Types of loans.
Variable Interest Loans
The basic interest rate on a home loan is known as the standard variable rate. Standard variable loans are the most popular type of home loan in Australia. They are a flexible loan with useful features such as redraw facilities and offset accounts.
The rate is calculated using the interest rate set by the Reserve Bank of Australia, which changes according to economic criteria set by the Bank. As the name suggests a variable rate loan may go up or down during the term of the loan.
The advantages of a variable home loan are that if the interest rate falls so do your repayments. Additional repayments can be made during the life of the loan, so you can pay off the loan as quickly as possible without penalty, saving yourself a small fortune in interest.
Basic variable home loans are "no frills" loans. Their lack of features is compensated by a lower interest rate.
Introductory Rate Loans
An introductory or honeymoon interest rate is lower than the normal variable rate. The introductory rate can be fixed or variable.
During the introductory period take advantage of the lower interest rate and pay off your loan as quickly as you can. When the introductory period ends, your mortgage will revert to the standard variable or fixed rate. These loans may have high fees if you wish to cancel the loan during or immediately after the initial period.
Line of Credit
A line of credit is like a big credit card secured by a mortgage on a property. There is a pre-set limit and you can draw out funds whenever you like and for whatever you like. The biggest difference is that you pay interest at the lowest possible rates - the home loan rate.
These loans have a lot of flexibility. You are only required to pay interest on the amount outstanding, although you can pay more to reduce the balance owing. Because interest rates and fees are usually slightly higher than for regular principal and interest loans they are not really suited for home buyers.
A line of credit is handy for investors because they can use it to put down deposits on new properties, pay for renovations or repairs, and cover short term cash shortages.
Low doc home loans
With no need for documentation to prove income, low doc home loans are designed for borrowers who would not normally comply with the usual income verification policies for standard home loan products.
For example, people with irregular income streams such as the self-employed, those who have difficulty in separating their personal and business cash flows, or who do not yet have up-to-date financial statements.
Borrowers must complete a self-assessment of their financial position in the form of a declaration and they should be sure that they have the ability to repay the loan without undue hardship. Lenders require a substantial amount of equity in the property being offered as security and a clean credit history
Split loans
If you are attracted by the certainty of a fixed rate, but would like some flexibility, then you might consider a split loan. You can choose which proportion of your loan you would like at a fixed rate and which you would like at a variable rate.
You benefit from the lower rates and flexibility of a variable loan, but also give yourself some protection against potential rate increases.
Professional packages
Professional packages can offer substantial discounts and special benefits, but are only available to those who satisfy specific criteria. The key criteria for most professional packages are that the home loan be in excess of $150,000, and that you earn more than $50,000 per annum.
You do not actually need to be a white collar 'professional' to qualify. The benefits vary between lenders, but in general can include interest rate discounts of between 0.50 and 0.75 per cent for the life of the loan, lower fees and discounts on other bank products.
These are generally great products and well worth considering if you qualify.
Bridging loans
A bridging loan (or relocation loan) is a short-term loan that covers the gap period between purchasing your new property and selling your old one.
These loans are offered at the standard variable rate and usually have a term of six months if you are selling your property.
Each lender assesses bridging loans differently, so it pays to have an expert on your side. All lenders will require you to have significant equity in your property for a bridging loan.
Reverse mortgages
For anyone aged 60 or over, a reverse mortgage can free the equity in their property without it being sold. Depending on their age, applicants can borrow up to 45 per cent of the value of their home with funds advanced in one payment on settlement, or as needed.
No repayments are required over the life of the loan. Interest fees and charges are capitalised to the loan and repayment is deferred until the property is sold, the borrowers are no longer living in the house, or the borrowers are deceased.
Lenders apply strict conditions to reverse mortgages. For instance, before funding can take place, all applicants are required to seek independent financial and legal advice.
Contact one of our qualified financial brokers today for further advice.
