Home loans, investments and stamp duty - we've got your FAQs covered

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Mortgage brokers Scott Morton from RAMS Mittagong and Scott Lorkin from Nector Mortgage broke down some frequently asked questions when it comes to home loans and properties.

The first thing people who are in the property market should do is to look at their finances and the deposit required to buy a house or investment property.

Both Mr Morton and Mr Larkin agree that the minimum deposit needed to buy a property is five per cent.

"You need a minimum of five per cent of genuinely saved funds," Mr Morton said.

"This number is a little ambiguous though as it doesn't take into consideration mortgage insurance which is added onto the five when lending the maximum 95 per cent.

"You may also need additional funds to cover stamp duty costs and legal fees."

Scott Lorkin explained that stamp duty, now known as Transfer Duty in NSW, had undergone some changes but were still subject to approval.

Transfer Duty is payable on the transfer of ownership of real property.

"First home buyers are entitled to either an exemption or charged at a concessional rate subject to meeting the qualification criteria. If the proposed home is valued at less than $650,000, purchasers can apply for a full exemption of transfer duty.

"If the value of your home is between $650,000 and $800,000, purchasers can apply for a concessional rate of transfer duty based on the amount of the home purchase.

"The State Government changes now include increasing the exemption limit to $800,000."

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According to Scott Morton, if anyone wants to borrow more than 80 per cent of the purchase price, they would need Lender Mortgage Insurance.

"Lender Mortgage Insurance or LMI is a once-off premium paid by the borrower on behalf of the bank if the borrower wants to lend more than 80 per cent of the purchase price of the property," he said.

Mr Lorkin said there were a number of lenders who were prepared to provide finance up to 98 per cent of purchase price inclusive of lender mortgage insurance, but it would be subject to additional qualification criteria.

"These loans would attract a higher interest rate based on risk pricing," he said.

"Lenders Mortgage Insurance protects the lender if the borrower is unable to repay the loan, and the sale of the property does not cover the outstanding loan balance and costs.

"The upside to the borrower is that due to the backing of LMI, lenders are willing to consider low deposit loan applications for deposits as little as five per cent.

"The downside is that LMI can be expensive, and you need to consider this when working out your financial position.

"The LMI premium is generally calculated on how much you want to borrow, the LMI product type (e.g. first home buyer) and the loan to value ratio."

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Homebuyers also need to consider their borrowing power, particularly in the COVID-19 pandemic.

Scott Morton of RAMS said that COVID-19 had impacted borrowing capacity.

Mr Morton said that borrowing power was determined by the listing of all dependents, assets and liability costs against the level of income.

"Banks are asking for a lot more information from businesses and individuals during these times," he said.

"They have also reduced the amount self- employed can borrow.

"All banks always put a small buffer onto the interest rate called 'servicing rate' to allow for any increase in the rate over a period of time."

Scott Lorkin of Nectar Mortgage said borrowing power was determined by the applicants' ability to repay the loan.

"COVID-19 has affected some industries more than others in terms of employment and of course incomes of participants," he said.

"This flows into other areas of the economy, including tenants ability to pay rent on an investment property.

"Lenders are asking additional questions of applicants about the impact of COVID on their current and future employment circumstances."

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Mr Lorkin said the ability to borrow from lenders was based on several factors.

These include:

"Recently there has been an increased focus on living expenses with lenders requiring increased substantiation of living expenses supported by a review of bank statement information to evidence information provided on application forms by loan applicants," he said.

Scott Morton said if people would like to use equity to purchase an investment property, they would have to be mindful that banks won't allow them to borrow the full amount.

"Equity is the difference between what you owe for the property against what you own," he said.

"For example, a house with a value of $500,000 has a loan against of $400,000. The equity value is $100,000. Keep in mind that no bank will allow you to borrow the full 100 per cent value of the property unless it has another property to cross-collateralise with."

Scott Lorkin further explained that equity was the amount available in the property based on the market value of the home.

"This can also be expressed in terms of a loan to value ratio or Loan Value Ratio," he said.

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Scott Morton said people should talk to their tax accountant if they would like to purchase an investment property to discuss positive and negative gearing.

"Positively geared means you make more out of the property each year than it costs you and negatively geared is when the property costs you more than you earn from it," he said.

"There are certain tax pros and cons either way. Your accountant can help you work out the best for your situation."

Scott Lorkin said it was important to note that the value of the property could increase or decrease in value over time.

"Both income and growth need to be considered when assessing taxation impact. Readers should make their own enquiries with their professional advisers on all taxation matters," Mr Lorkin said.

For both Scott Morton of Rams Mittagong and Scott Lorkin of Nectar Mortgage, any time is the right to invest.

"I believe it's always a good time to invest," Mr Morton said. "

"The market will continue to go up and down regardless of you.

"The question should be 'when am I ready to invest'?"

Mr Lorkin agrees.

"We are in an unprecedented environment right now and the impact of COVID-19 could potentially change the outlook in an instant," he said.

"Provided all associated risks are assessed, managed and mitigated; investment decisions certainly could be made.

"Any investment decisions need to be made with an assessment of individual circumstances."

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