Community CPS - Managing Your Finances - Retirement

What type of loan do I need?
How much can I borrow?
Applying for a loan
What a lender is looking for
Your credit rating
Right and wrong reasons to borrow money
Terms to know
The First Home Owners Scheme
How to buy a home: a step by step guide:
Tips on applying for a loan
Tips on buying a home
Loan Interview Checklist

Take Control! Free - Visit the publications page for free downloads of publications

Your plans for retirement are probably to live comfortably on your savings and investments with minimal debt.

One of your biggest financial goals, that of owning your own home, may be realised. But, what about the holiday you've promised yourself. Also, the car has seen better days, and you would love to upgrade to a new model.

These new goals require considerable financial outlay and so it's worth considering a loan.

A loan can allow you to fast track your finances and open up new opportunities you might otherwise miss out on, but it's not a decision to be taken lightly.

When you take out a loan you are making a legally binding commitment to:

repay the loan plus interest
in regular instalments
over a set time period

A loan forces you to stick to a disciplined financial plan to meet weekly or monthly loan repayments. Along with household bills and basic essentials, loan repayments become an important, ongoing expense. That means no last minute splurges or savings blowouts!

Tip
Repaying a loan takes discipline and financial planning so it's not for everyone. Carefully consider the reasons you want to borrow the money and how you will make payments before taking out a loan.

Loan application checklist

You'll need to have copies of these documents when applying for loans:

your last two pay slips
a letter of employment, showing your start date, position and salary
your last credit card statement
current account statements from savings or cheque accounts
valuation documents or statements from other assets such as term deposits and managed funds
current statements from loans and other credit accounts
share certificates (if you own shares)

What type of loan do I need?

There are lots of different loans available so it's important to find the right type of loan to fit your lifestyle and goals. A good loan should help you reach a well-considered goal, be flexible and within your financial means.

Shop around for the best deals and learn about the different loan products available. Don't be afraid to ask lots of questions-it will help you to make the right borrowing decision.

Loan	Benefits	Tips
Credit card A revolving line of credit allowing users immediate access to funds in exchange for an interest rate higher than a personal loan	ideal for financing short term purchases once approved credit can be accessed instantly can be a useful way to consolidate simple household bills into one easy repayment credit can be quite cheap if the balance is paid off in full each month, saving on interest payments many cards offer up to 55 interest-free days to pay off the balance used wisely, regular credit card use can help accrue points on a linked loyalty card scheme using a credit card while shopping, instead of the ATM or EFTPOS, can save on savings account transaction fees some cards come with a range of free added extras, including extended warranties and product or travel insurance the card issuer can reverse the charges which provides extra protection when items are disputed or mail order purchases are faulty	instant access to credit can be dangerous for spur-of-the-moment shopping expeditions parting with cash is visible but the impact of putting it on credit is not obvious until the statement arrives interest can accrue quickly on balances left unpaid each month loyalty schemes, encouraging card users to clock up dollars in exchange for free gifts or discounts, can lead to card overuse there are many different styles of credit cards-some have interest-free days, some don't in exchange for a lower interest rate-read the fine print before choosing the best card for you withdrawing cash from a credit card account will attract interest from day one cards with an interest free period will charge an annual fee
Car loan A type of personal loan that can be either secured (other assets are guaranteed as security for repayment of the loan) or unsecured	suitable for medium term borrowing goals borrowing to buy a more expensive car may become cheaper in the long term than buying an older cheaper one that requires costly ongoing service can be more cost effective than taking out special finance through a car dealership	might be an enticement to buy a far more expensive car or one with more 'added extras' than you could afford through simply saving the cash the car's value may diminish in the future, leaving you with only a minor asset once the loan is paid off
Personal loan A basic type of loan that can be either secured or unsecured, with the option of having fixed repayments or variable repayments	suitable for medium term borrowing goals can help you reach a goal faster, be it an overseas study trip or buying a new piece of furniture can be a simple and effective way to consolidate other outstanding debts into one regular lump sum repayment cheaper than using a credit card to pay for large-ticked items a good starting point to learn the discipline of borrowing, in preparation for borrowing to buy a home	the apparent benefits of the loan may not be tangible, you may not have a visible 'asset' once the loan is paid off (eg. if the loan was used to finance a trip or consolidate debts) can run the risk of simply borrowing from one lender to pay off another not s flexible as a credit card, repayments are set and must be met regularly to pay out the loan if you have a mortgage, a line of credit attached to the loan can be a cheaper source of funding if the loan is secured, there may be valuation and legal fees to pay
Consolidation loan Usually in the form of a personal loan, used to bundle a range of debts together under one loan	can save interest by paying out higher interest rate loans and bundling them into one lower interest rate debt can help organise finances and, if in trouble, can set a borrower on a more disciplined, organised path personal loans generally have lower interest rates than other loans or lines of credit such as overdrafts, credit cards or finance company loans generally low in fees stops the confusion of paying out a range of staggered interest repayments on different loans, possibly saving a borrower from defaulting on a particular loan and jeopardising their credit rating	if used unwisely a borrower can end up 'borrowing from Peter to pay Paul'-shunting a debt from one institution to another a borrower may not finish paying off the loan with a tangible asset, such as a car, particularly if the loan was used to consolidate a mass of bills can lead to undisciplined borrowing in the future if the lesson is not learned that undisciplined use of debt can be expensive
Home loan More types than there are flavours of ice-cream, but is generally a long term loan with a fixed or variable interest rate (and therefore fixed or variable repayments)	suitable for long term borrowing goals perhaps the only way most people can eventually own their own home creates the opportunity to create a long term secure and valuable asset channels money that would otherwise be used as 'dead' rent into a personal wealth creation strategy the discipline of paying off a home can lead to greater overall financial health bundling products under one roof-eg. a term deposit, credit card and mortgage-can attract a variety of discounts and concessions with an institution some home loans come with a range of added extras like redraw facilities, early repayment without penalty and interest offset credit cards can be linked to a loan account to attract cheaper interest rates	is a long term debt, requiring long term discipline requires a saved deposit creates less flexibility in lifestyle, unlike renting a home it can't easily be vacated on short notice home owners with a variable loan are subject to changing interest rates, wreaking potential havoc on the household budget refinancing one home loan to move to another can lead to a raft of fees and charges breaking out of a fixed home loan early can be subject to penalties any credit cards linked to the loan account are secured by your home
Home equity loan A type of home loan that has a line of credit against the equity in the home, like a big overdraft	a long term loan a more flexible style of home loan allowing immediate access to funds can be a simple way of managing all household finances in one big account may offer card and cheque access a cheaper way of paying regular bills than a credit card no restrictions on making additional repayments on the loan at any time immediate access to funds can help borrowers take advantage of cash-saving opportunities like sales or early bill repayment can be used to take advantage of share floats or other investment opportunities suitable for renovations and home improvements	undisciplined borrowers ma be tempted to dip into the equity and splurge on unplanned purchases undisciplined spending can lead to an even greater debt than the loan amount originally borrowed the debt may still be outstanding long after the purpose of the loan has been reached like any home loan, the debt is long-term and requires discipline borrowers should read the fine print before taking on a loan of this structure as the loan is subject to a range of conditions and fees the variable interest rate can be changed at the lender's discretion
Overdraft A credit facility attached to an existing account	suitable for short term access to credit quite easy to set up provided your credit history is sound once set up, the overdraft is pre-approved so access to funds is immediate less tempting to access-and overuse-than a highly portable credit card many have a cheaper rate than credit cards	like a home equity loan, instant access to a potentially large sum of money can be dangerous interest accrues immediately once funds are accessed a large overdraft can attract a range of fees and servicing charges a small overdraft is less flexible than a credit card
Investment loan Can be a variation on a standard home loan or can be a type of fixed interest repayment loan, as it will depend on the borrower's reason for taking out the loan	can be a medium to long term borrowing goal a powerful way of harnessing current assets to create more financial gain interest repayments on some investment loans can be tax deductible, depending on the style of investment might also attract cheaper interest rates or fees if other products like a credit card are taken out with the institution	can hold more risk than borrowing to buy the family home and this is reflected in higher interest rates fees and charges can also be higher than non-investment loans could ultimately end up with a large debt and no assets if the investment is unsuccessful

How much can I borrow?

Different loans have different borrowing limits, but as a general rule, loan repayments are limited to a maximum of 25 to 30 per cent of your pre-tax income. So if you earn $1,200 a month, your loan repayments should be no more than $300 to $400 a month.

Tip
Click on the Calculators button on the right to work out your net worth and how much you can afford to borrow on your current income.

Applying for a loan

Taking out a loan is a big step but it need not be a daunting experience. Knowing what a lender is looking for and having a good reason to borrow can improve your chances of getting a loan approved.

What is a lender looking for?

Put simply, a lender is looking for evidence that you are capable of repaying your debt within a specific timeframe. To assess your level of financial risk a lender will weigh up:

your financial history, checking your credit rating, personal, employment and residential history
the current value of your assets (your net worth)
the size of any current liabilities (other debts)
your future earnings potential

This information is gathered from the loan application form you will be asked to fill out, providing the lender with a snapshot of your current financial situation.

Your credit rating

Having a good credit rating is very important when it comes to applying for any type of credit or loan. Your credit rating is based on how reliable you are at repaying debts, so if you've never had a loan or credit before, you have no credit history. Your application may still be approved but not as easily as if you had a solid credit rating.

To earn a good credit rating:

pay bills and loan repayments on time-never let 60 days or more lapse on overdue accounts
answer all questions on credit application forms fully and accurately
contact your creditors immediately if you get into difficulties

To improve a poor credit rating:

seek financial counselling
establish a consistent employment record
draw up a budget and live within your means
pay your rent or home loan on time
establish some savings
never pay credit card bills or loan repayments late
check that your credit file is accurate

For a copy of your own Credit Reference Association of Australia (CRAA) file call 1300 364 141 toll free for more information. Be sure to check if you will be charged for copies of your file.

Saving
Involves regularly setting aside money to stockpile funds and reach a financial goal

versus

Borrowing
Involves regularly repaying a set amount of money you have borrowed from a lender.

Right and wrong reasons to borrow money

RIGHT

WRONG

I need...

to buy a car to travel to work.
to buy a flat to live in that will also be a good investment for the future.
to pay out a few minor debts and consolidate my finances.

I want...

to buy a new car because I'm sick of the old one.
to go on an unbudgeted overseas holiday with friends next month but I don't have much money saved.
to pay off a mountain of debts and keep creditors off my back.

Terms to know

Before applying for a loan it's important to know some lending jargon-it means you know exactly what you're signing up for, and may even help you ask more questions.

Borrower
person borrowing funds, the loan applicant-you!

Lender/credit provider
the institution or finance company providing the funds

Fixed loan
a loan where the interest rate and repayments are set for a pre-arranged term

Variable loan
the interest rate can vary at the discretion of the lender, often changes in line with official financial market movements

Secured loan
a loan where the lender takes additional security out over other assets worth more than the loan. If the borrower fails to pay out the loan, the lender can take possession of the secured assets

Unsecured loan
a loan that does not have other assets offered as security against default on the loan, in exchange the interest rate is usually higher

Interest only loan
loan repayments comprise only the interest portion, the remaining balance is due at the end of a term or the loan is restructured to include principal and interest repayments, usually for investment purposes

Principal and interest loan
standard style of loan where the initial amount borrowed is repayable over time with additional interest charges included in the repayments

Loan contract
document binding lender and borrower to a lending agreement

Guarantor
guarantee by a third party to pay a debt if the original borrower can't meet the debt repayments. For example, if a guarantor offers their home or other assets as security against the loan for a car, the creditor can legally seize the asset if the debt is not repaid.

The First Home Owners Scheme explained

As of July 1 2000, first homebuyers became eligible for non-means tested assistance upon the purchase of their first home.

Known as the First Home Owners Scheme (FHOS), the scheme means new homeowners will receive a $7000 grant administered by the States and Territories to put towards the purchase of their first home.

As outlined by the Australian Taxation Office, the broad principles of the grant are:

To qualify for assistance, neither the applicant nor their spouse (or de facto) must have previously owned a home, either jointly, separately or with some other person.
Entering into a binding contract or commencement of building, in the case of owner-builders, must have occurred on or after 1 July 2000.
An eligible home will be located in Australia and will be a new or established house, home unit, flat or other type of self contained fixed dwelling that meets local planning standards.
An eligible home must be intended to be a principal place of residence and occupied within a reasonable period.
Assistance will not be means tested.
Joint applicants will be restricted to a single application for a single property and only one payment of $7,000 will be made.

The grant assistance will not be means tested and joint applicants will be restricted to a single application for a single property and only one payment of $7,000 will be made. If the consideration of the home is less than $7000 then the grant amount paid to the applicant will equal the consideration.

Who is eligible?

You will be eligible to apply if you:

Are buying your first home
Are an Australian citizen or permanent resident
Intend to make the home your principle residence
You intend to start living in the home within a reasonable time.

If you are married or living in a defacto relationship, you and your partner must make a joint application and if neither of you have owned a home before, you should be eligible for the grant.

The payment will be the same regardless of income or the location of the property.

The word 'home' does not necessarily mean a house either. Your home can be established or one that you are going to build or it can be villa, unit or any type of self contained fixed dwelling.

Applications for a FHOS grant can be made through State and Territory Revenue Offices as seen below:

New South Wales on (02) 9685 2122
Victoria on 13 21 61
Queensland on (07) 3404 3956
Western Australia on 1300 363 211
South Australia on (08) 8226 3750
Tasmania on (03) 6233 3465
Australian Capital Territory on (02) 6207 0029, and
Northern Territory on (08) 8999 6086.

Need more information?

You can obtain a range of tax reform materials by:

phoning the general public infoline on 13 61 40
downloading information from the web site at www.taxreform.ato.gov.au
obtaining A Fax From Tax on 13 28 60

For more information on a variety of home loan products contact your local credit union.

How to buy a home: a step by step guide:

Get a home loan approved in principle
Choose a solicitor or conveyancer
Find the home
Ask for a copy of the contract from the seller or the agent
Start price negotiations
You may agree to a price at this stage subject to satisfactory condition (determined by a property inspection) and security (determined by a financial valuation and your loan approval).

You may then pay a holding deposit. This is not legally binding and is fully refundable. You may change your mind and the seller can also sell to someone else.
Check the contract
This involves checking that the conditions are acceptable and fair, making pre-contract inquiries and ensuring that you fully understand the contract. Your legal adviser can assist you.
Property Inspection
This involves a property and timber pest inspection. Also a strata -records inspection should occur your are purchasing a unit (etc) you're building consultant can assist you
Make a formal loan application with your selected financial institution
Lender values property and approves the loan
Exchange of contracts
Both parties sign contact and a formal deposit is paid. Generally this deposit is not refundable. If you have paid a holding deposit, this can be transferred to a formal deposit. Some contracts have a cooling off period although can be wavered. You're legal advisor or conveyancer will assist in the exchange of contracts
Organise building and contents insurer
Your insurance advisor or conveyancer can assist you with this
Inquiries made to various government bodies
This involves issues such as zoning and land tax. Your legal advisor or conveyancer normally coordinates this.
Requisitions
Seller is asked a set of standard questions and asked to provide documents. Your legal advisor or conveyancer
Complete special documents
1. Memorandum of transfer. This is a document that verifies the change in ownership from seller to buyer
2. Mortgage
Pay stamp duty:
This is paid on:
1. contract
2. mortgage
Your legal advisor or conveyancer will advise you how much
Settlement:
Also known as completion, this involves paying the rest of the purchase price. You then get legal title, which is a legal document, that is your proof of ownership.

Your legal advisor or conveyancer will coordinate

Credit unions offer a comprehensive range of financial services. For more information contact your credit union. Credit unions are member owned organisations so you'll find the service personal and helpful.

Tips on applying for a loan

Thinking about applying for a loan? It is a good idea to learn about different loan products, and how they work to find what loan best suits your needs.

Types of loans:

Credit card
Personal loans
Consolidation loan (used to bundle a range of debts together)
Home loan
Home equity loan (has a line of credit against the equity in the home)
Overdraft (a credit facility attached to an existing account)

Preparation steps:

Work out how much you need to borrow
Identify spending habits - work out a budget
Limit your liabilities - reduce the number of credit cards you have or the limit on the cards
Shop around for different loan options and offers
Once you've determined what sort of loan you require, you will need to demonstrate to lenders that you can repay your debt. Lenders will look at:

Your financial history
Current value of your assets
Current liabilities (other debts, including the maximum amount you could run up on cards)
Future earnings potential

Paperwork required when you apply for a loan:

Last two pay slips
A letter of employment or contract showing your gross salary and benefits
Share certificates (to gauge the current value of shares)
Valuation documents or statements from other assets such as term deposits and managed funds
Last home loan statement or rent slip
Current credit cad statement
Current statement from savings and cheque accounts
Latest statements from loans and other credit accounts

Credit unions offer a comprehensive range of financial services. For more information contact your credit union.

Tips on buying a home

Buying a home could be one of the most expensive purchases you make, it can be an exciting yet daunting time. Being prepared will make the process of buying a home easier and less stressful.

Personal priority checklist

Where do you want to buy (ie suburb)
What do you want to buy (house, unit, villa)
When do you want to buy

Tips for smart home buying

Shop around for the best loan
Work out how much you can borrow, can you comfortably meet repayments?
Save for a deposit ä usually at least 10 percent of the purchase price
Save some extra money for legal fees, inspections, government charges, moving costs etc
Try not to buy at the top of a boom in property prices
Coordinate a property inspection
Choose your legal adviser and building consultant carefully.
Ensure you understand everything before you sign
Pay off the loan as quickly as possible

Negotiating tips

Remove emotion from the situation
Never show your hand ä tell the agent that you will buy if the price is right
Talk to the agent about the price of the home, and try to negotiate. Often the agreed price is 2.5 to 5 percent lower than the original price. The agent wants to make a sale, after all they get a commission.
There may be other offers ä if the agent is using this as a bargaining point, ask to see the offer in writing or talk directly to the seller

Going to Auction?

NEVER pass your limit
In a flat market ä offers before the auction may work
Before each auction ä carry out all checking, including review of contract and property inspections

Credit unions offer a comprehensive range of financial services. For more information contact your credit union.

Loan Interview Checklist

So, you have decided to approach your financial institution for a home loan. The following checklist will assist you in preparing the appropriate documentation to take along with you to the loan interview.

You will need

Names and address of borrowers
Savings history - account details to verify savings period and amount saved ( including your deposit saved)
Total monthly income
Approximate loan amount required

Employment information

Employed applicants:

Confirmation from your employer(s) including:

Period of employment
Basic monthly wage
Details of overtime allowances and other benefits or second income

Self employed applicants:

Evidence of the past three-year's income by either:

'Income tax returns or assessment sheets
Profit and loss statements certified but a registered accountant
Statement of your income(s) by a registered accountant tax agent or your employer

Other sources of income

Photocopies of all bank and cheque accounts
Copies of exchanged contracts for sale of your present home or a letter from your solicitor confirming that you have a firm buyer and stating the likely net proceeds from the sale
Gifts must be supported by a statutory declaration signed by both the giver and receiver of the gift and witnessed by a justice of the peace.

Strata properties and land

Copy of registered strata plan or plan of subdivision (if plans are unregistered, a letter is needed from a solicitor or developer indicating the expected date of registration).

Information for loans for building new homes

Copy of plan and specification and quotations from builder
Evidence of council approval and final tender price will be required before a formal authority to build will be issued by the lender

Existing Mortgages

If an existing mortgage is to be paid out by the loan, you'll need a letter from your present lender indicating how much you owe plus copies of past statements

Title Particulars

If you know which property you are buying it is best to photocopy the front page of the contract because it will contain all the legal information your lender requires

Note: Tax agent's numbers and builder's licence numbers should be provided.

Credit unions offer a comprehensive range of financial services and can help you select the best way to borrow money for housing. For more information contact your credit union.

Loans