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FinanceLOAN TYPES
Standard Variable LoansThe interest rate can vary throughout the term of the loan - both up anddown. The term is usually 25 to 30 years. The advantages of this arethat if interest rates fall, your repayments will also come down; youcan usually make additional repayments without incurring a penaltyallowing you to pay off your loan faster. Remember, if interest ratesraise, your repayments rise as well. Lenders generally offer lots of packages on the standard variable rates. Theadvantage of Standard variable rate loans is that they may include manyfeatures which if used correctly can help pay off your mortgage morequickly. These features include mortgage offset, redraw and revolvingline of Credit. Some lenders will also offer discounts packaged with one year introductory rates. Basic Variable LoansMany lenders offer basic variable loans with lower interest rates thanstandard variable home loans however with generally with fewer features. Like all variable loans the interest rate and your repayments can varyover the term of the loan. The biggest advantage is price - basicvariable loans have a lower interest rate so repayments are sometimeslower than standard variable loans. Lenders normally do not offer the same range of features or flexibility e.g.many basic variable loans cannot be used in combination with other loans and are not portable. It is important that you look into each different lender as you need to work out the advantage or disadvantage of eachloan in comparison to one another. Fixed Rate LoansFixed loans allow a borrower to lock in an interest rate for a particularperiod of time (normally 1-5 years). You then have the assurance of your repayments being fixed for that period no matter what interest ratesdo. You could also split your loan between a fixed portion and a variableportion. Fixed has more restrictions usually e.g. most fixed rate loanslimit or do not allow extra repayments or you cannot pay out the loanduring the fixed period without incurring large penalties. Features such as redraw or mortgage offset are usually not allowed during the fixedperiod of a loan, however combining the loan allows you to takeadvantage of features available on variable rate loans. Splitting your loan into two portions (fixed and variable) can be a good way tohedge your bets on interest rate movements. The fixed portion is safe if fixed at a low interest rate particularly if interest rates thenincrease. The variable portion moves with interest rates which is goodif interest rates drop and you get the benefit of the change. You can split into thirds, quarters or more - sometimes there is a minimumamount required per portion. You should also consider any fees incurredin splitting and if the loan is one which can be split or pick a package which is designed for such set ups. Offset MortgageAn Offset Mortgage account becomes a personal transaction account. Thebalance in the account is used to reduce interest on your mortgage. Youcan deposit and withdraw on this account the same as other accounts soit could be set up as an account for depositing your salary forinstance. Your offset account is linked to your mortgage therebyreducing the balance of your mortgage by the amount of money in youraccount, dollar for dollar; therefore allowing the balance to reducedthe interest payable on your mortgage. Remember the daily limit of youraccount is offsetting your home loan when the lender calculates theinterest. It could be used as a Loan Reducer or Mortgage Reduction facility.Different lenders offer different types of Offset features, again youneed to shop around to make sure the lenders facilities are in line with your own requirements. Be aware that Mortgage offset is not necessarily always offset 100%. Although ATM, Eftpos, cheque and other access means are available, 100% offsetloans encourage borrowers to use a credit card for all purchases andthen settle the card in one transaction from the mortgage account permonth. This allows the money to remain in the account to reduce theinterest for the longest possible period of time. Introductory/Honeymoon Loans Honeymoon loans offer customers a special reduced ("teaser") rate for an introductory period, often one year. The loan then reverts to a standard or special variable rate. Whilst this might help initial cash flow, these loans can be on offer withdifferent packages, so again you need to look at the overall package inrelation to your specific requirements, working out the overall rateapplicable to the loan over a period of years. Be sure to know what theAAPR is - the effective rate of the loan, as part of ascertainingwhether to take a discounted rate or not. Principal & Interest (P & I)A standard loan on offer from lenders requires that you pay a portion ofprincipal and a portion of interest on every repayment every month ie.amortising loan. This will ensure that your home loan is repaid withinthe specified period or term. Paying extra repayment to your loan willalso allow you to pay off the loan in a quicker period thereforereducing the interest calculated on your home loan, potentially savingyou a lot of interest. Depending on the product that you use, you cansplit your loan according to the tax effectiveness of the funds that you have borrowed against it i.e if you have investment debt against yourhome for example, it is better to pay your home loan debt first thenwhen this is paid off, then concentrate on your investment debt. Thiscan also be tax effective for you. Interest OnlyNo principle repayments are required - only the interest portion has to be paid on this loan. Theoretically, the loan need never be paid out aslong as interest payments are being made. Some loans can be split with an interest only portion to reduce repaymentsearly on in the loan. Interest only works well with fixed rate loanswhere the ability to calculate future interest means interest can bepaid in advance. This is sometimes a good option for investors. The interest on a loan is the tax deductible portion of your loan if youare buying an investment and fixed portion sometimes is a good option if you are paying off more then one mortgage. It is recommended that youspeak to an accountant regarding the best way to work the repayments tax effectively. Revolving Line of CreditThis is essentially a facility to allow access to the equity that has beenbuilt up in your home over a period of time. It can be looked at like alarge overdraft where money paid in can be withdrawn again up to theoriginal amount borrowed. It can function as several different loans(e.g. house, shares, and car) without the borrower having to take outnew loans each time they have paid down a portion of the loan. However most people treat their revolving line of credit loans as an amortizing product in that they make their normal repayments but the flexibilityis there should you need to access a portion of your equity quickly.Revolving lines of credit often have higher interest rates than ordinary variable loans and can be a trap for those not good at budgeting. Formore of a safety net, a standard variable loan with redraw or mortgageoffset is often preferable; however you can split these loans to suityour requirements. RefinancingRefinancing means a borrower takes out a new loan to pay out an old loan.Refinancing can sometimes be advantageous with another financialinstitution taking advantage of different packages on offer. Manyborrowers refinance their home to take advantage of tax effectiveness in relation to investing or accessing equity in their property etc. It isalso a good way to take advantage of your home equity and to directfunds to investments. Reverse MortgagesMay typically suit retires who wish to tap into the equity of their home to enable lifestyle choices - i.e. new car, holiday, home renovations orto enable greater cash flow via financial planning / pension plans. Credit Impaired (Mortgage) LoansTo assist those people with bad credit history and who do not qualify for loans through the major banks. Non-Conforming LoansThese mortgage loans assist people who may have recently become self-employed or who wish to purchase their 1st home, but do not qualify under themajor banks credit criteria. Low-Doc LoansTypically allows self-employed people who have not completed their recent taxreturns to self-certify their income without the requirement of proof of income and enables these people to purchase or refinance properties. Commercial LoansThese Loans are secured by a commercial property and they may be structuredas Interest Only (up to 5 years) or Principal and Interest for up to 20years. Business LoansThese Loans may be secured by either Residential or Commercial Property, providing the funds are used for Business purposes. |
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