Which Mortgage For You?
Sydney Morning Herald
Tuesday March 29, 1988
HOME buyers have never before had such a wide-range of mortgage options open to them. Unfortunately, trying to assess which home loan is the best has become an almost impossibly confusing task.
While most people tend to focus only on the interest rate charged, there is a long list of other, extremely important factors which should be taken into account.
These range from up-front fees and the cost of mortgage insurance to penalties for early repayment of the loan and whether or not the lender has a tax-effective mortgage savings scheme.
A home loan which charges the lowest interest rate might end up being a financial burden if it is loaded down with a long list of "hidden"restrictions.
For example, mortgage insurance can add as much as $1,120 to the cost of taking out an $80,000 loan. As a result, the conditions determining when such insurance is required are important.
In an attempt to assess which are the best home loans on offer Money contacted all of the major mortgage lenders and asked them 10 questions about their home loans:
* WHAT are the main mortgages offered and what is the interest rate?
* WHAT is the up-front fee and is it refundable if the loan is not used after being approved? For this exercise we used the case of an $80,000 loan on a $120,000 home.
* ARE there any other, ongoing charges?
* CAN a borrower get approval for a loan amount before locating the property he or she wants to buy?
* WHAT do you have to do to qualify for a loan?
* WHAT is the criteria for determining the maximum amount someone can borrow and when does mortgage insurance apply?
* IS there any charge for paying off a loan early?
* CAN a borrower top-up a home loan at the same interest rate to finance renovations and, if so, what costs are involved?
* IF interest rates rise and a borrower can't afford the higher repayments, can the term of the loan instead be extended?
* IS there a tax-effective savings scheme linked to the mortgage?
Ideally, the survey would have revealed at least one lender which stood out in all areas. However, as the description of each lender's home loan package reveals, this is not the case.
The four big banks all have solid, fairly uncomplicated products but offer borrowers little in the way of cost-saving extras.
Rival lenders, including such major players in the home mortgage market as the Advance Bank and St George Building Society, tend to have more innovative products, but are often hedged about with costly conditions.
Of the issues canvassed, probably the least important factor was the interest rate. Not only does this vary only marginally from one lender to another, but there is little doubt the rates charged fluctuate constantly, with the accolade for offering the lowest rate changing with each shift.
The only two loans where some words of caution about the rate charged are probably necessary are Citibank's Mortgage Power and the Australian Bank's EquityCredit. This is because the rates on these two otherwise useful products not only tend to be somewhat higher but may also be more volatile than other home loan rates, a situation which reflects the fact they are partly funded from the short-term money market.
As well, both charge relatively high fees, with Citibank's charges being particularly high. This is also a drawback of Chase AMP's mortgages.
Having said this, it should be noted that both Mortgage Power and EquityCredit enable you to use your savings to reduce the size of the loan, but without losing access to your money. If you want to withdraw your savings, you can do so at any time.
In this way each dollar saved in effect earns a very high after-tax return without affecting the access you have to your money.
More conventional home loans which give you much the same benefits are those offered by the St George Building Society, Advance Bank and State Bank of NSW.
These tax-effective savings schemes are offered through St George's Loan Magic plan, the Loan Reduction/Offset scheme offered by the State Bank and the Advance Bank's Money Saver Mortgage Plan.
The availability of such schemes means a borrower can significantly cut the cost of a home loan, even if the only savings accumulated are those needed to pay for a planned holiday or future purchase.
Unfortunately, home loans from all three lenders have disappointing drawbacks. In the case of St George and Advance, there is a penalty equal to one month's interest if a borrower pays off a mortgage early and doesn't refinance with the original lender. A similar penalty also applies in the case of the State Building Society, National Mutual Royal Bank, Citibank's standard home loans and Chase AMP.
Given that most loans are repaid within seven years, mainly due to the fact people move house, this is an irritating and outdated impost which undermines the attractiveness of these mortgages.
In an effort to upgrade its home loans since adding on a savings banks service, the State Bank of NSW recently abolished its penalty for early repayment of a loan. It also abolished annual administration charges on new home loans.
But, once again, a very good product is partly undermined by an irritating flaw. In this case it is the fact that someone with a home loan from the State Bank who wants to borrow more to renovate his or her home is not allowed to simply top up the mortgage at the same rate. Rather, he or she is forced to take out a more expensive personal loan.
This same drawback, which doesn't apply to St George or the Advance Bank, does detract from the otherwise quite reasonable mortgages available from the National Australia Bank, ANZ and Westpac.
And while the Commonwealth Bank does permit top-up loans, these involve a reimposition of the the fairly expensive fees which apply to new mortgages.
THE Commonwealth Bank Offers a full range of loans, including low-start loans and standard housing loans. Low-start loans begin at either 10.5 or 11.5 per cent, and repayments rise annually by the percentage difference between the current rate and the agreed base rate.
The bank charges 13.5 per cent for standard loans, irrespective of the amount. Charges an establishment fees of $820 on an $80,000 loan. Only $160 is refunded if a loan is approved and the customer pulls out. Will approve a loan before a property is located, but same penalty applies if loan is not used. No ongoing administration charges.
Will lend to both customers and non-customers but insists on borrower being able to demonstrate an established savings record.
The upper limit on loans is set by the fact repayments should not exceed 30 per cent of gross salary. The bank prefers not to include overtime and shift pay, unless this can be proven to be "consistent and regular".
Mortgage insurance is required on loans larger than 80 per cent of valuation, and the maximum loan with mortgage insurance in 95 per cent. There is no penalty for early payout, and repayments stay the same when rates change. Instead they are re-negotiated every three years.
Borrowers can top-up their mortgages at the same interest rate in order to finance home improvements, but loan application charges apply, although at a reduced rate.
THE ANZ Bank has standard loans, low-start and high start loans. Up-front charges on an $80,000 loan are $805. There are no ongoing charges. Can get approval of loan before a property has been located, but once establishment fees are paid, they are not refundable. No ongoing charges.
The bank charges 13.5 per cent for loans under $200,000. Low start borrowers negotiate the initial rate reduction. Loans above 80 per cent of valuation require mortgage insurance, and the bank will only lend up to 95 per cent of valuation.
The bank's loan repayment limitation is 25 per cent of all income, including the income of joint borrowers, but overtime and shift pay is not taken into account. Lends to both customers and non-customers. No savings record required. If rates rise can extend the loan period rather than make higher payments.
There is no penalty for early repayment. In effect can top-up the loan to finance renovations but requires taking out another mortgage, with the same establishment fees.
THE National Australia Bank's standard loan automatically incorporates low-and high-start options. For low-start borrowers repayments are based on an agreed rate below the standard rate. All loans under $100,000 cost 13.5 per cent. Above this the rate is negotiable but higher. Currently around 14 per cent.
The bank charges a $770 up-front fee on an $80,000 loan. Also has an ongoing charge of $18, levied every six months. The up-front fee is, strictly, not refundable, but it doesn't have to be paid until the loan is actually used. Can get approval for a loan amount before a property is located.
Will not normally lend more than 80 per cent of valuation of a property. If larger proportion lent, mortgage insurance is required. Repayments should not exceed 25 per cent of gross income. This is based on both salaries if joint borrowers but doesn't include overtime.
Will lend to both customers and non-customers and no savings record is required. No penalty for early repayment of a loan. If rates rise, the term of the loan can be extended but only to a maximum of 20 years.
Can't top up a mortgage to finance home renovations. Instead, have to take out a separate loan at a higher rate.
WESTPAC offers the full range of mortgages, including interest-only and low-start loans as well as standard home loans. The ruling rate is 13.5 per cent for up to $100,000 and slightly more above this level. Fixed-rate loans for two years are 14.25 per cent, 14.5 per cent for three-year loans. Investment property loans are 14 per cent. There are no ongoing administration charges.
While the bank offers low-start loans, it does not encourage them because of the increase in monthly repayments these require.
The bank charges an up-front fee of $755 on an $80,000 loan. Fees are not refundable if the loan is approved but not used. Loans can be approved before a property is located. As with all lenders this is subject to final valuation. Without mortgage insurance the bank will lend up to 85 per cent of valuation, and up to 95 per cent with insurance.
Lends to both customers and non-customers but you need a consistent savings record. Limits on the size of the loan are based on monthly repayments, which should not exceed 25 per cent of gross income and net income. When there are two incomes, repayments should not exceed 40 per cent of the prime income earner's salary. Shift and overtime is generally not taken into account, unless proven to be a regular feature.
When rates rise, repayments do not normally change, although the bank will not increase the loan beyond 30 years.
The main drawbacks of the loan are that an additional loan at a higher rate is required, with additional establishment fees, should more finance be required. There is no penalty for repaying a loan early.
THE St George Building Society offers standard and low-start loans, both of which can be approved before a property is found. The rate on standard loans is 12.9 per cent for all new home buyers, irrespective of the size of the loan. No other on-going charges.
Imposes application, valuation and legal fees. For $80,000 mortgage on$120,000 home these total around $800 and are not refundable if loan approved but not used.
Don't have to be a St George customer but need to show a regular saving record. Requires mortgage insurance for loans above 75 per cent of valuation. With insurance will lend up to 95 per cent of valuation.
Loan repayments can total up to a maximum of 30 per cent of gross family income (including all shift allowances and 50 per cent of regular overtime).
If rates rise will extend the term of the loan if borrower is suffering financial hardship.
Main drawback is the imposition of a penalty equal to one month's interest if loan is repaid early. This is waived if the new home is financed through St George.
Two advantages are the ability to finance renovations by topping up the loan at the same rate and the operation of a tax-effective Loan Magic account. This pays 10 per cent. However, top-up loan has heavy application and valuation costs (around $400).
THE Advance Bank offers the full-range of home loans, including low-start and interest-only loans. The rate for new borrowers is 12.9 per cent up to$100,000. Above this the rate ranges from 12.9 to 13.5 per cent. There is an annual account maintenance fee of $18.
Imposes application, valuation (when loan is more than 75 per cent of purchase price) and legal fees. For $80,000 loan on $120,000 property, fees total $950, of which $350 is an application charge. These are not refundable if loan not used. Loan approval can be arranged before locating a property, but subject to valuation.
Lends equally to both customers and non-customers. No savings record required. Requires mortgage insurance if loan represents more than 75 per cent of valuation. Maximum lent is 95 per cent of valuation.
Maximum loan also depends on calculating total household income and deducting expenses. The result is the amount which can be allocated to mortgage repayments. Term of the loan usually can be extended if rates rise.
Main drawback is a charge equal to one month's interest if the mortgage is repaid early. This is waived if you refinance another home through Advance.
Two key attractions are the bank's tax-effective Money Saver Mortgage Plan, paying between 8.65 and 9.25 per cent, and the fact you can top up your loan at the same rate to finance home renovations. This costs around $200 in legal and administrative fees.
THE State Bank of NSW doesn't offer low-start loans. Charges 12.75 per cent for new borrowers on loans up to $200,000, with this rate being fixed for six months. Loans available to both customers and non-customers. No saving record required.
Lends up to a maximum of 85 per cent of the purchase price. No mortgage insurance required. Will approve loans before the borrower finds a property. Costs are the same. On a $80,000 loan these total $885, including a $600 application fee. Half of this fee is refundable if loan not used.
In assessing repayment capacity the bank works on up to 35 per cent of gross income. Includes total family income, including regular overtime.
If rates rise will hold repayments down for the first five years, after which customer can either increase repayments or the term of the loan.
Has improved its mortgages recently by abolishing both loan administration fees on new mortgages and all penalties for early repayment of a home loan. Another attraction is the bank's tax-effective Loan Reduction/Offset Account, which pays, in effect, between 8.75 and 9.75 per cent.
Main drawback is that borrowers can't finance renovations by adding to the loan at the same rate. Instead, have to take a second, more expensive loan.
THE State Building Society offers both standard and low-start loans, with the former costing 13.5 per cent and latter starting at 10.5 per cent. However, maximum low-start loan is $50,000. Also markets Premier Low Start loans. All loans subject to an annual loan administration fee of $20.
Charges application, valuation and legal fees. These total around $700 for an $80,000 loan. Fees not refundable if loan approved but not used.
Will lend up to 75 per cent of valuation without mortgage insurance and up to 90 per cent with. Maximum repayments permitted equal to 30 per cent of gross family income, including regular overtime and shift pay where verified by employer. Lends equally to customers and non-customers. No savings record required.
Will approve a loan before a property is located, subject to valuation. Term of loan can be extended if rates rise and borrower suffers financial hardship.
Main drawback is a fee equal to one month's interest if the loan is repaid early and another loan not taken out with the society.
Against this is that it will allow you to finance renovations by topping up your existing loan at the same rate. In most cases this costs around $40 to$70 for varying the mortgage. If new valuation needed, costs around $200 to$300.
THE National Mutual Royal Bank offers a range of loans, including standard mortgages and a low-start loan scheme. Unlike rival low-start schemes the interest rate reductions (starting at 2.7 percentage points) don't have to be made up in later years
New borrowers taking out standard mortgages pay 13 per cent (0.5 percentage points below the normal rate) for the first year. Loan approval, subject to valuation, can be given before a home is located.
A sliding scale of fees applies. For $80,000, the up-front fee is $800. Partly refundable at the bank's discretion. No other ongoing charges.
Loans are available equally to customers and non-customers. No savings record required. Mortgage insurance required if loan is more than 75 per cent of valuation. Will lend up to 90 per cent of valuation with mortgage insurance.
If income is less than $40,000, bank will allow repayments to equal 30 per cent of gross income. If more than $40,000 percentage rises to 40 per cent. For joint applicants, only 50 per cent of the second income is included in this calculation. Regular overtime is included.
Repayment of a loan within the first 10 years incurs a penalty equal to one month's interest. Waived if a new loan is taken out with the bank. Possible to apply to extend terms of a loan when rates rise rather than make higher payments. At discretion of the bank.
Can finance renovations by topping up the home loan at the same rate. Up-front fees reduced by 50 per cent. In most cases around $230, although can be higher if a new valuation is needed.
CITIBANK offers a number of mortgages for $50,000 and above but not a low-start loan. Best known product is its tax-effective Mortgage Power loan. All loans incur a $975 up-front fee. Valuation fees and Citibank's legal fees paid by borrower. On a $120,000 house these would total around $500. Fees not refundable if a loan approved but not used. No ongoing administration charges. Can't get approval for a loan before locating the property.
Charges a range of rates, which are fixed for various terms. A standard loan with the rate fixed for one year costs 14 per cent. Mortgage Power loans cost 14.75 per cent. Loans available to anyone. No savings record required.
No mortgage insurance payable. Maximum loan made is 80 per cent of valuation in the case of an owner occupier. Will lend to 90 per cent, but rate is increased by 0.5 percentage points.
If a joint application both salaries are taken into account in determining repayment capacity. Flexible approach to percentage of income which can be allocated to repayments. However, overtime and other allowances not included in calculating total income.
All mortgages except Mortgage Power subject to a penalty for early repayment, usually equal to two months' interest. If rates rise the loan term can be extended rather than lifting repayments, provided the term is less than 30 years.
Special conditions in Citibank mortgages allow people to top-up their loans at the same rate. Costs are stamp duty on the extra amount and valuation fee, if required.
THE Australian Bank's only mortgage product is its tax-effective EquityCredit loan. This allows borrowers to draw on a credit limit, as well as use savings to reduce the mortgage. This money can be withdrawn at any time but has the advantage of reducing the interest on your loan.
Loans range from $40,000 to $500,000 and rates are 14 per cent. Interest is only charged on the amount drawn, and the limit can be increased when income and/or the property value rises. There is no undrawn loan fee.
The bank will lend 75 per cent without mortgage insurance, and up to 90 per cent with insurance. The only fee charged by the bank is a $750 establishment fee, although an additional valuation fee of about $200 for a $120,000 property is charged. The fee is not refundable.
Withdrawals and repayments can be made by telephone. These are taken from a nominated account with another bank. The Australian Bank has no deposit accounts.
The bank limits the size of the loan by a multiple of the borrower's salary. For example, a borrower with a pre-tax income from all sources of$50,000 could borrow $87,000.
There is no penalty for early payout. Pre-approval is available to set an approved amount, but this costs $100. It is not refundable should borrowers decide not to proceed to the valuation and loan draw down stage.
The loan limit is indexed, so that it rises automatically, or the limit can be increased if borrowers can prove that their income has risen.
The EquityCredit loan offers customers the ability to transfer the loan to another property for a charge of $75.
CHASE AMP offers owner-occupied, investment and equity loans. Charges a$750 up-front fee for an $80,000 loan. The fees are less competitive for smaller loans, with $750 charged on loans from $30,000 to $100,000. As well, there are the bank's legal fees of around $550 for a property valued at $120,0 00.
Pre-approval is allowed, but if the customer declines to accept the loan after approval, only a small portion of the fees are refundable, depending on the costs incurred by the bank.
The bank charges 12.75 per cent for loans above $75,000 for owner-occupied houses, which is guaranteed for six months. Loans for less than this amount are charged 13.25 per cent. Fixed-rate loans for 12 months cost 13.75 per cent, three-years 14.25 per cent, while variable rate loans are 13.5 per cent
The bank lends up to 80 per cent of valuation without mortgage insurance for owner-occupied homes and to 90 per cent with insurance. The bank does not have a standard formula for setting a maximum proportion of income which can be allocated to repayments, with each borrower being treated individually.
If rates rise, the borrower can extend the term of the loan, so long as it does not exceed 30 years. The loan can be topped up for renovations at the same interest rate, with the only charges being statutory mortgage variation fees.
Stiff penalties are imposed for early payout of a loan. These are three-months interest for a payout made in the first three years, two-months for four-10 years, and one-month after more than 11 years.
© 1988 Sydney Morning Herald