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Loan Options

Which Home Loan is Right for me?

Determining which loan is best for you is a complex question and finding the answer may seem like a daunting prospect. However, with the right guidance, this process can be very simple and stress free.

Before deciding on a loan, you should first consider what lending strategy will best suit your needs.

 

  • How much you will need to borrow,
  • How long you will need the loan,
  • What sort of loan flexibility you will require,
  • What potential traps to avoid,
  • What future plans you may need to cater for.

 

Most importantly, you will also have an understanding of why that lending option is suitable for you.

 

Types of Mortgage Loan Products

Standard Variable:

The advantage of a variable rate loan is that you have more flexibility with the loan; for instance, you can make extra repayments without penalty. The disadvantage is that your loan interest rate can vary up and down which will affect your repayments and is more difficult to budget for.

Basic Variable:

As its name suggests, this type of loan is a variable rate loan without the bells and whistles. Generally, this rate is a cheaper rate than the standard variable loan, however it may be more limited for flexibility or you have to pay extra for basic features. On the flip side, you’re not paying a premium for loan options you may not use.

Fixed:

Your interest rate is fixed for a period of time that you nominate (generally 1-5 years) so your repayments will remain the same irrespective of economic cycles. While it is easy to budget your repayments, you may also have restrictions regarding changing the loan, including making extra repayments. It is also worth reviewing your loan when your fixed term expires as usually the interest rate will revert to a standard variable rate which is often higher than other available variable rates.

Line of Credit

In this case, you have a credit limit, much the same as with a credit card. You can keep a nil balance and then use the funds as needed. You’re required to repay the interest only that you’ve accrued over a month and if you want to make large lump sum payments, this is easily done. The challenge is that this very flexible loan type may be slightly more expensive than other variable loans available.

Discount/Honeymoon rates:

These loans are designed to allow an initial low rate which reverts to the standard variable after a short period (usually 1-3 years). The benefit of this loan is that you are able to pay extra off the loan during the discounted/honeymoon period, and allows lower repayments for the first year or so.

Non conforming:

These are loans for people who have a poor credit history or don’t fit the normal lending criteria of the major banks. The interest rate is usually higher or the loan restriction are greater, however, it may be a short term lending solution that suits your needs if other lenders won’t meet your funding requirements.

Loan Options

Loan Term:

This refers to the length of time the loan will exist. A 30 year loan term is now standard; a shorter loan term will increase your ongoing repayments as you’re committed to repay the loan off more quickly.

Principal & Interest (P&I):

This refers to how your repayments are made; specifically, that over the term of the loan, repayments of the interest plus the reduction of the actual loan (principal) are made. Therefore over time, the loan is reduced to zero. With additional or more regular repayments, the principal is paid off faster and therefore less interest is paid.

Interest Only (I.O):

With most lenders, there is the option to not reduce your debt and simply repay only the interest on the loan. This might be suitable for investors wishing to maximise their tax deductions or to assist with managing cash flow. This option can be available for a nominated period (i.e. 1 to 5 years) which reverts to P&I following the IO period.

Interest in Advance:

In some instances, it is advantageous to prepay the interest repayments for the following year in a lump sum. This saves some interest costs, can have some tax advantages for investors, and negates the need for regular repayments throughout the year. Not all lenders have this option, but it is available through most of the major banks.

Lo Doc:

This is a lending option where traditional income documents are not required. Most Lo Doc loans are designed for self employed persons who have the income to service a loan but their financial documents (ie tax returns) are not available as evidence of income. Instead, the borrower is required to declare their employment status and sign a declaration that they have the income to service the debt.  While initially this seems risky, the borrower is required to contribute far more equity/cash towards the purchase than the traditional borrower. It is also available for PAYG employees, however the restrictions are greater again.

Professional Packages:

Lenders have many differing names for this option but simply it is a package where the borrower pays an annual fee and receives benefits in the form of discounted interest rates and loan fees. This is designed for those who have enough debt to justify the annual fee and want to retain the maximum amount of loan flexibility. The greater the level of debt, the greater the amount of interest rate discount. It is also suitable for borrowers with multiple debts who can benefit from discounted loan fees.

Split Loans:

Variable and Fixed Rate loans both have benefits and disadvantages and in many cases it is suitable to split the loans to have both types jointly. This means that you gain from the flexibility of a variable loan and the stability of a fixed rate loan, without being overexposed to the disadvantages of each. A split loan does require management of two or more loans, however, most lenders are well set up to offer split loan packages.

Bridging Loans:

In some cases, a person may wish to buy a new house before they have sold their existing one. With Bridging finance, the lender will fund the purchase of the new home until the old home has been sold. This overlap is known as the bridging period and upon selling the old home, the bridging period is finalised and any extra bridging funds are repaid. When timing property transactions is difficult,  Bridging Loans are a convenient way to ensure you can secure a new property. This loan option is a little more difficult to set up and it is important that borrowers have a comprehensive understanding the requirements.

Construction:

This option is generally available with most standard variable loans. When building a house, a lender will make a series of ‘progress payments’ throughout the construction process, rather than handing all of the funds to the builder up front. With each progress payment, the debt accrues until the loan is fully drawn down on completion of construction. Borrowers are usually required to make Interest Only repayments during this construction period which then revert to a standard loan upon the final progress payment.

Guarantees:

There are three types of housing guarantees: Security, Servicing and a combination of the two. There is also Directors’ Guarantees for commercial lending. This is where a person or entity other than the borrower allocates a portion of their equity (ie home) or their income towards a loan. The most common example is a parent offering to guarantee a loan for a purchase of a property in their son or daughter’s name. There are many scenarios to consider with guarantees so it is highly recommended to discuss this with your lending consultant.

There are many other options including Offset Accounts, Redraw, Additional Repayments, Direct Salary Deposits, Loan Increases, and Product Switching, that your consultant can comprehensively discuss with you. 

 

 

Home Buyers Guide

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