Be Calculating

Sydney Morning Herald

Thursday October 25, 2007

Perrie Croshaw

Before signing up for a mortgage, you need to do your sums. Perrie Croshaw tracks down some tools to help you cut through the hype.

You've taken the plunge and decided to buy a property. Rapid calculations ensue as you assess how much you can afford to borrow. A good rule is to keep your mortgage repayments to about one-third of your monthly pretax income.

If you earn $5000 gross a month, you could comfortably service a loan of about $250,000. That might buy you a small two-bedroom apartment or a half share in a two-bedroom house. You don't really want to borrow the full amount because it might stretch your resources too far.

You have 10 per cent of the purchase price set aside for the deposit - $25,000. Now you need to make sure you have sufficient funds to cover all other costs associated with buying a home, such as solicitor fees, searches, government stamp duty, buildings and contents insurance and removalist charges.

But wait, there's more ...

Arranging a home loan incurs substantial fees and charges, too. Here are the typical costs you may face buying a property in NSW worth $250,000 with a loan at 7.1 per cent over 25 years.

First home buyers may be eligible for a one-off grant of up to $7000, and in NSW mortgage duty has been removed on owner-occupier property, and will be removed from investment property from July 1 next year.

Compare your loan: Home loans are not simple financial instruments. Different loans attract different fees and charges and have different features. Comparing them can be a nightmare. You can do this by using an online calculator such as www.cannex.com.au or www.infochoice.com.au. Cannex, for example, searches more than 2000 home loans to compare interest rates, fees, total repayments, offset functionality, flexibility and other product features.

Home loans are rated using a star system, with the best value residential and investment loans attracting five stars.

But often you see advertisements for loan products in magazines or newspapers. How would you quickly compare the rates on offer without relying on a computer to do it for you?

All lenders are required to disclose a loan's average annual percentage rate or AAPR - the true cost of the loan. Lenders are legally obliged to use this true rate, also called the comparison rate, when advertising their home or personal loans. This creates a level playing field because it compares like for like.

The AAPR is the average interest payable over a seven-year period for a loan amount including all upfront and ongoing fees, interest rate and the interest payable on that loan for the loan term, say 25 years.

Assessing the true cost: Comparing the AAPRs of two similar loans, rather than just their interest rates, will give you a better idea of which is the cheaper. Some no-frills loans have low interest rates, no fees and low AAPRs. One loan may have an AAPR of 6.8 per cent, while a similar loan with additional features such as a redraw facility, credit card and chequebook, might have an AAPR of 6.9 per cent. Which loan is better? While the first loan is cheaper, the second loan with all its extras might be the best, most flexible, option for you. Understanding, the AAPR lets you cut through the marketing hype to gauge a loan's real cost.

EXIT FEES

One per cent might not seem like much. But reducing a $400,000 mortgage by 8 per cent to 7 per cent means a savings in mortgage repayments of $4000 over a year. This may be enough of a saving to lure borrowers from one loan product to another or from one lender to another.

But many lenders will penalise you for this disloyalty, charging you an exit fee if you quit your loan early or transfer to another product. These charges are there to discourage you from constantly refinancing your mortgage to take advantage of lower rates.

These exit fees are getting higher and higher and may come on top of a discharge fee of between $50 and $200.

Loans which will almost certainly penalise you for switching include:

* those with a low ongoing rate;

* those which offer an initial up-front discount rate, and;

* fixed-rate loans against variable loans.

The larger your loan, the less likely it will attract a high exit fee. Also, the exit fee may be lower if you switch from one loan product to another with the same lender, rather than leaving that lender altogether. Make sure you read the fine print so you are aware of what exit fees apply to your loan.

© 2007 Sydney Morning Herald

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