Low Doc Loans
One of the most radical developments to the home loan market in recent years has been the introduction of Low Doc Loans. First launched by a couple of specialist lenders, the demand for this type of product grew quickly and these days most of the major banks now offer these types of loans.
So just what is a Low Doc Loan?
Quite simply, a Low Doc Loan is a type of home or investment loan where the borrower is not required to prove what he or she earns. This is in direct contrast to a normal home or investment loan where the lenders insists that payslips, group certificates, and in some cases, income tax returns accompany the loan application.
Even though proof of income is not required to support a Low Doc Loan, all borrowers must clearly state on the application form the amount they earn and this must be high enough to support the loan amount applied for.
Low Doc Loans were initially designed to suit the needs of self-employed borrowers who were not up-to-date with their financial statements. However as the Low Doc market matured, some lenders began offering the product to normal wage and salary earners.
Given the history, prudential lending guidelines in Australia and the frustrations suffered by many borrowers as a result, Low Doc Loans simply sound too good to be true. In fact, there is a catch....
A significant obstacle for most potential borrowers was the size of the deposit required. Most lenders are generally looking for at least 20% deposit or existing equity in other property. Some lenders will accept as little as 5% deposit, however, I should stress that these loans are becoming increasingly hard to find and ALWAYS at a premium cost.
Pricing used to be another obstacle but not any longer. When Low Doc Loans first hit the market some years ago, their interest rates were around 2% pa higher than the standard home loan variable rate. At the time, Low Doc lenders took the view that because they were taking a greater risk, they needed to be compensated with higher returns. However as more and more lenders entered the market and competition increased, this put pressure on prices and today most lenders offer Low Doc Loans at standard, variable home loan rates. In fact, some lenders also offer Low Doc Loans with Professional Package discounts depending upon the loan to value ratio (LVR)
These days, it seems, there is a home loan solution for almost every conceivable situation.
Home Loan Maternity Leave
Having babies and raising a happy family is one of the most rewarding things you can do in life. But without paid maternity or paternity leave, it can also be a financial struggle as you adjust to living on just one income.
Time and again, I hear people say that things would have been a lot easier if they simply didn"t have a mortgage to worry about.
Indeed, some well-organised couples prepare for the birth of their new baby by making additional home loan repayments for some months beforehand. This is a great strategy because if your home loan is sufficiently "paid in advance", you have the option of reducing or completely stopping your home loan repayments whilst you are on maternity or paternity leave.
Typically though, most couples are not in such a financially strong position.
To assist new parents during this financially challenging time, a number of lenders will allow you to take a "repayment holiday" from your home loan for 3-6 months, whilst your are on maternity/paternity leave. Some lenders allow deferment of the full monthly loan repayment, whilst others defer just half. Being able to take such a "repayment holiday" whilst on maternity/paternity leave allows you to free up your cash flow at a time when your family finances are typically stretched to the limit.
For example, if you had a $200,000 home loan, a 6 month "repayment holiday" would mean that just under $10,000 of your money that usually goes into home loan repayments would be freed up for other things.
It is important to remember that during your "repayment holiday" period, your home loan balance will increase each month as interest is capitalised to your account and you may need to increase your monthly repayments slightly over the next 3-5 years to compensate.
It is also important to note that not all lenders offer such a family friendly feature and those that do don"t actively promote it. So if you think that this is a loan feature that could be important to you, give us a call here at MASON MANAGEMENT FINANCIAL SERVICES and we would be pleased to help you out.
Myth Buster No.2
Paying weekly rather than fortnightly will help me to pay my loan off even quicker and save me even more money!
FALSE
The difference between paying weekly and paying fortnightly will not materially affect the term of your loan, though either of these options are better than paying monthly.
For example, if you pay half your minimum monthly payment each fortnight, you will cut your loan term down by 9 years 9 months and save yourself $84,816 in interest.
Alternatively, if you pay one quarter of your minimum monthly payment each week, you will cut your loan term down by 9 years 10 months and save yourself $85,273 in interest.
The real reason that paying weekly or fortnightly is better than paying monthly is that, over the course of a year, you make one additional monthly repayment to your loan principal.
For example, if your minimum monthly loan repayment is $1,000, you will make a total of $12,000 worth of repayments over the year. If you instead opt to pay either $500 a fortnight or $250 a week, you will make a total of $13,000 worth of repayments over the year. It is this extra $1,000 a year that makes such a difference to your loan term and interest savings.
Note: By paying extra on your monthly payment you can achieve the same result. It is not the frequency but the amount of extra payment that you make.
*based on $150,000 P&I loan @ 7.32%pa over maximum 30 year term
Disclaimer - No responsibility is accepted by Mason Management Financial Services Pty Ltd for the accuracy of any statement or advice in this newsletter.