Mortgage Broker Thoughts

Using a mortgage broker is a great way of making sure you get a variety of products and loan structures, not just what is on the shelf of your local Bank. Making sure you have one that is a member of the MFAA ( Mortgage and Finance Association of Australia) can be just as important. Members of this body have had to comply with  educational and experience requirements as well as having to hold Professional Indemnity Insurance and undergoing a Police check. Every year they also have to make sure they keep up with industry standards by attending training  & events which go towards a point system to ensure brokers won’t become stagnant.

The MFAA recently has ejected 1,500 brokers from its member base after they failed to meet basic qualification requirements. They all had two years notice!

In 2007, the industry body’s board decided that all new member applicants must have a Certificate IV in Financial Services (Finance and Mortgage Broking) qualification (or equivalent) as a prerequisite to MFAA membership, while existing members were given until July 1 this year to meet the condition.

This recent development can go some way to showing you who is committed to the industry. Licensing on a National level has been tabled to be introduced later this year in a model similar to the Financial Planning model.

Just to reassure you, I am a full member of the MFAA.

Today’s big question is…to fix or not to fix…..that is the question. No doubt repeated around the country. The answer is Yes, and No! ( in my opinion)

Currently variable rates are relatively low with the basic variable sitting in the low five percent region. 3 years fixed rates are levelling out in the high 6 percent mark. Assuming we have some rate rises in the next 18 months, ( as predicted by economists) this means we would need at least six .25% rate rises to even catch up! Let alone win!

Some people favour fixed rates because of the peace of mind and certainty they provide. Bear in mind that with certainty and peace of mind comes their close cousins inflexibility and hefty break costs.

My solution is two fold. If you are that hooked on fixing, consider fixing part of the loan, this way you can still enjoy some certainty and some flexibility. Most fixed rate loans only allow you to pay an extra $10,000 per year. This solution alleviates that inflexibility and allows you to attack the variable portion without the fear of incurring extra fees.

The second part of my solution is to leave your loan variable and pay the repayments at the higher ( fixed) rate. This way you are getting in front of your normal repayments and creating a buffer if anything should go wrong and cushion the effect of rate rises in the future.

Not really new concepts , however they make sense as Banks are not in the business of giving away money. Their boffins are always trying to stay ahead of the rate game, however it is their shareholders they think of first. Therefore be careful when you see a “Great Rate”.

Just finished downloading the forms to do one of these tomorrow. For the lay person this type of loan is where a parent or close relative guarantees a portion of their equity in their house to the Bank & Borrower  (usually their son/daughter) so as they can save money on Lenders Mortgage Insurance by lowering the actual LVR ( Lending Value Ratio). This also saves the need for genuine or indeed any large amount of savings and will become more popular once the First Home Owners grant is reduced and/or withdrawn.

A risk for the parent? Yes! That is why they should obtain independent legal advice. Some Banks make this mandatory, and the solicitor charges a small fee.

The “child” usually arranges for the guaranteed equity from the parent  to be included as a separate split in the loan so as they can see the portion owed to mum or dad, and hopefully attack that portion. In a few years with house prices (fingers crossed) rising or the child gaining increased income, then they can refinance or pay the split off, thus releasing Mum or Dad’s security.

A perfectly legitimate solution for those people that wish to gain access to the property market now, providing everyone is comfortable with the situation.

Welcome to the Blog of Loan Library. This blog will hopefully give you some  insight into the mortgage market in Australia and give you access to Q&A’s to help you make the right choices.

Thanks

Steve Mules

www.loanlibrary.com.au