Mortgages

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See below for the different types of home loans available: 

 

Variable Rate Home Loan

Key features
Variable rate home loans have interest rates that, over the life of the loan, track the interest rate movement set by the Reserve Bank of Australia (RBA). You are making a bet that interest rates will fall, or will at least stay constant. There are two types: standard and basic variable.

Standard variable rate home loans often have features that include redraw facilities, portability and ability to make additional repayments. You can also make repayments weekly, fortnightly or monthly, and combine your home loan with another, eg a fixed rate or split loan.

Basic variable rate home loans or 'no frills' loans have lower interest rates compared to standard variable rate loans; however, these loans do not have the same range of features. Basic variables are generally not portable and may not be combined with other loans.

Advantages
If the Reserve Bank cuts interest rates your repayments also drop. Variable rate home loans are generally cheaper than fixed rates. The flexibility in repayment without penalty is handy if you want to pay off your mortgage earlier and reap substantial savings in interest.

Considerations
If interest rates go up, the extra rate rise would be charged on a monthly basis and added to the loan, making repayments higher. However, some variable rate home loans can be capped.

Suitable For
All types of borrowers who can allow for a marginal rate increase but wish to benefit if rates decrease. First homebuyers should ensure they could service their loan should rates increase. Allow for at least a 1% rise in a budget.

 

Introductory Rate Home Loan

Key features
Also known as 'honeymoon rates' these home loans usually offer the lowest interest rates available in the market. Interest rates are discounted for a certain period of time, which can vary for the initial months of the home loan depending on the institution and the product structure. After this 'honeymoon' period, the interest rate reverts back to the higher variable rate.

Advantages
The main benefit is that you have a softer introduction to that product because you are paying lower instalments during the intro period which help you get ahead financially during those months.

Considerations
When the 'honeymoon period' ends, the interest rate is likely to be higher, so it is important to find out what the revert rate is to ensure you will not be paying a higher rate than the standard variable rate in the market- thus cancelling out any savings. Also check to see if the loan rolls over to a fixed or variable rate product. Ask your lender about the costs for discharging or switching the loan, and whether you are able to make extra repayments during the introductory period. You need to assess what the benefits are going to be over the long rather than short term.

Suitable For
First homebuyers who are breaking into the mortgage market would benefit from the lower intro rates as they get used to paying their mortgage. Intro loans are also worth considering if you are refinancing and need a short-term financial boost.

Construction Home Loan

Key features
Designed for borrowers building a new home or planning major renovations of their existing dwelling, these home loans carry variable rates and feature an interest-only repayment structure during the construction phase, and after the project is completed it reverts back to principal and interest. Unlike standard home loans, the funds will be drawn down in stages rather than a lump sum payment.

Advantages
You only have to pay interest on the money you've drawn out rather than on the total mortgage amount. You are also allowed to make unlimited repayments during this period.

Considerations
Because they are variable rate home loans, if the rates go up during constructions your repayments also rise. These loans do not allow you to convert to fixed term during this phase. Since you are only paying interest on the amount you have drawn out, you are not reducing your total debt significantly.

Suitable For
As the name implies, construction home loans are suitable for those undertaking major capital works or their property.

Low Doc Home Loan

Key features
Aimed at self-employed borrowers, a low- doc home loan is exactly that- it requires far less documentation to prove your income, savings history and capacity to repay the home loan. You would need to show statements from a business trading account for three months to verify your income, or details of previous tax returns if you have them.

Advantages
Low-doc home loans have allowed thousands of Australians who have been rejected by mainstream credit providers to obtain a mortgage. Allowing borrowers to supply alternative documentation to income and savings histories has opened up the world of home ownership to self employed people. If you can supply sufficient documentation you will usually be able to borrow at mainstream rates lending rates.

Considerations
Low-doc lenders 'rate for risk', meaning that the perceived level of risk in lending to you will determine the interest rate you are charged. If it turns out to be extremely high, you may be better off not borrowing until your circumstances improve. Ensure that the lenders optimism doesn't result in you being sucked in to borrowing more than you can comfortably repay each month.

Suitable For
Low-doc home loans are popular with those who struggle to verify their income to mainstream lenders, including the self-employed, particularly those experiencing timing delays in preparing their tax returns. They're also designed for contract and seasonal workers, or families who have just moved to Australia.

No Doc Doc Home Loan

Key features
A cousin of low-doc, no-doc is a variation on the theme of providing less documentation in order to satisfy lending criteria. No-doc home loans and their variants operate in much the same way as a low-doc home loan, but differ primarily in the amount of documentation required.

Advantages
The latest from the low-doc loans are extremely handy for self-employed people who, for whatever reason, would prefer not to disclose the source of their income.

Considerations
With an increasing tendency towards no-doc, and a desire to capitalise on the enormous demand for residential mortgages, certain lenders may be so keen to get you on board that they neglect to properly assess whether you can actually repay. Make sure you're not being encouraged to borrow more than you can afford.

Suitable For
No-doc home loans are ideal for creditworthy people who want maximum privacy and can afford to pay for it. A borrower may require a no-doc loan because he or she is self-employed and cannot supply tax records as proof of income, aged over 65, a contract or seasonal worker, or a recent arrival in Australia.

Equity Release Home Loan

Key features
A home loan that allows you to borrow the equity or cash in your home while you still live there, the most popular type of equity release is the reverse mortgage. Repayments don't have to be made until die or move into long-term care; then the loan must be paid out in full, usually out of the proceeds of the sale of the property. If you are 60 years or older and own your home, you can borrow between 15% and 45% of the value of your property.

Advantages
The benefit is that you have access to funds, and still live in your own home and retain ownership. This means that you are not solely reliant on a pension or superannuation policy to survive, allowing you more financial freedom.

Considerations
Reverse mortgages are generally more expensive than traditional home loans and can be restrictive. Because you are not making regular repayments each month, you're not reducing your debt but accumulating interest. To protect yourself, you need to get a "no negative equity guarantee" from your lender. Members of the Senior Australians Equity Release Association of Lenders (SEQUAL) are required to offer this assurance when you take out a reverse mortgage. It's vital to get independent legal advice before taking up this type of mortgage. You may also want to discuss it with your family.

Suitable For
Retirees who own their home but don't have enough cash to meet living expenses. Also suitable for Baby Boomers seeking to retire in the next five years, or for younger borrowers looking to upgrade their properties. It's also worth considering if you can look at reverse mortgages as a form of superannuation or paying for retirement.

Investor Home Loan

Key features
Standard variable investor home loans are virtually a mirror image of their owner-occupied counterparts, with an important distinction. Lenders tend to be more conservative in lending to investors and will generally only approve a loan to value ratio (LVR) up to 90%. Specifically branded investor loans may carry other features suited to investors, such as an offset or line of credit.

Advantages
Specialised investor loans tend to be competitive with standard variable loans in terms of interest rates and fees, but the inclusion of handy features such as offset facilities may give certain products the edge over the rest. An interest-only loan can help you maximise your tax deductions simply because you are paying off a higher proportion of interest each month. Lenders are now offering a range of bells and Whistles to encourage investors, including home loan portability.

Considerations
While interest rates for investor loans are generally now on par with those for owner-occupiers, lenders generally seek to recoup costs in more creative ways. A common way for investors to be hit with hidden charges lies in the provision of extra features such as lines of credit. You may derive substantial benefits from such a feature, saving you money, but it's essential to weigh up any perceived benefits that the feature will provide versus the fee charged.

Suitable For
Ideal for anyone looking to fund an investment, and has 10% or more in cash or equity to throw in. Several properties can be combined for the serious investor, who would also benefit from salary crediting features like offset.

Fixed Rate Home Loan

Key features
Fixed rate home loans are priced according to a pre-determined interest rate, which is independent of fluctuations in the official cash rate. You can fix your entire loan for a period of between one and five years, or you can fix a certain portion and leave the rest variable. When the fixed term expires, the fixed portion will generally revert to the prevailing variable interest rate.

Advantages
If you are worried that interest rates may rise in the next few years, locking in an interest rate by fixing a portion of your home loan is an insurance policy against rising repayments. At present, fixed rates are almost on par with variable rates. Although there is normally a fee charged for fixing a loan, the added certainty fixing brings makes fixed rate home loans attractive.

Considerations
Besides a fee for setting up a split loan with fixed and variable portions, you will be charged if you choose to leave the fixed term before it expires. Fixed rates have been criticised due to their lack of flexibility: few features, fees charged for transactions such as redraw and lump sum repayments. Fortunately, this is changing but check with prospective lenders to make sure the fixed product contains the features you require. While you will be insulated from rate rises, you won't benefit if rates drop during the fixed term.

Suitable For
Anyone who is concerned that interest rates may rise in the near term. In the current climate of sky-high oil prices pushing up inflation, fixing at least a portion of your loan is a sensible strategy.

Line of Credit

Key features
A line of credit (LOC) allows you to access additional funds by drawing on the equity value of your home. Setting up a LOC involves fixing a limit on how much you can borrow - generally it's a fixed percentage of your loan amount. You direct income from all sources into your line of credit loan account and then draw down funds as and when required.

Advantages
You'll have greater flexibility in managing the size and timing of your repayments, enabling access to additional funds and even taking your mortgage with you to a new house. Because your entire income stays in your account until you need it, a major portion of your income stays in your loan account longer, and saves you interest. LOCs are a great way to fund projects where you need access to your funds in stages over time- such as a home renovation.

Considerations
These products may seem like the best thing since sliced bread, but he warned- most come at a price, and the extra funds you shell out for a loan feature may not actually pay off financially. If you are not disciplined with your money, you are probably best off not drawing down on your home equity.

Suitable For
A line of credit is only a sensible choice if you are extremely disciplined in managing your everyday finances. If you will be tempted to use the funds for spur of the moment purchases, a line of credit is probably not for you.

 
Financing a property is an important decision. We want to help you be certain that it's one of the best. So when it's time to choose your finance, call us on 1300 788 371. 

Call us on 1300 788 371, we're here to help you!