Getting Finance

Before you choose a loan

A home loan is a large debt that you live with for many years, so carefully research, compare and fully understand the differences so you can choose the one most appropriate for you.

Before shopping around for a loan, work out how much you could afford to pay back each month.

If appropriate, also look into the first home buyers grant offered by the Office of State Revenue (OSR) in Queensland. When you buy or build your first home, you may be eligible for a grant. An additional grant may also be available for the purchase or construction of certain homes as your first home, depending on the timing of the purchase or construction and a number of other factors.

To be eligible you must occupy the home as your principal place of residence within certain timeframes.

For more information visit the Office of State Revenue website at www.osr.qld.gov.au or phone 1300 300 734.

Also check OSR's website for information on how much stamp/transfer duty will be payable on your desired property - the percentile scale will vary according to the amount of the sale price and whether or not you intend to live there or rent it out to tenants as an investment.

Budget

Prepare a budget and work out how much money you earn each week and then assess what your current expenses are along with the expected extra costs associated with buying a house such as:

  • mortgage fees and charges;
  • interest rates rising to over 10% in the future;
  • land and water rates;
  • house and contents insurance;
  • house repairs; and
  • body corporate fees (if applicable).

When determining your budget, set aside additional funds to pay for:

  • legal fees (including mortgage insurance and mortgage documentation);
  • removalists;
  • security deposits;
  • connection fees for essential services such as electricity and telephone;
  • formal valuation; and
  • building and pest inspection.

Shop Around

Shop around to compare loans and understand all the differences and implications of the various types of loans, interest rates, fees and charges before you make any decisions.

You can do this by consulting financial institutions directly yourself or using a finance or mortgage broker. Choice Magazine found many loan products could be more cheaply assessed by consumers online than those available via brokers.

If shopping around yourself, make sure you use the comparison rate for fixed term loans to properly compare loans.

Under the Consumer Credit Code, all credit providers are required to quote a uniform comparison rate for fixed term loans - such as personal or home loans - in all forms of advertising, including brochures and websites that quote an annual percentage rate. Credit providers are also required to have available copies of a comparison rate schedule for members of the public.

The comparison rate includes both the interest rate, fees and charges relating to a loan - as a single percentage figure.

When shopping around for the best deal you should also consider how the lender will deal with you if things go wrong. You might need to dispute charges added to the account or vary the loan depending on personal circumstances, eg. loss of job or illness.

Many lenders belong to a free independent complaints service that deals with complaints that you are unable to resolve with them. The banking and Financial Services Ombudsman is an example of one of these services. Some lenders do not belong to any independent complaints service and if you are unhappy with any of the lender's decisions, your only option is to take legal proceedings. This can be very expensive. Make sure you check your potential lender's dispute handling process first before signing up.

Signing the Credit Contract

It is your responsibility to read and fully understand the contract before signing.

Make sure you understand the minimum monthly payments, fees, charges and penalties for early termination because these are often what get people into trouble.

Don't forget that the contract isn't set in stone until you sign it, and you don't have to sign it if you don' understand it or agree with it.

Home Loan Checklist

  • Shop around as interest rates can vary.
  • Is the interest fixed (ie. won't change for a set period of the loan) or is it variable?
  • Are there additional fees and charges? These may include establishment fees, legal fees, application fees and insurance. Understand what they are and when you have to pay them.
  • Read and understand the contract before you sign. If you have questions, ASK THEM.
  • Take all the time you need before signing up.
  • The faster you pay back your loan the less you will pay overall.
  • What are the conditions (eg. terms of payment) and do they suit you? For example, can you change how, when and where you make repayments? If you have spare money, can you pay the loan off early - without penalties?
  • In most cases, the credit contract is separate from the contract to buy the property. You can't cancel the credit contract if you decide you no longer want the property.
  • Keep all your paperwork in a safe place.

The Office of Fair Trading's free Good Credit Guide provides practical information on loans, creditors, dealing with debts and contact details of organisations which can assist you. Download the guide www.fairtrading.qld.gov.au or call 1300 658 030 for a copy.

Dealing with Mortgage Brokers

Finance or mortgage brokers can assist you with finding the right loan but keep in mind that mortgage brokers in Queensland are currently not regulated.

Before engaging the services of a broker you should:

  • find out if they belong to a reputable industry association;
  • ask if they are independent or if they only deal with a certain lender;
  • check that they have professional indemnity insurance;
  • find out if they are a lender as well as a broker, as this may affect their recommendations;
  • check that they offer a wide range of loans from a variety of independent lenders;
  • ensure you do not pay an upfront fee;
  • make sure that they disclose all fees and commissions prior to signing up (as a guide, the fee should not be any larger than 1.5 - 2% of the loan amount);
  • ask them to justify their recommendations - beware that brokers receiving commissions or kickbacks from lenders may recommend the loan that gives them the biggest fee;
  • ask to see a copy of the application and any financial details they send to the lender on your behalf;
  • make sure you know what you are agreeing to when you sign up - some broker contracts require you to pay the broker if they obtain an offer of finance - even though the interest rate or conditions on the loan found by the broker don't suit you; and
  • be wary about brokers coming to your home - some brokers are trained to exploit politeness towards guests and may refuse to leave your home until a sale is made.

Dangers of wrap loans and vendor finance

If you are a first home buyer, don't let the dream of your own home influence you to sign a contract you might regret. Vendor financing arrangements may seem like an easy solution, especially if you are having trouble obtaining finance elsewhere, but they have the potential to deprive you of your hard-earned savings and leave you with nothing.

A vendor finance, wrap loan or rent/buy Scheme is an agreement where the owner of a property (the seller often called a 'wrapper') offers finance to the purchaser. The purchaser never legally owns the property until all the money owing to the seller has been paid.

The interest rate is usually about 2% to 2.5% higher than the standard home loan, and there may also be a premium over the purchase price of the property payable to the seller.

Because the purchaser is not the owner, they have limited rights.

If the vendor or 'wrapper' has borrowed to finance the property and they default on the loan, the purchase still loses possession and any possibility of ownership or refund of any monies paid even though the purchaser is not in default to the vendor.

Approach vendor finance contracts with extreme caution. The consequences if you default can be very harsh.

If you fall behind on repayments - even one payment - you risk losing the property. This means you risk losing your house, any repayments already paid, your credit rating and your first home owners grant.

Next Page: Protecting your Investment