- Finance

Refinance accounts for 40% of loans

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According to a recent finding from Finance Aggregator AFG refinancing currently accounts for 40% for all loan activity. This number is up 29% from 2009. So what accounts for this shift

As a result of market sentiment people are becoming much more cost sensitive and one of the major costs of households is their homeloan.

Now the effects of the GFC has cooled on the finance market the major banks are coming under increasing pressure from their competitors. This competition has created opportunities for borrowers to look elsewhere for better deals.

This change in the market also coincided with the removal of exit fees from the banks which has made it even easier for borrowers to shop around for the best deal.

Another factor being considered by borrowers in this uncertain market is the opportunities presented by falling interest rates. The attractive interest rates being offered by lenders are attracting a lot of activity. Many of the lenders offering the best fixed rates are not the Major banks but other non-bank lenders.

After the way many borrowers have been treated by the bank over the last few years many borrowers are eager to take advantage of every opportunity to take their business elsewhere to get the best deal.

How construction finance works

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When entering into a building contract you should check that the contract has a condition that allows you to make every reasonable effort to get finance by a specific date, so that if you are unable to get finance the contract will not proceed.

It is important that you take the time to 'shop around' for a lender before you enter a building contract. An experienced Mortgage Broker will be able to assist you to ensure the best possible lender for your requirements.

There is an important difference between getting a loan to build as opposed to a loan for an established property. When you employ a builder, you agree to pay the builder by instalments (called progress payments) depending on specified building milestones being achieved. Usually, you will only pay interest on the amount of the progress payments that have been paid to the builder, not the total amount of the loan.

So, until the final progress payment is made, you will generally only pay interest on the amount of money actually paid to the builder.

There are a number of ways you can organise your finance for building however the most common way is to extend the existing loan for land to finance the construction of your house .

In today's financial market the maximum amount extended for new dwelling construction is approx 95% of the total construction cost. This means that if your house cost $200,000 to build you would be required to contribute $10,000 to the construction cost from your own cash reserves.

It should be noted that a considerable saving can be made on stamp duty when constructing a new home compared with purchasing an existing home since stamp duty will only be paid on the land not on the construction of your new home.

For example if you bought a block of land for $200,000 and build a house for $200,000 you would only pay stamp duty on the land (approx $10,000). Whereas on an existing $400,000 house you would pay stamp duty on the full purchase amount (approx $20,000)

Another major benefit existing for first home buyers when building a house is that they may be eligible for the First Home Buyers Grant (FHOG). The FHOG is currently $15,000 for newly constructed dwellings