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Lending Information

Offset Facility

An offset facility is a powerful financial tool designed to optimize the benefits of your home loan. By linking a transaction account to your mortgage, you can leverage this facility to reduce the interest payable on your loan.

An offset facility utilizes the balance of your linked transaction account to offset or decrease the portion of your home loan that accrues interest. With this feature, you can effectively save on interest payments while keeping your funds accessible for daily transactions. Unlike traditional savings accounts that offer interest earnings, an offset account enables you to save on interest expenses, thus accelerating the repayment of your mortgage.

  1. Reduced Interest Expenses: By depositing your funds into an offset account, you are essentially reducing the outstanding loan balance used for calculating interest. This results in lower interest charges and potentially significant savings over the life of your loan.
  2. Flexibility and Accessibility: Your offset account serves as a transactional account, allowing you to deposit and withdraw funds as needed. It provides the convenience of instant access to your money while minimizing interest costs.
  3. Tax Advantages: The funds held in an offset account are not considered repayments towards your loan balance. As a result, they are not subject to tax implications, providing potential tax benefits for certain individuals.
  4. Compound Interest Impact: By reducing your loan principal through the offset facility, you can potentially benefit from compounded interest savings over time. The lower your outstanding loan amount, the less interest accumulates, accelerating the repayment process.
  1. Regular Deposits: Consistently depositing funds into your offset account helps to maximize the interest savings. Consider directing your salary, savings, or any surplus income towards your offset facility.
  2. Minimize Account Withdrawals: Although an offset account offers accessibility, limiting unnecessary withdrawals can ensure the maximum benefit of reducing interest costs over the long term.
  3. Leverage Surplus Funds: If you receive gifts, bonuses, or tax refunds, consider depositing these extra funds directly into your offset account. Doing so can significantly accelerate the repayment of your home loan.
  4. Seek Professional Advice: Each individual’s financial circumstances differ, and seeking professional advice from mortgage experts or financial advisors can help tailor the use of an offset facility to your specific needs and goals.

Redraw Facility

A redraw facility is a feature that allows you to access any extra repayments you have made on your home loan. It provides the flexibility to withdraw these additional payments from your loan when needed, giving you the freedom to utilise the funds as per your requirements. By utilising a redraw facility, you will only be charged interest on the remaining balance of the loan. Consequently, this feature effectively reduces your overall interest charges on the loan. It is important to note that each lender may have different procedures and regulations regarding redraw amounts and the frequency of withdrawals.

  1. Flexibility: The redraw facility offers a flexible solution by granting you the ability to access your extra repayments whenever necessary. This allows you to manage your finances more efficiently and adapt to changing circumstances.
  2. Cost Savings: By reducing the interest charges on your loan, the redraw facility enables you to save money over the course of your home loan. You can minimize your interest payments by maintaining a lower outstanding balance.
  3. Convenience: Accessing funds through the redraw facility is a convenient process. You can easily withdraw the desired amount when needed, eliminating the need for additional loan applications or credit checks.
  4. Repayment Optimisation: With a redraw facility, you have the opportunity to make extra repayments on your home loan, which can accelerate your journey towards full loan repayment. This option allows you to manage your finances proactively and potentially shorten the term of your loan.
  5. Lender-Specific Guidelines: Each lender may have specific guidelines and policies regarding redraw facilities. It is essential to familiarise yourself with these terms, including any potential fees or restrictions associated with the redraw facility.

To make use of the redraw facility effectively, follow these general steps:

  1. Determine Eligibility: Confirm with your lender whether your home loan includes a redraw facility and understand the specific conditions that apply.
  2. Make Extra Repayments: Regularly contribute additional funds towards your home loan. These repayments will accumulate as a surplus within the redraw facility.
  3. Assess Your Financial Needs: Evaluate your financial requirements and identify situations where accessing the extra repayments through the redraw facility would be advantageous.
  4. Submit a Redraw Request: When you need to access the surplus funds, submit a redraw request to your lender. Follow their specified process, which may involve submitting a form or initiating the request through online banking.
  5. Utilise the Funds: Once your redraw request is approved, the desired amount will be transferred to your nominated account. You can then utilise these funds as needed, such as for home improvements, education expenses, or other personal financial goals.
Redraw Facility provides the flexibility to withdraw your additional payments from your loan when needed, giving you the freedom to utilise the funds as per your requirements

What is the difference between Redraw and Offset?

Both redraw and offset are useful features that can help you save on interest for your home loan. However, there are some key distinctions between the two. Understanding these differences will enable you to make an informed decision regarding which option suits your financial needs best.

Choosing the Right Option for You

When deciding between an offset account and a redraw facility, it’s important to consider your financial goals and personal circumstances. Here are some factors to keep in mind:

  • Offset accounts are ideal for individuals who want to maximize their interest savings while maintaining easy access to their funds for day-to-day expenses.
  • Redraw facilities are beneficial if you prefer to make additional repayments towards your loan but still want the flexibility to access those funds when necessary.

Ultimately, both offset accounts and redraw facilities offer advantages in terms of interest savings. Consult with your financial institution or mortgage broker to determine which option aligns best with your financial objectives and overall loan strategy.

Remember, making extra repayments and utilising these features can have long-term benefits, potentially helping you pay off your home loan sooner and save money in interest charges.

Lenders Mortgage Insurance (LMI):

Lenders Mortgage Insurance (LMI) is an insurance policy designed to protect the bank or lender in the event that a borrower defaults on their mortgage. It provides an added layer of security for the lender, allowing them to mitigate the risks associated with high loan-to-value ratio (LVR) loans.

  1. Lenders Mortgage Insurance (LMI) safeguards the lender, not the borrower, in case of mortgage default.
  2. LMI is a mandatory requirement for loans with an LVR exceeding 80%.
  3. The cost of LMI depends on factors such as loan amount, LVR, and property type (owner-occupied or investment).
  4. By paying LMI, borrowers can secure a loan with a smaller deposit, enabling them to purchase a property sooner.
  5. The cost of LMI can vary significantly among different lenders.

Lenders Mortgage Insurance serves as protection for the lender when the borrower’s loan-to-value ratio exceeds 80%. In simpler terms, if you’re seeking a loan where you have less than a 20% deposit, LMI will likely be applicable.

Lenders incur a higher risk when granting loans with a higher LVR, as the borrower has a smaller equity position in the property. LMI acts as a safeguard for the lender by providing financial coverage in case the borrower defaults on the mortgage and the property needs to be sold at a loss. This insurance helps ensure the lender’s financial stability and enables them to continue lending to borrowers with smaller deposits.

The cost of LMI varies based on multiple factors, including the loan amount, LVR, and property type (owner-occupied or investment property). Each lender may have different criteria and pricing structures for calculating LMI premiums.

Although LMI is primarily in place to protect lenders, it offers some benefits to borrowers as well. By allowing borrowers to purchase a property with a smaller deposit, LMI can help individuals enter the property market sooner, rather than having to accumulate a larger down payment. This can be advantageous in situations where property prices are rising rapidly or for borrowers who are unable to save a substantial deposit within a reasonable timeframe.

We understand that navigating LMI calculations and options can be complex. Our team is here to provide expert guidance and support in determining the most suitable LMI options for your specific needs. We can assist in calculating the cost of LMI based on your loan requirements, LVR, and property type. Feel free to reach out to us for a comprehensive analysis and personalized advice to help you make an informed decision.

In the process of applying for a loan, it is essential to understand the availability of LMI (Lender’s Mortgage Insurance) exemptions. LMI exemptions can provide significant financial benefits by waiving the need for LMI payments. Below, you will find details regarding LMI exemptions and the specific professions that may qualify for them:

  1. Maximum LVR and LMI Exemption: For most applicants, LMI is required when the Loan-to-Value Ratio (LVR) exceeds 80%. However, certain professions may be eligible for LMI exemptions, allowing for higher LVRs up to 95%. Please note that exemptions are assessed on an individual basis.
  2. Professions eligible for LMI exemptions: The following professions have the potential to qualify for LMI exemptions:
  3. Medical professionals: This category includes doctors, dentists, veterinarians, and optometrists. If you belong to any of these professions, you may be eligible for an LMI exemption.
  4. Legal professionals: Lawyers, solicitors, and barristers are included in this category. If you are practicing one of these professions, you may be considered for an LMI exemption.
  5. Accountants/CFOs: In certain situations, accountants and Chief Financial Officers (CFOs) can be eligible for LMI exemptions. However, the assessment for exemptions in these cases is conducted on an individual basis.

It is important to note that meeting the professional qualifications alone does not guarantee an LMI exemption. Each application is evaluated on its individual merits, taking into account various factors, such as financial stability, credit history, and overall risk assessment.

To determine whether you qualify for an LMI exemption based on your profession, it is recommended to consult with your lender or financial institution. They will guide you through the application process and provide the necessary information and requirements specific to your situation.

Guarantor Loans

Guarantor loans can speed up purchasing a home while eliminating the requirement for Lenders Mortgage Insurance (LMI). By leveraging the equity held by a parent or family member in their property, you can secure a loan without the need for substantial personal savings.

Guarantor loans are a type of mortgage that allows a borrower to obtain financing for a property purchase with the support of a guarantor. A guarantor is typically a parent or family member who pledges the equity in their own property as security for the borrower’s loan. This enables the borrower to overcome the barrier of insufficient savings and potentially eliminates the need for LMI.

A guarantor plays a crucial role in a guarantor loan. By providing a guarantee, the guarantor assumes responsibility for the loan repayments in the event that the borrower defaults. The guarantor’s property equity serves as collateral to protect the lender, providing them with added security.

Benefits of Guarantor Loans:

  1. Faster Home Purchase: With a guarantor loan, you can enter the property market sooner, bypassing the need to accumulate a large deposit over an extended period.
  2. Avoidance of Lenders Mortgage Insurance (LMI): LMI is usually required by lenders when borrowers have a deposit less than 20% of the property’s value. By involving a guarantor, lenders may waive the LMI requirement, potentially saving you thousands of dollars.
  3. Increased Borrowing Capacity: The involvement of a guarantor allows you to access larger loan amounts, as their property equity acts as additional security.
  4. Improved Interest Rates: With a guarantor loan, you may be eligible for more favourable interest rates, as the risk to the lender is reduced.

Responsibilities and Risks:

  1. Borrower Responsibility: As the borrower, it is essential to fulfill your repayment obligations to protect your guarantor and maintain a positive credit history.
  2. Guarantor Liability: The guarantor’s responsibility is to ensure loan repayments are made in the event that the borrower is unable to fulfill their obligations. Guarantors should carefully consider the potential risks involved before agreeing to provide their guarantee.

Eligibility for guarantor loans varies among lenders, but typically requires:

  1. A suitable guarantor, usually a family member with sufficient equity in their property.
  2. Demonstrated ability to service the loan repayments.
  3. Meeting the lender’s standard mortgage criteria.

Before deciding on a guarantor loan, it is crucial to seek professional financial advice and discuss the specifics with a mortgage broker or lender. They can provide personalized guidance tailored to your circumstances and help you navigate the application process.

Guarantor loans are a type of mortgage that allows a borrower to obtain financing for a property purchase with the support of a guarantor.

Loan-to-Value Ratio (LVR) and Calculation

The Loan-to-Value Ratio (LVR) is a crucial factor considered by banks when determining the lending amount for a specific transaction. This ratio is calculated by dividing the required loan amount by the property value and expressed as a percentage, up to 100%. Lenders generally consider 80% LVR as a favourable threshold and do not require lenders mortgage insurance when lending below this value. Additionally, banks may impose maximum borrowing limits for certain transactions. For instance, some lenders may provide loans up to a maximum of 95% LVR for owner-occupied properties and 90% for investment properties. It is important to note that these limits can vary among different lenders.

What is an Interest Only Loan and How Does It Work?

An interest-only loan is a type of loan where you make payments that cover only the interest charges on the loan, without reducing the principal amount borrowed.

Interest-only loans typically have a standard interest-only term that ranges from 1 to 5 years. During this period, you are only required to make payments towards the interest portion of the loan, resulting in lower initial repayments compared to loans with principal and interest repayments. However, it is important to note that after the interest-only period ends, the loan will revert to a principal and interest facility.

Once the interest-only period is over, your repayments will include both the principal amount borrowed and the interest charges. As a result, the repayments on the remaining term of the loan will be higher compared to the initial interest-only phase. It’s essential to plan your finances accordingly and be prepared for the increased repayment amount once the interest-only period concludes.

Interest-only loans are commonly used for investment debt purposes. One of the advantages of utilising an interest-only facility for investment debt is that the interest payments may be tax deductible. This feature can provide potential tax benefits to investors. By keeping the cash flow requirements at a minimum through interest-only repayments, investors can allocate any surplus funds towards non-deductible debt or other financial goals.

In summary, an interest-only loan allows borrowers to make payments covering only the interest charges for a specific period, without reducing the principal amount borrowed. While this may result in lower initial repayments, it’s important to plan for the higher repayments once the interest-only period ends. Interest-only loans are commonly used for investment debt as they provide flexibility and potential tax benefits. By understanding how interest-only loans work, you can make informed decisions regarding your borrowing needs and financial strategies.

What is a Principal & Interest Loan and How Does It Work?

A principal and interest loan is a financial arrangement designed to gradually decrease the loan balance over time. Each month, a portion of the repayment is allocated to cover the interest charges, while the remaining portion is applied towards reducing the principal amount. This type of loan typically spans a maximum duration of 30 years, with repayment structured to ensure complete loan repayment by the end of the agreed term.

Initially, a significant proportion of the repayment is allocated towards paying off the interest. However, as the loan balance gradually diminishes, the interest charges decrease, resulting in a higher percentage of the repayment being utilized to reduce the outstanding principal amount.

By following this repayment structure, borrowers can systematically chip away at their loan balance, ultimately leading to complete repayment within the agreed-upon timeframe.

Key Features of a Principal & Interest Loan:

  1. Balance Reduction: Monthly repayments are designed to gradually reduce the outstanding loan balance.
  2. Interest Allocation: A portion of each repayment covers the accrued interest charges.
  3. Principal Reduction: The remaining portion of the repayment is applied to decrease the principal amount owed.
  4. Maximum Term: The loan is contracted for a duration of up to 30 years.
  5. Term Repayment: The repayment amount is determined based on the necessary funds to fully repay the loan by the end of the agreed term.
  6. Changing Payment Distribution: Over time, as the loan balance diminishes, the allocation of repayment shifts from a higher interest charge to a lower interest charge and a higher reduction of the outstanding balance.

A principal and interest loan structure enables borrowers to make consistent progress in reducing their loan balance, gradually working towards complete loan repayment over the agreed term. This repayment approach provides borrowers with clarity and a systematic plan to achieve their financial goals.

Variable Rate Home Loans

A variable rate loan is a type of loan in which the interest rate is subject to change over time. The rate fluctuates based on various factors, such as the cost of funding for the lending institution and adjustments to the official RBA cash rate. This type of loan offers certain advantages and disadvantages that borrowers should be aware of before making a decision.

Benefits of a Variable Rate Loan:

  1. Flexibility: A variable rate loan provides borrowers with a high degree of flexibility. You have the freedom to make unlimited additional repayments, allowing you to pay off your loan faster if desired. Additionally, these loans typically allow for early loan repayment without incurring any additional fees or charges.
  2. Redraw Facility: One of the advantages of a variable rate loan is the availability of a redraw facility. This feature allows you to access any additional repayments you have made above the required minimum. It can be useful in situations where you need extra funds for unexpected expenses or investments.
  3. Offset Account: Another benefit of a variable rate loan is the option to have an offset account. An offset account is a separate transaction account linked to your loan. The balance in this account is taken into consideration when calculating the interest charged on your loan. By keeping your savings in the offset account, you can reduce the amount of interest payable on your loan and potentially pay off your loan sooner.
  1. Interest Rate Volatility: The main drawback of a variable rate loan is the potential for interest rate fluctuations. As the interest rate can change periodically, your loan repayments may increase or decrease. This uncertainty makes it difficult to predict your future financial commitments, which can be a concern for some borrowers.
  2. Budgeting Challenges: Due to the variability of interest rates, it can be more challenging to budget for your loan repayments. Fluctuating rates make it harder to plan and allocate your monthly finances, as the amount you owe may change over time.
  3. Financial Risk: If interest rates rise significantly, your loan repayments can increase, potentially putting a strain on your financial situation. It is important to consider your ability to manage potential interest rate hikes and have a contingency plan in place.

By understanding the features and pros and cons of a variable rate loan, you can make an informed decision that aligns with your financial goals and risk tolerance. It is recommended to seek professional advice and compare different loan options before finalizing your choice.

Fixed Rate Home Loans

A fixed rate loan is a type of loan where the interest rate remains unchanged for a predetermined period, typically ranging from 1 to 5 years. This stability offers several advantages and drawbacks to consider before making a decision. Here is an overview of fixed rate loans, their benefits, and potential drawbacks:

What is a Fixed Rate Loan? A fixed rate loan is a financial arrangement in which the interest rate is locked in for a specific term. During this period, both the interest rate and repayment amount remain constant, providing borrowers with a predictable payment schedule.

  1. Rate Stability: With a fixed rate loan, you have the assurance that your interest rate will not change for the agreed-upon term. This stability allows you to budget more effectively, as your repayments remain consistent, regardless of any fluctuations in the broader market.
  2. Protection against Rate Increases: If interest rates rise during your fixed term, your loan remains unaffected. This insulation shields you from potentially higher repayment amounts, providing peace of mind and greater financial security.
  3. Flexibility at Term End: At the conclusion of the fixed rate period, your loan will automatically switch to a variable facility. This transition grants you the freedom to make changes to your loan, whether you decide to keep it as a variable loan, refix it for a new term, or even explore refinancing options with a different lender, without incurring any additional costs.
  1. Break Costs: Should you choose to pay off or close the loan before the fixed rate period ends, you may be subject to break costs, also known as economic costs. These costs can be substantial, depending on factors such as the original loan rate, prevailing fixed rates in the market at the time of closure, and the remaining term of the loan.
  2. Limited Features: Fixed rate loans often lack certain features compared to variable rate loans. For instance, most fixed rate loans do not offer a 100% offset facility or a redraw option. Additionally, they typically allow only a limited number of additional repayments, which can restrict your ability to pay down your loan faster.

It is important to carefully consider your financial goals, risk tolerance, and future plans before choosing between a fixed rate loan and other loan options. Assessing your unique circumstances and consulting with a qualified financial advisor can help you make an informed decision that aligns with your needs.

Split Loans – Fixed and Variable

It is possible to have a mix of variable and fixed interest rates for the same property purchase or refinance. This unique loan structure allows you to enjoy the advantages offered by both loan types. By dividing your loan into variable and fixed rate portions, you can benefit from the flexibility and additional repayment options provided by a variable loan, while also taking advantage of the stability and rate-locking benefits of a fixed loan.

  1. Flexibility: A variable rate portion of your loan enables you to make additional repayments, helping you pay off your loan sooner and potentially saving on interest costs.
  2. Offset Facility: By having a variable rate portion, you can also benefit from an offset facility, where any funds in a linked offset account are used to offset the interest charged on your loan, further reducing the interest payable.
  3. Rate Lock: Choosing a fixed rate portion allows you to lock in a competitive interest rate, protecting you from potential interest rate increases during the fixed period. This provides stability and predictability in your repayments.
  4. Customisation: Split loans offer the flexibility to customize the proportion of your loan allocated to each rate type based on your specific needs and preferences.

At Manson Financial Services, we understand the importance of tailoring loan structures to meet our clients’ unique requirements. Our experienced team of professionals will work closely with you to determine the most suitable split loan arrangement, ensuring you benefit from the features and advantages offered by each loan type.

Split Loans - This unique loan structure allows you to enjoy the advantages offered by both loan types.

What is Negative Gearing and Positive Gearing?

Negative gearing and positive gearing are investment and tax strategies that involve the management of income and expenses in relation to an investment. These strategies can have an impact on your taxable income. Here’s an overview of each concept:

Negative Gearing

Negative gearing is a tax strategy used to offset investment losses against taxable income. It applies when the expenses associated with an investment, such as an investment property, exceed the income generated by that investment. The difference between the expenses and income can be claimed as a deduction to reduce your taxable income. Examples of expenses that can be claimed for an investment property include:

  1. Interest charges
  2. Property management costs
  3. Property insurances
  4. Strata costs (if applicable)
  5. Council and water rates
  6. Associated maintenance costs

By deducting the loss from your taxable income, you can potentially reduce the amount of tax you need to pay. This strategy is commonly used to build wealth through property investments.

Positive gearing

Positive gearing is a situation where the income generated by an investment exceeds the associated costs of holding that investment. For example, in the case of an investment property, when the rental income received is higher than the interest and other associated costs, the property is considered positively geared. In this scenario, the surplus income from the investment is added to your taxable income and is taxed at your marginal tax rate.

Although there is no specific tax benefit associated with positive gearing, it is still a favourable situation as the investment is not costing you anything to hold and is generating additional income. Positive gearing can be an attractive strategy for investors looking to generate immediate income from their investments.

In summary, negative gearing allows you to claim investment losses to reduce your taxable income, while positive gearing involves generating income that exceeds the costs associated with holding the investment. Both strategies have their respective benefits and considerations, and their suitability depends on individual financial goals and circumstances.

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