Home-loan specialist Lisa Montgomery answers your questions...

By Nila Sweeney
Lisa Montgomery has over 25 years' experience in home lending and is here to answer all your questions in this monthly forum. To ask Lisa a question go to www.resi.com.au/asklisa
Split decision
I am worried about what is going to happen to interest rates over the next few years and have been following fixed rates closely. My plan at the moment is to fix in for a five-year term, but I am hesitating because I am worried about the length of the term and what might happen over that period. Should I go for a combination fixed and variable rate? Daniel
This seems to be a common dilemma for most people considering fixed rates at the moment. Variable home loan rates are at 45-year lows – but we all know that interest rates are cyclical, and like property prices they will fluctuate. Fixed interest rates have already begun to rise as financial institutions begin to predict future interest rate trends. The most common fixed rate period is three years, as it seems to be a time period that most people are comfortable with and can ‘visualise’ to some extent. So regarding your question about splitting a loan between fixed and variable: my opinion has always been to create a balance with your loan portfolio to take advantage of the best of both worlds. The fixed term you are looking at is a long one, and usually you cannot make any additional repayments in that time without paying a penalty. This means that you cannot get ahead on your loan with small payments each month or make a lump sum payment using something like your tax return. By splitting your loan and keeping a portion variable you can take advantage of the variable portion of your loan and pay more off. Read the fine print on your fixed rate agreement, since break costs will apply if you end the contract before the conclusion of the fixed term. Also, make sure you ask what will happen if you need to sell the property – some organisations will allow you to transport the loan to the next house with no break costs payable. Good luck with your decision.
No frills vs fully-featured loan
We are first homebuyers and are about to take the plunge! We are both relatively young (24 and 26 years old) and we feel comfortable making the purchase, but there is one thing we are not agreeing on. My boyfriend really wants to take out a low-rate loan that doesn’t have redraw or allow us to make extra payments. His argument is that the low rate is what matters, but I think we should have a loan that includes these features. Who is right? Erica

There is so much information out there about the different types of home loans these days. Even our friends and families are ‘experts’ and the information they give us will influence our decision. In this case, you are both right! A low interest rate is obviously important, but so are features like flexibility, low fees and good service. Low interest rate home loans that have minimal features are known as basic rate loans – and are popular with first homebuyers because of the low interest rate. I think it’s important for you to choose the right lender and the right home loan from the start, as switching loan providers every couple of years can be costly. It can also divert your focus away from the primary objective, which is to pay your loan off quickly and with the smallest amount of interest paid over the term.

There are some competitive interest rates available at the moment that come with all the bells and whistles like extra payments, redraw, portability, 24/7 access and low fees. You may even want to choose a loan which has a low introductory rate for 12 or 24 months. These loans can be great for easing you into regular monthly repayments, but make sure you get one that allows extra payments in the introductory period as it is a great time to get ahead. Also make sure that when it reverts to the variable interest rate that the rate is competitive. The best way to do this is to check out the comparison rate. This rate indicates the true cost of the loan including fees and interest rate – so the lower the comparison rate the lower the overall cost is to you. In summary, my suggestion is for you to look for a loan that has a competitive rate and those features and benefits you need to operate your loan easily and effectively.
Cost of buying and selling
I currently own a unit and am thinking of moving to a different location and buying a house. I owe $293,000 on my mortgage (taken out three years ago for 30-year term). I also owe $3500 on my credit card and a further $10,500 on a bank loan. I expect to receive approximately $350–$360,000 for my unit, and expect to buy a house for approximately $330,000. I have contacted my lender and they say that I can keep my same loan and move it across to the new property. What I would like to know is, which additional fees will apply when buying and selling? Given I’m sticking with the same lender and mortgage, will I still have to pay mortgage insurance and stamp duty on the new property? Also, if my new property costs less than what I receive from the sale of my unit, does this mean I would have money left over that I could use to pay off my other debts? Sean

Because each lender is different, you really need to verify with them which fees they will charge. That said, the standard costs for a security substitution include: valuation fee, loan variation fee, mortgage registration and discharge costs. Stamp duty applies to all purchases and is charged by the state government – so there’s no avoiding that one!

You need also to enquire about lenders mortgage insurance. As long as the loan size and the loan to valuation ratio remain the same or lower, there shouldn’t be any additional premium payable. You should find out from your lender the maximum loan size your loan can reach without incurring an additional mortgage insurance premium. Once you know all the details of the sale and purchase, you can work out whether you will have sufficient funds to clear your other debts. If at the end there are not sufficient funds to clear your other debts, find out what the Mortgage Insurance premium would be to do so. It may be worthwhile to roll all your debts into one.

Remember that if you do roll your short-term debt into your home loan over 25 or 30 years, you will end up paying more interest over the long term if you pay the minimum payment only. So if you choose this strategy, make sure you pay more than the standard payment to make a real difference to the interest you pay overall.

Good luck with your sale and purchase!!
First Home Owner Grant and investment property
I read somewhere that if you have an investment property and have never lived in it; you can still get the First Home Owner Grant if you purchase your first home to live in? I purchased a 2 bedroom investment unit 2 years ago and have never lived in it (I am still living at home) can I get the grant if I buy a home to move into now? Debra

This is a very interesting question indeed. I recently made an enquiry to the Office of State Revenue for a Resi customer on this very subject. As I understand it, and from the information you have provided, you may very well qualify for the FHOG. The information we have received recently indicates that if you purchased the investment property after 1st July 2000, and have lived in the property for less than six months, you may qualify for the grant. The criteria surrounding the FHOG has been a hotly-debated topic for many years now – and even more in recent times with the bonus amount in place to assist first homebuyers. It’s also worth noting that even though you may be eligible for the FHOG under these circumstances, you may not be eligible for any stamp duty concessions like most first homebuyers, because your name does appear on the title of a property. I would strongly suggest that you contact the OSR in your state to ask these specific questions that relate to your personal situation.