Types Of Loans
This is a ‘no frills’ variable rate home loan with a discounted interest rate. They generally have fewer features than the standard variable and not quite as flexible.. Like the standard variable home loan, the basic variable home loan rate will rise and fall as set by the Reserve Bank of Australia.
This is the ‘benchmark’ variable interest rate for each lender. This home loan is usually flexible, but not competitive as far as interest rates, fees and charges go. The interest rate will rise and fall, as set by the Reserve Bank of Australia, and will therefore affect repayments required.
A fixed rate home loan is where the interest rate and repayments are fixed or locked in for a set period of time, usually 1-10 years and in some cases longer. After the fixed period ends, the loan will revert to a variable rate (usually the standard variable rate). The advantage of a fixed interest rate is having certainty about your required home loan repayments making budgeting easier. It also protects you from potential interest rate increases. The disadvantages are a reduction in flexibility – ie extra payments, redraw facilities and the fees involved if you break the terms and conditions of the facility, if interest rates fall, you will still be paying your existing repayments as the fixed rate will not change. It is important to know how much flexibility your facility offers. Most lenders offer to ‘lock in’ the fixed rate at the time of application, however this may incur a fee.
INTRODUCTORY / HONEYMOON RATE HOME LOAN
These are variable rate home loans with a discounted interest rate for the first 6, 12 or 24 months of the home loan. After the ‘honeymoon’ period, the interest rate will automatically roll onto the standard variable. Some lenders may fix or cap the rate during the honeymoon period. The obvious advantage is the lower interest rate which reduces your repayments, and gives you the opportunity if you choose to pay more of the principal as quickly as possible. The disadvantages are that once the ‘honeymoon’ period is over you are usually left with a less than competitive interest rate, and there may be higher exit fees. It is important to know the exit fees and switch fees (fee incurred when you change home loan products) so you are aware of the costs to secure a better interest rate once the honeymoon period is over.
COMBINATION / SPLIT HOME LOAN
This allows you to take part of your home loan variable, and part fixed or part principal and interest and part interest only. When splitting your home loan between variable and fixed it gives you the advantages of fixing into a rate and having the comfort of knowing that portion of your home loan will not change should interest rates go up, while still having the full flexibility on the variable portion. Of course your variable portion is still vunerable to interest rate changes and will rise and fall as set by the Reserve Bank of Australia. If interest rates fall, your fixed portion will not. Again it is important to check the interest rate your fixed portion will revert to. Also check fees and charges associated with splitting your home loan. Check also for the rate lock fees on the fixed portion of your home loan.
The construction home loan is similar to a residential home loan except the property used as security is yet to be built. The loan is drawn down in progress payments (usually 4 or 5) in accordance with the stages of construction. After construction is complete you may have the option to switch to a more competitive product. Some lenders charge ‘progress fees’ to cover the valuation at each stage.
Bridging finance is a short term loan that covers the gap between the purchase of a new property and the sale of the old property. Lender policies on bridging finance vary significantly so it is important to know exactly what is required under the credit contract..eg. Loan servicing requirements, loan term and allowing interest capitalisation. There is a certain amount of risk involved in bridging finance, so it is important to allow for worst case scenarios.
LOW / NO DOCUMENTATION HOME LOAN
The Low or No documentation home loans are commonly referred to as low doc or no doc home loans. These facilities have been designed to make the home loan application for self employed (and in some cases PAYG employees) who do not have their current income and taxation details available for the home loan application.
EQUITY RELEASE / REVERSE MORTGAGE
A reverse mortgage or equity release mortgage has been designed for home owners over 60 to access equity in their home to help fund their retirement without having to sell their home. It is important to make sure the lender is a member of SEQUAL. Products vary according to flexibility and the amount you can borrow, as well as how the funds are paid to you – so make sure the lender you choose SUITS YOUR NEEDS.
An offset account is a savings account linked to the home loan. All income is deposited into the offset account and with many lenders you can use the offset account for ATM, eftpos, cheque and internet transactions or in some cases transfer money from the offset account into a transaction account when required. You are not paid interest on the money in the offset account, but the balance in the offset account is ‘offset’ against that owing on your home loan. Any ‘notional' interest earned at the same rate as the linked loan. Over time this can help you pay off your home loan sooner and build up equity.