that everything looks good so you lodge your application and supply the supporting material. Then, surprise surprise you're told that you don't qualify for that particular loan or that the features are ridiculously restrictive but you will qualify for a loan with a higher interest rate. By now with a bit of pushing from the broker/lender you feel so committed to the process you'll most likely go ahead with what's now being offered. The truth of the situation was that the offer you responded to was most likely never available to you. That is Bait and Switch. TIP: If it sounds too good, it most likely is. Before you respond to any offer that stands out from the rest do your homework before you respond.

Be clear in yourself that what's offered is genuine and that the company offering it is reputable.

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Doubtful withdrawals
When a lender is assessing your mortgage application they'll examine how you conduct your financial affairs. They do this by looking at your bank, loan and credit card statements. Where they see constant withdrawals from a hotel, club or casino bells will ring as they will have natural concerns that you may have a gambling problem. Seeing these withdrawls may be enough to have your loan application rejected or at least more closely examined.. TIP: If you have a number of these withdrawals in your statements be upfront and honest with your broker so that they can best represent your position to the lender.

Tips for dealing with a mortgage broker
In other parts of this report we discussed how to select a mortgage broker. In this section we look at some tips to follow when dealing with them and building your relationship. As we said in the Broker v Bank section you should treat your relationship with your broker as an on-going one just as you would with your local butcher, mechanic or hairdresser. 1. Always ensure that you have an agreement in place with the broker before you lodge a formal loan application. That agreement should disclose fees and your loan requirements. This can be amended as needed. In NSW, WA and Victoria this is a legal requirement. 2. Always be totally honest about your personal and financial position. 3. Don't set your goals at unrealistic levels. Your broker can explain just what can and cannot be done. For example if you have a credit problem don't expect an A grade bank style loan. 4. Never accept just one loan product recommendation from a broker without a very good explanation. These days a good mortgage broker should have over 100 lenders in their resource. 5. Always supply any requested supporting documents quickly. This is the greatest factor in slowing down loan settlements. You'll be amazed how fast your home loan approval can go when you act quickly and supply all documents promptly. 6. If your broker does a great job for you, tell your family and friends. If you have a bad experience, talk to the broker and if there's no satisfactory resolution tell your family and friends. 7. Don't shoot the messenger. Your broker is the conduit between you and many lenders. If a lender declines you work with your broker to get an approval elsewhere, don't blame the broker.

Know your Credit History!
One of the key factors faced by Australian borrowers is the condition of their credit history as maintained by Veda Advantage.
Borrowers should treat their credit history with great respect, as every lender the borrower applies to for a loan will do a credit check with Baycorp. Whenever a credit enquiry is done by a lender that enquiry leaves what is called a “foot print” showing who has made the enquiry and the reason for the enquiry. In many cases lenders may decline a loan application because of the number of enquiries on the borrower’s credit report. In Australia we have "negative" reporting. This means that only non payments, defaults and enquiries are listed. A borrower could have paid their credit card payments on time for 20 years and then have a minor problem that wiull be listed. The difficulty in Australia is that all that is recorded is a loan amount, who enquired and the nature of the enquiry. There is no record to show whether the loan was actually taken up. If a borrower has unpaid defaults those defaults will remain on their report for 5 years after they are paid. On the other hand, bankruptcy records are maintained for up to 8 years after discharge. Once borrowers are clear about what’s on their credit file they should then examine their budgets and see just how having a mortgage or a revised mortgage would impact on that. TIP: Obtain a copy of your own credit report by calling Veda Advantage on: 1300 762 207.

We would recommend that all borrowers use these simple recommendations as their guide for a triuble free loan settlement.
1. Get a copy of your credit report and dispute any inaccurate entries. 2. Get a property report as explained in "Property Valuations". 3. Realistically assess what type of loan suits your credit, employment and property circumstance. 4. Ask family and friends for broker recommendations. If they can't recommend any, let your fingers do the walking and speak to a few. 5. Interview your broker and only proceed if you're comfortable with their professionalism. 6. Get your agreement with your broker in writing BEFORE you lodge a formal loan application. 7. Lodge your application and supply all requested supporting information quickly. 8. Double check all amounts that are to be paid out with your loan ie credit cards and personal loans so you are left short.

Early repayment penality
Yes, as hard to beleive as it may seem some lenders on some loan products will carge you a fee to make extra payments on your mortgage. One key feature borrowers should confirm is their ability to make additional repayments above and beyond their regular payments. This might be by way of cash payments off the mortgage or by making weekly payments instead of monthly. Some loan products don’t allow extra payments without a fee being paid while others set a minimum amount that will be accepted as an extra. The borrower's broker should explain these options. As a general rule for every extra $1 paid early on a mortgage saves around $2 in interest over the full term of the loan.

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Note: The information contained in this report may vary from lender to lender so it is essential that all borrowers do their own research and do not solely rely upon the information in this report. © 2007 Information sources: The Age Newspaper, Choice Magazine, Mortgage & Finance Association of Australia, Australian Securities and Investment Commission, Australian Institute of Mortgage Brokers, Australian Prudential Regulation Authority, Info-Choice, PMI, Mortgage Insurance Aust, Home Price Guide, Fox

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