This case study demonstrates the benefit of shopping around for your home loan and using a mortgage broker to do all the leg work.
Lenders offer a wide array of products and interest rates. Most significantly, there are great differences in the amount they will lend an applicant.
John and Mary*, both in their early 40s, had just sold their rural residential property and calculated that they would have a deposit of just over $50,000 to put towards their new home.
John earns $45,000 gross per annum and Mary earns $15,000 gross per annum. They have two teenage children going to high school, run two cars and have no other liabilities.
The area they were interested in was experiencing an active real estate market and they wanted to borrow to their maximum capacity to buy a quality home.
Their regular bank told them they would qualify to borrow up to $252,000. They told the loans officer that they felt they could easily manage repayments of up to $500 a week, because that’s what they were paying on their previous mortgage and car loan. The repayments on $252,000 were around $330 a week so they had capacity to reduce their new loan reasonably quickly.
Unfortunately their deposit, less an allowance for costs, only allowed them to buy something for around $290,000. George, their real estate agent, was finding it difficult to show them any properties that lived up to their expectations in that price range. As a comparison, George drove them by two properties listed around $360,000 that matched the couple’s vision of a quality home.
Naturally, John and Mary were disappointed that it appeared their dream home was out of reach. They returned to George’s office to review their options. These included:
- Lowering their expectations of the type of house they could afford. This meant doing without some of the things they were hoping for, like a pool and close proximity to the high school.
- Looking in a different location where the market was not quite as high. This meant as much travelling as before and the kids having to bus to school or even change schools, which was not a popular option.
- Somehow increasing their income to be able to borrow more. Mary could go back to full time work, but this also was not favoured as she was heavily involved with two volunteer organisations.
At this point George, concerned about not being able to meet their needs, asked about their lender. He immediately recognised that that lender was not among the more generous ones he was told about during a recent presentation by a mortgage broker.
George suggested they shop around for a more generous lender who might loan them the amount they needed – about $325,000. With his ready reckoner, George calculated that the repayments of around $430 per week would still be well under what John and Mary said they could afford.
On hearing this, John and Mary said, “but we won’t be able to borrow any more; all the banks are the same, aren’t they?” George replied that he had thought that too until it was proven otherwise during the presentation from the broker. George, seeing some hope for his clients, suggested they contact the broker who he knew had relationships with a broad range of lenders, adding that it would cost them nothing to make a quick phone call.
After a few minutes of questions and answers, the broker was able to identify two reputable and well-known lenders with whom John and Mary would qualify to make a loan application of up to $330,000. With one brief phone call, John and Mary had gone from the despair of giving up on their dream to actually turning it into a reality.
In the meantime, suspecting that John and Mary’s position was likely to improve, George had made two quick phone calls to make tentative arrangements for inspection of the properties later that afternoon. John and Mary readily agreed to view the properties and picked up children on the way so they could also be part of the selection process.
The first property was okay, but needed some money spent on it to create an outside entertainment area. On inspection of the second property, the whole family fell in love with it. The pool and outdoor area would be perfect for entertaining and the children could ride or walk to school.
The owners of the property, who were in their early 50s, mentioned during the inspection that they had bought the property when their two children were about the same age as John and Mary’s and it had been a great home to raise kids. The house and the pool were no longer suitable for their needs and they were planning to buy a couple of townhouses for their retirement home and investment.
After a few minutes’ discussion John and Mary, eager not to miss out on the opportunity, asked George to put an offer of $355,000 to the owners (list price $365,000) subject to finance. When George made the offer, the owners said that they would accept $360,000. The couple countered with an offer of $358,000, which was immediately accepted. A deal was struck only three hours after John and Mary first jumped in the car with George.
John and Mary were excited but nervous having made such a quick decision, but they were sure they had done the right thing. They commented to George that they were still a little apprehensive about the financial side of things. George reassured them by saying that it was made clear to the owners that the offer was made “subject to finance”.
The next evening, the mortgage broker met with John and Mary at their home and arranged a loan for $320,000 at a special three year fixed rate below 6% pa and with no application fee.
John and Mary couldn’t believe their good fortune: the home of their dreams, a cheap home loan that met all their needs and, to top it off, no establishment fees or inconvenient bank interviews.
Six weeks later, the family was enjoying a house-warming party with their friends and new neighbours.
THE END (AND A NEW BEGINNING)
* names have been changed
