The Law Handbook 2024

546 Section 6: Houses, communities and the road • whether instalments of the principal can be paid without penalty during the loan; • the lender’s policy about late instalment payments; • other services available with the loan, such as an offset account; and • whether mortgage loan insurance is required based on the borrower’s equity share in the property, and the premium payable. You should get detailed information about home loans from three lenders and compare the costs, especially the amount of interest and hidden charges. One way to do this is through a mortgage broker. Many lenders use a very low interest rate for a short initial period of the loan to attract borrowers. However, make sure a loan is cost-effective for the whole term. Use the average annual percentage rate over five to seven years to compare the real cost of each loan. The lender can quote this rate. The lender usually calculates interest on home loans daily or on a particular day in each month. Usually, the borrower repays the principal loan amount and the interest in corresponding monthly or fortnightly instalments. Interest savings can be considerable if you accelerate your repayments. Lenders decide how much to lend by considering: • the property’s value, position and condition; • the proportion of the price that the borrower pays (the borrower’s equity); • the type of title; • the borrower’s financial position, age and credit history; and • any additional security that the borrower can offer. The amount lent is based on a valuation, not the purchase price, of the property. If a buyer needs to borrow money to complete settlement, it is in their best interests to sign a real estate contract that has a finance clause. This clause generally ensures the return of all the buyer’s deposit if the buyer can prove that they promptly applied for a loan but were refused by a stated date. You should make sure that this finance clause gives your bank long enough to complete a valuation of the property and to process your application, as the clause only allows you to get out of the contract if you produce a letter within the specified time frame from the specified lender stating that they refuse to lend you the specified loan amount. A finance clause can only be negotiated where the sale is by private treaty, not by auction. Auction contracts do not contain finance clauses, or generally any other extra clauses that protect the buyer. A successful sale at auction generally results in an unconditional contract. Types of home loans Mortgages provide finance for a borrower in exchange for security over a property for the lender. If the borrower defaults in repaying the mortgage, the lender can sell the property. If the proceeds of the sale are less than the debt and expenses, the borrower must pay the difference. The terms of home loans vary considerably. Variable rate mortgage This is the typical home loan. With a variable rate mortgage, the lender can change the interest rate (and repayments) as the market rates change. Instalments are calculated to pay off the loan in an agreed period (usually 15 to 30 years). Fixed rate mortgage With a fixed rate mortgage, the lender charges a fixed interest rate for a set period (usually one to five years). If a borrower wants the loan to continue, they must renegotiate the terms of the loan. If a borrower wants to repay the loan in full during the loan period, the lender negotiates the terms of the payout and charges a penalty. Second mortgage Second mortgages are available from lenders such as finance companies and credit unions. They are usually short term with very high interest rates. The first mortgage lender must facilitate the lodgment of the second mortgage by making the Certificate of Title available for lodgment. This may incur additional legal and administration fees to allow the first mortgagee to complete their due diligence. Reverse mortgage A reverse mortgage is where a lender advances money to a person who is retired or elderly. A reverse mortgage allows a home owner to borrow a limited percentage of their property’s value (15–25 per cent). Repayment of the mortgage is deferred until the house is sold, the home owner dies or goes into care. This can significantly reduce the owner’s equity in the property by the time the loan is repaid as interest accrues and compounds. Home owners should