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Archives for November 2016

Hidden Costs on Fixed Rate Home Loans

It’s an exciting time when you find the property you want, and finally, have approval for the money required to buy it!  Because that’s the reality now, most of us rely on loans to fund our property purchases.

There are significant differences between Variable and Fixed-rate mortgages. There are also some hidden traps to look out for when comparing those loan offers, especially within this low-interest rate environment when Fixed Rate offers are being heavily promoted by lenders.

Always ensure you read the Terms and Conditions before signing on the dotted line, so you know exactly what you are getting yourself into, especially if you are thinking of paying your mortgage off sooner than the contract states.

You might think you’re protected should you need or want to get out of the loan contract. But when the federal government stepped in and banned exit fees on all new variable rate mortgages in 2011, fixed-rate mortgages were not included in the ban.

So, if you are planning on paying your mortgage off sooner than expected, a variable rate mortgage may be a more appropriate loan structure for you, or even better you could split the loan so you have the portion you know you can’t pay back for a period in the fixed portion of your loan, and the amount you believe you can pay back faster in the variable portion.

Fees to watch out for with Fixed Rate Mortgages:

Establishment fee

An establishment fee is a one-off payment when you start your loan. Usually ranging from $600 – $1,000.

Ongoing fee

An ongoing fee is charged every month or year for administering your loan – and this is usually around $10 a month.

Break cost fee 

Break cost fees, also known as exit fees, early repayment adjustment fees or prepayment fees, are charged if you make extra repayments on your loan, pay your loan off in full or decide to switch to another loan type such as a variable rate loan.

Most lenders will allow you to pay a small amount off your loan each year without being charged, this can range from $10,000 to $30,000, however, if you pay more than this amount you may incur a hefty fee.

How are break cost fees calculated?

They are essentially based on three factors: the length that remains on your loan, what interest rate you are paying (compared to your current lender’s current fixed rate), and the amount you initially borrowed. Break costs can run into the tens of thousands of dollars depending on how much interest rates have changed.

Discharge Fee 

A discharge fee, also known as a termination fee or settlement fee, will be charged when you pay your mortgage in full. This is normally $150 and covers the lender’s legal costs.

Purchasing property and using borrowed funds is a big financial commitment and therefore it is incredibly important that you seek independent legal and financial advice.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. If you would like more tailored advice, please contact us to speak with one of our mortgage brokers today.

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Is Your Income Protected?

With Australian household debt to income ratios at record highs, it is vital to ensure that you have adequate personal risk protection cover in place to provide security for your home loan.  It is also critically important to consider your cover needs if another family member has provided a guarantee to assist you in obtaining the loan.

Unfortunately, in the excitement of buying a home, very few prospective or existing borrowers consider the consequences of not being able to work due to sickness or accident, or the financial impact of death, particularly with loans held jointly with a spouse, or with an additional guarantor.

Loss of income in the event of disability, even for a short period, will place stress on the ability to meet mortgage and/or personal loan repayments, and day to day living expenses.  Without adequate Income Protection cover, you will erode savings, and risk falling behind in your mortgage payments.  If you default on your loan, the bank may commence legal proceedings to repossess your home or pursue a guarantor to seek payment of the liability.

In the event of the death of a borrower, the person who inherits the home, or is a surviving joint tenant will be responsible for the debt.  If the property owner was a sole borrower, the bank may request the payment of the outstanding loan amount.  If there is a shortfall in the sale price versus the loan amount, the bank may sue the beneficiary to recoup the balance of the loan.  Without adequate death cover in place, you may be putting your surviving family at risk!

Many homeowners falsely believe that they will have adequate protection via the default cover offered through their superannuation fund if they are temporarily unable to work, suffer permanent disability, or death.  Unfortunately, there is often a huge discrepancy between the amount owing on the average mortgage, and the cover held via super.

It is crucial to understand that the Death/Total and Permanent cover offered via many funds is unit based, and will decrease significantly as you get older.  The rate at which the cover reduces during your working life is typically much faster than the rate at which a mortgage is paid off!

The Income Protection cover offered by many superannuation funds may only offer a minimal benefit for a maximum period of 2 years, which in many cases will not cover mortgage payments in addition to other costs of living.  In the event of claiming on your Income Protection held via super, the benefit may be reduced based on your pre-disability earnings, and other offset provisions.

Some facts to consider in relation to covering your debts:

  • For every home destroyed by fire, 3 are forced to be sold due to death, and 48 are forced to be sold due to disablement.
  • 1 in 6 men and 1 in 4 women are expected to suffer a disability between the ages of 35 to 65 that causes a loss of 6 months or more off work.
  • 2 out of 5 Australians will suffer a critical illness such as Cancer, Heart attack or stroke before they reach 65.

Here at The Investment Collective, we have friendly advisers who specialise in risk insurance. If you would like to review your personal cover requirements contact us today.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs.

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