Why does the bank have a higher amount on my loan offer?
We sometimes get some concerned clients touch base with us when they receive their loan offer as it has two amounts on there. One is the amount they are borrowing and one is substantially higher. What's this all about!
That higher amount on the loan offer is called a priority amount.It’s there for two reasons:
- To protect the bank
- To save you money long term
What does it mean for the bank?
It basically gives the bank the upper amount they can claim to if you don’t pay your mortgage. If, for example, things get very out of hand, and there is a lot of penalty interest or fees owing on your home loan, they can claim up to that priority amount figure (of course they can only claim as much as you actually owe). This gives them the ability to have a higher level of security over your property if you need to repay them more than you originally borrowed from them.
What does it mean for you?
The priority amount is also there to save you from the negative side of capital gain and borrowing a bit more money down the track. So for example, you borrow $400K, property worth $500K, priority amount is usually say 1 1/2 times property value. In 15 year’s time your property is worth $800K and you want to borrow another $300K to buy a business – you can do that because your total would be $700K and your priority is $750K. If it was set at $500K you’d have to get the lawyer to register a new mortgage against your property, and that costs money. This is actually there to help save you money as well.
The benefits without the confusion!
So a priority amount is fairly simple but can be very confusing when you see it appear on your loan offer. It is there as a benefit for both you and for the banks.
If you have any questions about anything in the mortgage process, we love answering those. Fire them through to Claire, Greg or Adam and we'll happily answer it the best we can for you.