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‘Devil in the detail’ can jeopardise finance options

31/10/2011

Not being aware of and managing the ‘devil in the detail’ of home loan and other credit repayment timings could jeopardise people’s chances of securing finance in the future.

Smartline Personal Mortgage Advisers says it sees many borrowers who believe they are up-to-date with their loan repayments, but a mismatch in timings between due repayments and household cash flow is damaging their repayment history and their ability to secure finance.

Smartline’s Managing Director, Chris Acret, said that while it might sound like a small issue, it had significant consequences.

“As a result of the GFC, all lenders considerably tightened up their lending criteria with a much greater emphasis on the credit worthiness of applicants,” Mr Acret said.

“In this environment, you really can’t have a clean enough credit history for the lenders and any suggestion that a person can’t meet their debt repayments on time is a red flag.

“This is particularly an issue if you are looking to borrow more than 80% of the value of the property, requiring Lenders Mortgage Insurance. The mortgage insurers won’t even consider an applicant with any hint of loan arrears.

” For example, a couple purchase a new home which settles on the 8th of the month. Their monthly home loan repayment is then due on the 8th of each month thereafter. However, both are paid monthly, receiving their pay on the 15th of the month. Their home loan statements therefore show that the payment was rejected on the 8th of each month due to insufficient funds and is being paid on the 15th.

This is viewed as the home loan being in arrears – even though the payments were made, albeit late – and often brings with it costly late and penalty fees.

When the couple later go to refinance their home loan or look to buy a new property and secure a new home loan, the lender views their home loan statements and considers them a higher risk due to their home loan being constantly in arrears.

The couple can’t meet the lender’s criteria of having a ‘clean’ repayment history and, having addressed the issue by ensuring they can pay their home loan on the due date, have to wait at least six months to prove their credit worthiness again.

The same problem also occurred with people with personal debt such as car loans, store cards and ‘lines of credit’. However, late payments with these facilities also had the added negative of significant penalty and late fees, or high interest charges.

Mr Acret said the best way to avoid the situation was to ensure that you know exactly when your repayments are due and be at least one payment ahead from the outset of the loan.

“For example, ensure that you have the funds available to make your first loan repayment on the day your loan settles so you’re straight away ahead of your repayments from day one,” he said.

“You should also be trying to time the settlement of the loan to be in sync with your pay cycle, so you know every month that your home loan or any other loan repayments will be made on time.”

Mr Acret said this situation highlighted the importance of understanding how your home loan worked and was structured, and having someone to explain these aspects to you.

“If you’re securing your loan through a quality mortgage adviser, they will ensure that you understand how the loan works and can work with the bank on your behalf to ensure that the timing of your repayments is aligned with your pay cycle,” he said.

As always, talk to your Smartline Personal Mortgage Adviser for more information.

 

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