Why do property buyers use a mortgage broker to find their finance?
Being a “mortgage” broker is a lot like being a “marriage” broker.
There’s this bride looking for a husband. She wants a husband for life; not just for the next few months.
To avoid making a mistake she consults a reputable marriage broker.
The broker knows all of the available suitors. She’s dealt with them before.
This one might have plenty of gold and jewels but he’s also pushing ninety. This one is tall, dark and handsome but he’s as poor as a church mouse. This one is both rich and handsome but he has a history of leaving broken hearts wherever he goes.
The marriage broker’s job isn’t to recommend the first man to come along. It certainly isn’t to recommend the one that is paying the largest amount of money and it isn’t to recommend someone that is destined to be a disaster.
The happy ending to the story is obviously an ending where everyone is happy.
Finding the right home loan can be a very similar story.
Firstly, a good mortgage broker knows who to call and generally knows which banks or which lending institutions are likely to suit the property buyer’s situation. (There are dozens of different banks and lenders offering hundreds of different home loans).
The broker (after doing their homework) then recommends two or three banks (or lenders) to the property buyer and explains the features and benefits that are available with these loans. One lender may offer a redraw facility, and another may let you pay off the loan quicker without any penalties, another might be willing to talk to self-employed people. Every lender offers different benefits and facilities.
In the past if you got all the benefits then you usually paid a higher interest rate but these days the banks and lenders are very competitive. There are some amazing products out there but no two are alike. My job is to find the right home loan that meets all of my client’s needs and wants.
It’s just a matter of knowing where to shop.
The mortgage broker then helps to set up the loan. This might be quite straightforward or it might be complex. It might take a couple of days or it may go on for weeks.
The first thing I do is find out EVERYTHING that I need to know about my client (and their financial situation). I expect them to be completely honest with me and I’m completely honest with them. (My business is to organise & obtain finance... it’s not PR).
I work for my client. I don’t work for the banks or lenders. Sure the bank writes me a cheque when the deal is done but my clients’ interests take precedence over everything else. Nothing that I do is hidden or below the table. My clients always know who is paying me and how much.
So my advice is: choose your mortgage broker wisely then listen to their advice.
Property equity is power
Many people believe the fallacy that in order to invest in property you need to be wealthy or to have a high income. The reality may be somewhat different, especially for people who already own (or are paying off) their own home.
In fact, the equity you have in your current property may enable you to buy one, two or even more residential investment properties which grow in value over time and increase your net worth as a result. It’s like the ad says…..“equity mate”.
Equity can be defined as the difference, in dollars, between the current market value of a property and the amount owing on the property. This equity can be used in a number of ways, but we’re going to look specifically at how it can be used to buy an investment property.
Let’s look at an example:
A couple own a home which is worth (in today’s market) $295,000. They also have an existing loan on the home of $123,000. This means their “equity” is $295,000 - $123,000 = $172,000.
The next thing we need to determine is whether or not our couple can afford to borrow (using the existing equity in their home) to buy an investment property.
Usually a bank will lend around 75% of the value of a property without the borrower having to pay mortgage insurance, so we will use this level of borrowings in our example.
75% of the $295,000 is $221,250, but we need to subtract the existing loan ($123,000) from this amount.
That leaves us with $221,250 - $123,000 = $98,250 which could be used as a “deposit” to buy an investment property.
Our couple could then also borrow 75% of the value of the investment property they want to buy. If the property is worth $285,000, then they could borrow $213,750, plus the “deposit” of $98,250 we determined they could borrow from their existing home, giving them total buying power of $312,000.
This means, as long as the bank can establish our couple can service the loans based on current income, as well as income from the new investment property and potential tax savings, they can go out and buy $312,000 worth of property.
This would mean they would own $580,000 worth of property with total borrowings of $123,000 + $98,000 + 213,750 = $298,000. If these properties increase in value over the next 12 months, by say 7%, then they have added $40,600 to their net worth in a year.
So you can see the power of using existing equity to grow your property portfolio and your personal wealth over time.
Of course, before contemplating any investment in property we strongly recommend that you seek advice from your accountant or other financial advisors.