Bridging Finance or Bridging Loan
This specialist loan provides funds to buy your next home before you’ve sold your current one. It covers the deposit and other buying costs, such as Stamp Duty. Once you settle on your old home, the proceeds of the sale are paid as a lump sum to reduce your interest repayments on the bridging loan.
Capital Gains Tax
Capital gain on an asset is the difference between how much it cost you and how much you sell it for. Tax is payable on the price difference, or capital gains. Personal assets, such as your home, car and furnishings are exempt from capital gains tax. Depreciating assets – such as business equipment or fittings in a rental property – are also exempt from capital gains tax. Capital loss on a taxable asset can be used to reduce any capital gain in the following year.
This reveals the total cost of a loan, allowing you to compare ‘apples with apples’ when choosing a loan. The comparison rate takes into consideration the costs associated with setting up a loan, including the interest rate, the loan approval fee and any other upfront or ongoing fees. It excludes government fees and charges because they are standard across all loans.
It is also important to consider the features of a loan rather than just the interest rate when comparing loans. No monthly fee, repayment flexibility and money saving features such as 100% mortgage offset, can make a huge difference to the final cost of a loan.
A deposit bond is an alternative way to pay the deposit for your new home, rather than using your own immediate funds. Deposit bonds can be issued for all or part of your deposit, usually up to 10% of the home purchase price. Once you’ve settled, the deposit bond amount is paid back to the lender. The fee for a deposit bond is usually less than the fees for breaking a fixed-term or similar to get access to the cash you need.
Equity is the difference between the value of your home and the amount you owe on it. For example, if your home is worth $900,000 and you owe $500,000, your equity is $400,000. As you pay off your home loan, your equity increases. You can borrow against the equity in your home to buy an investment property.
First Home Loan Deposit Scheme
The Australian Government offers the First Home Loan Deposit Scheme whereby first-time home buyers who meet the eligibility criteria can borrow up to 95% of the value of a home without having to pay mortgage insurance (LMI). Mortgageport is the only non-ADI institution to be selected as an approved FHLDS scheme lender by NHFIC
The scheme is to help first time buyers move into their homes faster. The scheme reduces the deposit amount first time buyers must pay to 5%. You can only apply for this scheme through an approved lender like Mortgageport.
First Home Buyers Assistance Scheme (FHBAS)
Eligible first homebuyers may be entitled to full or partial exemptions on transfer duty, if the property they are purchasing is valued less than $1,000,000 and they are Australian Citizens or permanent resident of Australia over the age of 18 years.
As of 1st August 2021 the following Stamp Duty thresholds will apply to homes purchased in NSW under the FHBAS. Please refer to the Revenue NSW website for more information.
- Stamp Duty exemptions for new homes valued less than $800,000
- Stamp Duty concessions for homes valued between $800,000 and $1,000,000
- Stamp Duty exemptions for existing homes valued less than $650,000
- Stamp Duty concessions for existing homes valued between $650,000 and $800,000
- Stamp Duty exemptions for a vacant block of residential land to build your home if valued less than $400,000
- Stamp Duty concessions for vacant land valued between $400,000 and $500,000
In a fixed-rate home loan the interest rate is locked-in for a specified period, often over several years, regardless of changes to interest rates.
This type of home loan means a borrower only pays the interest component of the loan. This structure requires the repayment of the original borrowed amount in a lump sum when the home loan period is complete, or the property is sold. Most interest-only home loans revert to a principal and interest loan after a set initial period.
‘Interest-only’ and ‘principal and interest’ (see below for more details) home loans are designed to give borrowers a choice in the way they make their repayments, and how much and when they repay. Both will suit different borrowers’ needs and circumstances.
Interest-only home loans are more widely used by property investors, who are attracted by the tax saving aspects and are usually not likely to hold the property for the term of the home loan. An interest-only home loan works well for investors who want to use the property to generate rental income and capital gains.
They are not ideal for owner occupiers who are more focused on building equity in their property, as the underlying home loan debt is not reduced.
Loan portability means transferring the loan on your current home to a new property. Some home loans offer this as a feature, so you don’t need to refinance when you upgrade to your next home. Bringing your old home loan with you works if you’re selling and buying at the same time. While you have the convenience of staying with your current home loan, and you don’t need to pay for bridging or refinancing, which normally incurs fees. If you’re sure the home loan you already have is the best deal for you, then loan portability may be worth exploring.
A mortgage broker acts an intermediary between you as a borrower and specific lenders. The broker’s role is to assess your personal circumstances, find a suitable loan product for you and then negotiate the successful approval and settlement of the loan. A mortgage broker often cannot access the entire mortgage market and offers a more limited selection of products.
Mortgage Insurance (LMI)
Mortgage insurance covers the lender in the unlikely event that you default on your loan. It does not cover you, the borrower. Your mortgage consultant can advise you about the costs involved. Mortgageport may be able to structure your loan to avoid, or minimise, the need for mortgage insurance.
A mortgage manager can offer clients custom-designed loans to suit their individual needs. A mortgage manager can approve your loan in-house, manage every aspect of your loan throughout the term and provide wholesale interest rates to save you money.
Mortgage Offset Account
Mortgage offset accounts allow borrowers to use their savings and income to reduce the amount of interest they pay on their mortgage. This works by using the interest that would usually be paid on your savings to be deducted from (or ‘offset’ against) the amount of interest you owe on your mortgage.
Because you don’t actually receive any interest on your savings directly (interest is offset against your home loan debt, rather than being credited to your savings account), no tax is payable on it. You get the full, tax-free benefit of the savings interest to reduce your home loan debt.
This often operates best when your mortgage offset account is used as your primary bank account – for savings, lump-sum payments and salary payments.
Offset accounts are more common with variable rate home loans and are not always available on fixed-rate home loans.
You have a $200,000 mortgage, on which you pay interest. You also have $20,000 savings in an offset account, earning interest. When the $20,000 in the savings account is offset against the $200,000 owing on the mortgage, you will only be charged interest on a home loan debt of $180,000 ($200,000 – $20,000 = $180,000).
This type of account particularly suits property investors and self-employed people. It’s important to check the interest rates for both your mortgage and the offset account – they can be different (the interest rate you earn on your savings can often be less than the interest rate you pay on your home loan). Some home loans will offer the same rate of interest on the mortgage and the offset account, and these are known as full offsets.
Mortgage offsets can be very effective if used correctly, but lenders often charge a higher-than-average rate on the mortgage, usually up to about 0.15 per cent. They may charge additional monthly fees, for having this feature. It is important to do your sums, as it might not suit your circumstances, especially if you have a large mortgage and little savings to put in the offset account.
A non-bank lender is a finance provider that offers loans and other types of banking services. Mortgageport is a privately-owned, family-run business that operates as a non-bank lender, mortgage manager, and mortgage broker.
Principal and Interest (P&I)
A principal and interest home loan means borrowers pay the interest accrued on the mortgage and also repay a part of the principal. Repayments on principal and interest home loans reduce your debt by reducing the size of your home loan. Repayments are calculated and spread out so that the last scheduled payment fully pays out the home loan.
‘Principal and interest’ and ‘interest-only’ (see above for details) home loans are designed to give borrowers a choice in the way they make their repayments, and how much and when they repay. Both will suit different borrowers’ needs and circumstances.
If you are planning to buy a property to live in long-term, a principal and interest loan will probably better suit your needs. Repaying both interest and the principal will allow you to gradually increase your equity in the property by reducing the size of your mortgage, and at the end of the loan term, you will be the sole owner of your home.
Redraw facilities on a home loan allow you to make extra repayments into the mortgage and help borrowers reduce the interest on their home loan, which in turn helps reduce the term of the loan.
It also provides borrowers with a safety net, as they can access the extra payments if required, down the track. This is particularly suited to first home buyers who are not likely to have extra funds in the early stages of their home loan but may in the future.
Redraw deals vary between lenders. It is important to be aware of the costs involved, which may include set up, activation fees and redraw fees. There may also be limits on redraw withdrawal amounts (both maximum and minimum).
Refinancing means breaking your current home loan contract to take on a new loan. It’s important to understand what’s involved because the costs of switching home loans can sometimes outweigh the benefits.
Settlement is the official exchange of contracts for the sale of a house, conducted between legal and/or financial representatives of both the buyer and the vendor. Settlement takes place on a day and time agreed by both parties. The average settlement is four to six weeks but both parties can negotiate a shorter or longer settlement period, depending on their needs.
An SMSF is a Self-Managed Superannuation Fund. It allows you to take complete control of building your retirement wealth. The key difference between an SMSF and a standard superannuation funds is that SMSF members are also the SMSF trustees. As SMSF member/trustee you manage the fund for your own retirement benefit, and you are fully responsible for complying with superannuation and tax laws.
Although the rules and regulations for SMSFs make them complex to set up, the control and flexibility of investment make them very attractive to many people. It’s a major financial decision and you need the time and skills to manage your own super fund effectively.
Mortgageport can help you understand (contact us) the benefits and disadvantages.
A home loan can be split to have one part at a variable rate, and the remainder at a fixed-rate. It may be split 50% variable / 50% fixed, or some other ratio such as 60% / 40%. A split loan allows you to take an ‘each way bet’ on future interest rates.
Stamp duty is a State Government charge that relates to the transfer of property. The amount varies between the states. Use our handy Stamp Duty Calculator to estimate your stamp duty.
Stamp Duty exemptions
Stamp Duty exemptions for new homes valued less than $800,000
Stamp Duty concessions for homes valued between $800,000 and $1,000,000
Stamp Duty exemptions for existing homes valued less than $650,000
Stamp Duty concessions for existing homes valued between $650,000 and $800,000
Stamp Duty exemptions for a vacant block of residential land to build your home if valued less than $400,000
Stamp Duty concessions for vacant land valued between $400,000 and $500,000
The interest rate on a variable rate home loan can change at any time, either up or down, in line with official interest rates set by the Reserve Bank of Australia. Market circumstances and competition between lenders can also lead to interest rate changes, which can affect the interest rate of your loan.
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