Category: Finance

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Buy Now Pay Later: The Hidden Dangers

The Buy Now Pay Later (BNPL) sector is winning-over the youth demographic with the promise of instant gratification. However leading mortgage brokers are warning that with every sugar-high comes the risk of a corresponding low.

‘Buy Now Pay Later’ providers such as AfterPay, Zip Pay and Pay It Later have experienced massive growth in popularity. The number of users jumped from 400,000 to approximately 2 million between 2015 and 2018 and have continued to rise. With COVID, many more shops have signed up in an attempt to persuade more buyers to spend with them.

Driven by a simple proposition whereby the BNPL provider pays the merchant, allowing the customer to obtain the goods or receive a service immediately while subsequently paying off the debt generally through instalments, Buy Now Pay Later presents a tempting offering. However, this is no different to using a credit card – with less governance!

But as the sector’s breakneck growth continues, mortgage professionals are warning users – particularly in the younger demographic – to be cautious of overdoing it as this could risk affecting their chances of securing a home loan further down the track. “It’s the layby of our day but in reverse. It’s your forward credit for an item, which I don’t agree with,” said one leading mortgage broker.

In theory it makes sense. A consumer gets the item or service and pays it off over instalments, so they’re actually pushing forward the liability. In some cases it means paying a higher interest rate than a credit card with additional monthly fees. This might be OK for someone that manages their money well, if they pay off the item on time and use their mortgage offset account correctly. This way they are delaying the expense and offsetting more of their savings against their home loan.

Buyer Beware

However there’s probably one per cent of people doing that and the rest are spending beyond their means. As a result, there may be a stigma associated with using BNPL schemes rather than paying up-front or using a fully vetted personal loan from an established lender. Utilising a Buy Now Pay Later method may send the wrong message to a bank. If a lender sees many BNPL transactions showing frequently on a client’s bank statements, that will trigger more questions about their spending behaviours. Ultimately this may mean the bank chooses to decline the application.

We would much prefer to see our clients save for smaller value items, utilise personal loans for bigger purchases and demonstrate good financial habits. If you are concerned about your level of expenditure or your ability to secure a home loan, a conversation with Astute St Leonards could set you on the right path.

It’s important to appropriately manage your expenses well in advance of applying for a home loan. That way you can show that you can save and afford to service a mortgage when the time comes.

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5 Great Reasons to Use a Broker

We recently created a series of four simple videos to explain the benefits of using a financial broker. If you haven’t seen it on our Youtube channel (with nearly 10,000 views) then have a look at the first edition here. In this video, I give 5 great reasons to use a broker when looking for a home loan or any financial loan.

Over the next month, we’ll show the other videos in the series! In the meantime have a look at our Astute St Leonards page to see the breadth of services we offer:

  • Home loans and mortgages.
  • Refinancing existing loans to a lower rate.
  • Finance for renovations.
  • Construction loans.
  • New and used car loans.
  • Car restorations.
  • Musical instrument purchases (talk to use about our preferred partners).

We are your local resource for all things finance, so start by learning the 5 great reasons to use a broker like Astute St Leonards.

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Don’t Forget the Extra Costs of Buying a Home!

When taking out a mortgage, don’t forget the extra costs of buying a home – consider the associated fees and expenses that you will incur. Here are some of the extra costs that you’ll need to consider when you get a home loan:

Home Loan Application Fees

Most lenders charge a home loan application fee. This can range from loan to loan, and covers:

  • Loan contracts
  • Property title checks
  • Credit checks
  • Attending a settlement
Mortgage Fees and Costs
  • Mortgage establishment fees – Lenders generally charge a mortgage establishment fee – a fee for setting up a mortgage.
  • Property valuation – A third party – chosen by the lender – is appointed to determine the value of your land and improvements.
  • Mortgage registration – Your mortgage deeds need to be registered with the Government.
  • Mortgage stamp duty – Some State Governments charges stamp duty to register your mortgage.
  • Lenders mortgage insurance – If you don’t have 20% of the purchase price or the value of the property, the lender will require you to pay  for a lenders mortgage insurance policy that covers their risk in the event you default on your repayments.
Property Fees and Costs
  • Building, Pest and Electrical Inspection fees – It’s wise to have your new property inspected for any structural or electrical problems and for pests (e.g. termites).
  • Stamp Duty – Governments charge Stamp Duty to transfer the ownership of a property.
  • Registration of Transfer Fee – The new owner of the property must be registered at the Land Titles Office.
  • Legal fees – You generally need to pay a Solicitor of Settlement Agent to handle the transfer of ownership of the property on your behalf
  • Home & contents insurance – Most homeowners insure their home and contents against a range of threats: burglary, fire, storm, etc. Lenders will insist that your property is insured while you have a mortgage.
  • Life and income protection insurance – Borrowers should consider protecting their incomes and themselves while they have a mortgage.
  • Utility costs – Connecting electricity, gas and telephone can attract a fee.
  • Council Rates – Your local council charges rates to cover garbage collection and a host of other services.
  • Water Rates – The water corporation charges rates for the supply and upkeep of water to your property.
  • Body corporate fees – If you buy an apartment or Strata Titled property, body corporate fees will be charged. Some buildings can have very high feed – particularly if the building is in need of a major work (e.g. concrete cancer, security upgrade, new hot water system, etc) or if there are lifts, pools and other communal facilities. This should be a key question to ask before agreeing to buy an apartment.
  • Maintenance costs – Don’t forget to make provision for regular maintenance on your home – even if you decide not to undertake significant renovation.

There is a lot to consider when you are ready to buy a new home – especially if this is the first time you have bought a home in Australia. Our advice is to talk through these when you are reviewing the options for your home loan – in some cases it may help your loan application if you have a plan to cover the ongoing costs of ownership.

Make sure that you don’t forget these extra costs when buying a new home – talk to us at Madison Wells Pty Ltd t/a Astute St Leonards to help with your planning! We are here to help you through the process.

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Why is Lenders Mortgage Insurance a Good Idea?

While some view Lenders Mortgage Insurance (LMI) as being exclusively beneficial for lenders, we explore the value for first home buyers and why it is a good idea.

Not to be confused with mortgage protection insurance (which is designed to protect the borrower), LMI is the insurance that covers the lender’s risk within a residential mortgage transaction should the loan go into arrears and the borrower is unable to resolve the situation satisfactorily. LMI is a fairly common practice within the industry, particularly for new home buyers who may struggle to save a deposit. It allows an additional fee to be paid by the borrower and usually applies when the loan is more than 80 percent of the purchase property’s price.

The purpose of Lenders Mortgage Insurance is to ensure security for the lender in case the borrower fails to make loan repayments. Even though the actual house acts as security, the nature of the property market, like any investment class, means there is a chance that its value could decline, resulting in a financial loss for the lender.

The cost of the premium is dependent on several factors, such as the loan size and property value, and most insurers are flexible when it comes to the method of payment. It can either be a one-off upfront premium payment or that premium could be included in the overall cost of the loan and included in monthly repayments. It is not transferable, which means a new loan may require a new fee depending on how much equity the borrower has.

What’s in it for me?

While it may appear that it is exclusively favourable to the lender, there is value to borrowers in paying the premium. Opting for LMI means it allows a borrower to independently purchase a property sooner than they otherwise might. LMI is the alternative to using a guarantor or having to save for a bigger deposit, both of which are not feasible options for many first home buyers.

A deposit of at least 20 per cent of the desired loan amount is required for a borrower not to be deemed ‘high-risk’. If you consider that the average price of a home in Sydney is around $650,000, that would mean a deposit of around $130,000 is required. The beauty of LMI is that it buys time, which means borrowers with smaller deposits are able to enter the market sooner rather than later.

The major benefit of LMI is that it allows the dream of homeownership to become a reality for a lot of first home buyers. To see if this is the case for you, give us a call at Astute St Leonards, we are happy to help.

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Five Ways to Finance a Home Renovation

Considering transforming your home from ‘banal’ to ‘brilliant’, but lack the funds to support your makeover? Never fear, Astute St Leonards have rounded up five home renovation finance options that could help turn your dream into reality.

1. Equity Release / Top Up Home Loan

This is probably the most common way home owners borrow money when they want to get renovation finance. It involves borrowing against the current value of your home, before any value-adding renovations and in most cases allows you to obtain the funds upfront. You won’t be able to borrow the full value of your home but, without mortgage insurance, you can usually borrow up to 80 per cent of its value if you own it outright. One potential problem is that the cost of your renovations may actually be higher than the equity you have available. If you run out of funds mid-construction – and if the property is then not in sound, lock up condition – you may have an issue obtaining extra funds down the track.

2. Construction Loan

If you’re planning to completely transform your home and undergo a major makeover, this may be a good option as you can spread the cost over a long period of time. You could even possibly borrow up to 90 per cent of the end value of your home and take advantage of mortgage rates which tend to be lower than credit card and personal loan rates. With a construction loan, the lender will assess the value of your home after the renovation based on the building plans and you can typically borrow against that value.  You won’t be given the full loan amount upfront, but usually in staggered amounts over a period of time – this is called ‘progress payments’ and is linked to a fixed price building contract which will be from your builder.

3. Line of Credit

When you apply, you can establish a revolving credit line that you can access whenever you want to – up to your approved limit. You only pay interest on the funds you use and as you pay off your balance, you can re-borrow the unused funds without reapplying if that becomes necessary.  However, care must be taken not to get in over your head in terms of serviceability. Make sure you can make repayments on the line of credit that will reduce the principal because your minimum repayment only pays the interest, it will not reduce the loan. Rates on this product are typically much higher than a construction loan or top up loan. This product feature is great if managed well, but can also be a trap if not seriously considered as your limit will never change.

4. Personal Loan

If you’re only making minor renovations – personal loans are usually capped at around $30,000 to $50,000 – this might be suitable, but interest rates on personal loans are higher than on home equity loans and payments need to be made usually over a maximum of seven years.

5. Credit Cards

This option should only be considered if you want to undertake really small renovation projects. The interest rates are usually much higher than on mortgages, but for a very small project, that extra interest might actually total less than loan establishment fees.

*HomeBuilder

If you’re looking for further assistance to be able to afford your property renovation project, the Federal Government recently announced $25,000 grants for eligible Australian owner-occupiers to build a new home or substantially renovate an existing home. The Government’s HomeBuilder package for home renovation finance is designed to assist the residential construction market by encouraging the commencement of new home builds and renovations. Income and other conditions apply and this grants program has been expended to 31 March 2021. For more information visit the Treasury website.

One thing you must do

There are very few exceptions to the rule that your renovations should add more value to your home than they will cost to carry out. Think about how the money you spend on a renovation will increase the value of your property. For example, consider making changes that would appeal to the majority of potential buyers to help you sell your house faster and at a higher price.

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Finance Support for Business and Personal Use

Madison Wells Pty Ltd is pleased to announce two new partnerships to help our customers in this time of economic uncertainty. Cash flow is a critical aspect to the success of any business or even personal finances. Balancing the flow is key to financial success and is the foundation of our Revenue and Cost Management services. We are now able to provide finance support for business and personal use.

Astute Financial St Leonards

Madison Wells has partnered with the Astute Financial Group to offer finance, insurance and wealth services. Primarily geared to the residential, investment and vehicle market, Astute St Leonards can now provide a range of products and services to help our customers with their future finance planning.

Astute Financial has been in operation since 2000 and has had a relationship with the founders of Madison Wells since that time. We felt that it was only natural to offer their products to our own customers considering the help they have provided to us over the last twenty years. Astute Financial was one of the first businesses to offer a fully integrated financial services business model that offers their customers access to specialists in finance, insurance and wealth services.

Finport

Madison Wells recognises that many of our customers require help with their cash flows when importing product for resale. Our partnership with Finport enables us to help with the management of costs with the gap between purchasing and resale. Finport are a leader in trade finance smoothing out the cash flows between ordering products and the later sale. Unique to this market, Finport also manage the freight forwarding, reducing the risk further for companies who have regular imports. Importantly, this also applies to shipping interstate.

Importing products needs cash flow management - Madison Wells provides finance support for business and personal use.
Importation and logistics are key to business success

This diversification through new partnerships provides simple, straightforward solutions. Every stage of your financial journey is important and Madison Wells will keep all your finance needs managed properly. Talk to Madison Wells today about how we can help provide finance support for business and personal use!