It is important when purchasing a property that you have discussed your financial situation with a mortgage broker or your current bank before signing a sale and purchase agreement. This way, you can make sure you are looking in the right price range for your financial situation.
There are a number of different issues that can arise when looking at your lending, and typically these issues are best dealt with by a mortgage broker who can search out the best borrowing conditions that will suit your personal circumstances. However, to provide you with some details as to these finance issues, some things to consider are noted below:
Loan-To-Value Ratio (“LVR”)
The LVR is important to consider as it effectively represents how much equity you will have in the property at settlement. Typically, banks prefer a 20% equity contribution from you as the purchaser. This means if you are purchasing a $500,000 property, the deposit you would need is $100,000, or 20% of the purchase price. Such a situation would mean there is an LVR of 80% from the bank’s perspective.
If you do not have a deposit which matches what the bank requires for normal lending, then there are some alternatives that can assist. These could include:
The bank could charge a LOW EQUITY FEE for the loan it makes to you or charge you a higher interest rate so that it is compensated for the risk it takes on with a low deposit loan;
Having a relative, i.e. your parents, GUARANTEE the loan the bank provides to you so that the bank has comfort that some additional financial backing is being provided to you as the borrower. If you are looking to have a guarantee situation we recommend you talk to us before getting a bank’s approval to your borrowing so the nature of the GUARANTEE can be discussed before the final terms of the loan are provided by the bank. This is important because it is preferable that the GUARANTEE provided is only to the extent required by the bank rather than a full GUARANTEE which may expose the guarantor to more risk than is required.
Cross – Collaterisation
This arises where a bank uses two or more properties for security for lending they provide you. This is a simple way of LEVERAGING to purchase additional properties. Using another property as SECURITY for the new borrowing you are taking on for the new purchase can be done in different ways.
If you already have an existing property that you will continue to own, i.e. a rental property or the current home that may become a rental property for you, then equity you may have in that property could be used to assist with your new PURCHASE. If this is the case, we suggest that you should discuss this with us before you advance to organising the loan with the mortgage broker or the bank. This is because you may want to get some advice on how to manage the issues around CROSS-COLLATERALISATION of multiple properties for your purchase. The notion of “putting all your eggs in one basket” is not always the right option, and the alternatives should be considered to try and reduce the level you are exposed to your bank for. CONTACT US
Also, if you are buying a new home and converting your old home into a rental property, you need to be mindful of how you can maximise your tax-deductible interest on that property.
You should be ensuring that the type of loan or loans you enter into provide you with the maximum flexibility to suit your lifestyle and the repayment options you desire. Too many people in recent times have been caught out with costs such as BREAK FEES or EARLY REPAYMENT FEES which are often charged by the banks when a borrower repays a fixed-interest loan before the fixed-interest rate period has finished. By talking to us or a mortgage broker before finalising the loan structure, these issues can be thought through so you have a planned strategy to present to the bank. CONTACT US
It is important to understand that although you may have finance pre-approved by the bank, that pre-approval may have bank conditions (such as a valuation) that need to be satisfied before the bank will confirm your finance is unconditionally approved. Most pre-approvals are only conditional and it is risky to enter into any SALE AND PURCHASE AGREEMENT solely relying on such pre-approval. We recommend you make sure you have a satisfactory FINANCE CONDITION in your agreement before you sign. CONTACT US to prevent such problems.
Structure for the Purchase
Depending on your desires you should also consider what structure you will use for purchasing the property at the stage you are considering what lender to use. You may decide to utilise a trust to purchase a family home, or simply use personal names. However, whatever structure you do decide on, it is important to let the mortgage broker or bank know of this at an early stage so that they know what details need to be included in the documents.
For a TRUST STRUCTURE, we will need to liaise with the mortgage broker or bank to provide the names of the trustees and advice on how the ownership and loan should be structured from a lending perspective.
The exact debt structure is also important from a GIFTING perspective, if you are using a family trust to purchase your new home TO SEE THE DIFFERENT OPTIONS FOR STRUCTURING THE LOAN WHEN USING A FAMILY TRUST AS THE PURCHASING ENTITY CLICK HERE
As you can see, the financing for purchasing a new property is not necessarily a straight-forward matter. You should contact us to get our assistance with utilising an appropriate FINANCE condition for your agreement.
Remember, this needs to be done before you have signed the SALE AND PURCHASE AGREEMENT.