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Loan types
Looking for the right home loan can sometimes feel like going to a new city without a map. But don’t worry – when it comes to the complex world of loans, there’s no better guide than a Smartline Mortgage Broker.
If you’re raring to get started, then the following handy guide will give you some idea of the loan features that might work for you.
Fixed or variable?
The basic interest rate on home loans is known as the standard variable rate. This is based on the interest rate set by the Reserve Bank of Australia, which changes according to economic criteria set by the Bank.
Many lenders also offer loans at a fixed interest rate. This means that your interest rate does not change for a given period of time – usually from one to five years.
Fixed rates are generally higher than variable rates, because they include a premium to keep the rate fixed and protect against the risk of rising rates. The longer the term, the higher the premium.
The certainty of a fixed rate can help with budgeting in the early years of a mortgage – it’s good protection against the unexpected.
As a rule of thumb, if a rise in interest rates of more than 2% would mean that you couldn’t cope, then it might be a good idea to fix at least a portion of your loan.
Usually you cannot make extra repayments or vary repayments with a fixed rate loan. These loans also carry penalties if you cancel the loan.
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.
Basic home loan
The main feature of a basic home loan is a very low variable interest rate with little or no regular fees. However, these loans offer few extra features and if, for example, you want the flexibility of a redraw you generally pay extra.
Introductory rate loans
A discounted introductory rate for the first few months or years is a popular feature on home loans. For example, your introductory rate might be two percent below the standard variable rate. Your rate will change if interest rates change, but it will remain cheaper than the standard variable rate.
During the introductory period take advantage of the lower interest rate and pay off you 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.
Redraw facility
Loans with a redraw facility allow you to put extra money into your loan. You can take the money back out again when you need it.
Over time these payments can significantly reduce your interest payments and the life of your loan. If you think that you might be able to pay a little bit extra into your mortgage, either regularly or intermittently, then this type of loan might work well for you.
Some lenders charge a fee to activate this feature, and/or a fee each time you redraw, so you need to take these costs into consideration.
100% offset account
With an Offset account your income is paid into an account, which is linked to your loan. You can use the account for all your EFTPOS, cheque, Internet banking and credit transactions. The balance in the account is offset against your loan, so the more money you keep in your account, the faster your loan is reduced.
These loans are usually charged at the standard variable rate or higher, and may have other fees.
Line of credit
With a line of credit, or an All in One account, you pay all your income into your loan account. Essentially it all goes to pay off your loan, but you also use your account as your cheque, credit and savings accounts combined – almost like a simple redraw facility. Keeping money in the account can reduce your loan amount and your interest payments.
You have a pre-approved loan amount that you can access bit by bit, or all at once. This is a very flexible way to borrow, but interest rates tend to be higher than standard variable rates, and there are usually fees.
These loans are more difficult than standard loans for most people to repay because there is no set monthly repayment.
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 mortgage 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 mortgage, lower fees and discounts on other bank products.
These are generally great products and well worth considering if you qualify.
Low Docs
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.
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. 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.
Family products
There are a number of innovative new mortgage products specifically targeted at first homebuyers. These new home loan products assist young people wanting to enter the property market for the first time by allowing family members to help out.
These loans have the added bonus of reducing the Loan to Value Ratio, meaning borrowers can dramatically reduce, or even avoid, paying mortgage insurance.
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