Budgeting for a loan

Before you try to get a loan, it helps to have worked out what you can afford to pay each week in loan repayments. If you need help with budgeting or calculating your repayment ability, you can get help from a financial counsellor. Their services are free and available through Credit Helpline on 1800 808 488. You might also try your local neighbourhood centre or community legal centre. Some charities and church groups will also help. If you need an interpreter, call the Telephone Interpreter Service on 13 14 50.

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What is a mortgage?

When a financial institution lends you money to buy your home, it acquires a legal interest in the property. In this case, the property is said to be 'mortgaged'. A mortgage acts as a form of security in case you fail to make the repayments.

As the property owner, you are called the 'mortgagor' and the home loan provider is called the 'mortgagee'.

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Shopping for a credit provider

It's wise to shop around for a credit provider (also known as a mortgage provider) as you would for a car or a house. It's a big commitment and there are many players in the market. Doing your homework could save you thousands of dollars in the long run.

Check out the 'Which mortgage?' section on the Cannex Web site for a comparison of all the home loans available on the market. This site also compares personal loans, overdrafts and credit card deals.

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Finance brokers

Increasingly, Australians are using finance brokers (also called mortgage brokers) to find home loans that suit them. A finance broker is an agent between you and your home loan provider. They look at your individual situation and then arrange the loan they believe is best for you.

While using a finance broker can save you time and hopefully money, keep in mind that generally they receive their commission from the home loan provider. So, there is always the risk that they could recommend a mortgage that isn't the best one for you.

If you decide to use a finance broker, do your homework first so you know you're getting a good deal.

It's also wise to ask them a few questions before you arrange a meeting. For example:

• How many credit providers and products do you assess?
• Which credit providers do you have on your list of lenders? 
• How do you get paid?
• Does the commission you receive vary between mortgage providers?
  

Look in the Yellow Pages to find a finance broker in your area. In most cases, they will arrange to come to your home to talk with you.

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How the law protects you

A few years ago, the credit laws changed to give more protection to people borrowing money. This law is called the Consumer Credit Code. It requires home loan providers to give you information that is clear and easy to understand, so that you can make a decision on whether you can afford to borrow. The Consumer Credit Code applies to:

• mortgages
• housing loans
• credit cards
• department store cards
• overdrafts
• hire of goods
• Short-term credit.

Before you sign a mortgage contract, the home loan provider must give you:

• details about fees and charges in a pre-contractual statement and
• an information statement which outlines your rights and obligations.

Pre-contractual statements should tell you:

• the amount of money you are borrowing
• the annual percentage interest rate
• how the interest is calculated and when it is charged
• the credit fees and charges to be paid or how they will be calculated
• how they will inform you of changes affecting interest rates and fees or charges.

Important. Always read the mortgage contract thoroughly before you sign it. It's a good idea to take a copy home so you can study it and get legal advice if you are unsure about some of the terms. Remember you are not obliged to sign anything on the spot.

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Comparison rates

A comparison rate is a tool to help you identify the true cost of a loan.  It is a rate which includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure.  For example, a credit product’s advertised interest rate may be 6.49 % and its comparison rate 6.75%.

A comparison rate must be included in any advertisement for fixed term consumer credit which contains an interest rate; and with comparison rate schedules – that is, lists of comparison rates for a standard range of loan amounts and terms – must be made available by credit providers, finance brokers, and linked suppliers (suppliers of goods and services who refer customers in need of finance to particular credit providers).

Comparison rates only have to be provided for:

• credit which is wholly or mainly for personal, domestic or household purposes;
• fixed term credit – that is, credit that must be repaid within a specific time period. (A home loan with a term of 25 years, and a car loan with a term of 5 years are examples of fixed term credit.  In contrast, credit cards, which do not have to be repaired within a particular time period, are examples of continuing credit).
  

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Your credit history counts

If you don't have a good credit rating you may not be able to get a home loan. If you have had problems paying off a loan or credit card in the past, your details may be held with a credit reference company.

Baycorp Advantage Ltd is the largest credit reporting agency in Australia. It has over 4,000 subscribers (many are home loan providers) who can check with them to see if you are a good risk.

If a home loan provider rejects your loan application because of your credit record, you may want to get a copy of your individual credit file to check the information.

Alternatively, visit www.mycreditfile.com.au. 

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Getting someone to guarantee your loan

Sometimes when you have trouble borrowing money from a home loan provider, a friend or family member may be willing to guarantee the loan. This will make them a 'guarantor' under the law. However, this is a big step and a decision that shouldn't be taken lightly. Essentially, it will mean that if you don't pay, they will have to!

Before you take out the loan, your guarantor must be given a copy of the mortgage contract and the document explaining a guarantor's rights and liabilities. If you stop making payments, the home loan provider will first take action against you. They can usually only take action against the guarantor after they have tried all avenues to get the money from you.

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Borrowing with your partner

If you decide to take out a home loan where both your name and your partner's name are on the mortgage contract, then you become a co-borrower. This means that you will both be responsible for the debt. If the payments stop the home loan provider can choose which one of you to sue for the whole debt. This may depend on:

• who has the highest income
• who can be found at the time.

There is no legal requirement that you and your spouse or partner must both sign a loan contract unless you are a co-borrowers.

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Income Protection Insurance

Income Protection Insurance covers you in case you can't make repayments because of unforeseen circumstances such as unemployment, sickness or injury. The benefits and costs vary so it's a good idea to shop around before you decide which insurance company to go with.

Mortgage providers can't force you to take out the insurance. However, they can insist that you take out insurance for the building and contents. There is no obligation to take out insurance through the insurance arm of the credit provider. Shop around to find the best deal.

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Changes to the mortgage contract

Your mortgagee can only change the contract if the contract specifies that changes may be made. Read the contract carefully so that you know what changes may occur.
The mortgagee must generally notify you of interest rate increases. Notice must be given no later than the day on which the increase takes effect.

Notice must be 30 days if:

• the way interest is calculated or applied is changed, or
• a credit fee or charge is increased.

If the mortgagee does not notify you individually about the change, the mortgagee must publish the change in a newspaper and will confirm the information on your next statement.

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Difficulties with making payments

If you can't meet your repayment obligations due to temporary unemployment, sickness or other reasonable cause, you can apply to the mortgage provider to vary your payments. If you can't reach an agreement contact the Office of Fair Trading for help.

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