Types of residential loan
The choice between interest only loans and principal and interest loans should reflect your personal circumstances. Repayments on interest only loans will always be lower than principal and interest loans but there is the disadvantage of not reducing the principal loan amount. The flexibility of being able to make extra repayments in good times is an attractive option for interest only loans. However with a principal and interest loan you are locked into making higher repayments if you should suffer a cash shortage. Most home loans have the facility of being able to make additional repayments without a penalty.
This is a loan with lower repayments for the first six to twelve months. After the ‘honeymoon’ the loan becomes a standard variable loan and the repayments increase. Make sure that you can meet the higher repayments for the remainder of the loan. You could also be faced with a fee at the end of the honeymoon period to switch to another loan type.
Basic or ‘no frills’ loans are a variable rate loan with a relatively low interest rate. The low rates for these loans could mean that you can’t repay the loan faster because there are no extra options available. Repayments will rise and fall with interest fluctuations. Remember to check that the loan conditions will suit your circumstances – particularly the ability to make additional repayments and pay-out without a penalty.
These loans are the most common type available. The variable rate loan offers more features and flexibility than the basic or “no frills” loan, so the rate is usually slightly higher. The extra options (for example a redraw facility, the option to split between fixed and variable, extra repayments and portability) should be taken into account when choosing your type of variable loan. Repayments will vary as interest rates fluctuate.
These loans are set at a fixed interest rate for a specified period (usually one to five years). The advantage of allowing you to organise your finances and repayments without the risk of rising interest rates is offset by the disadvantage of not benefiting from a drop in rates. At the end of the term all fixed loans automatically revert to the applicable variable rate. At this stage you have the option to lock in another fixed rate for a new term, switch to variable or go for a loan where you split with a percentage fixed and the remainder variable. However these loans may have limited features and lack the flexibility of 100% variable loans. There may be early exit fees and limited ability to make extra payments.
These loans combine the features of various products and can have the security of a fixed rate loan and the benefits of a variable loan. They can also combine a standard term loan and a line of credit. For example part of the loan can be borrowed at a fixed interest rate with the remainder on a variable rate. These loans can be split into as many products as you want to reflect your personal circumstances.
Low doc and no doc loans were created to cater for the self employed or small business owners who are unable to prove their income. There is usually limited documentation required for this type of application and the interest rates are typically higher as the lending institution are taking more risk by lending finance without normal evidence. Clients are required to complete a declaration that they can afford the repayments. Variable or fixed rates are available for these loans.
A reverse mortgage loan is a loan for people 65 years and over against the equity or asset value in their home, holiday home or investment property. This equity can be taken out in a lump sum, through regular ongoing payments or a combination of both. Interest is added and no repayments are necessary. The principal loan amount is not required to be paid back until the borrowers either pass away or leave the home. Legal advice is recommended prior to considering this type of finance.
These loans are a great way to access the equity in your home to use for things like home renovations, investments or other personal purchases. Repayments on a line of credit loan are determined by the interest rate applicable at that time. If you have sufficient equity in your home and your current loan structure doesn’t allow for withdrawing your equity, you will need to make a separate application for a line of credit loan. You have the added advantage of being able to make unlimited deposits/repayments as your repayments are not set. You must check the conditions of these loans as they are sometimes more expensive than standard products.
These loans are offered to provide an all-in-one home loan package. They offer interest rate and fee savings on your home loan, credit card and transaction accounts. Some lenders also waive the annual fees for your credit cards. An annual fee ranging from $120 to $395 is usually applicable on these loans. Professional packages can also offer amazing flexibility, with some lending institutions willing to waive product switching fees when changing from a variable to a fixed rate or converting a principal and interest type loan to an interest only loan.
A bridging loan may be necessary to cover the financial gap when buying one property before the existing one is sold. This finance is generally secured against your property as you are utilising the equity in your existing property. Usually bridging loans are short term and more expensive than other types of loans.
If you’re building a new home or planning major renovations to your existing home, a construction loan is generally the most appropriate funding option. The difference between a construction loan and other types of loans is that a construction loan is drawn down in stages and not paid as a lump sum. The draw downs enable the builder of a home to finance the various stages of the construction process from the acquisition of land to the various stages of building.
Subject to each lender’s credit policies these loans fund land purchase and settlement costs, pre construction costs, professional fees, construction costs, loan costs, interest, marketing costs etc. Each loan is assessed on its merits and the lender takes into consideration a multitude of factors including time, risks, product being developed, location, competition, supply and demand, developer’s experience and track record, market conditions, selling strategy, number of pre-sales, reputation of the builder etc. Interest rate charged by the lender can vary according to the above assessment. These loans are interest only. The loan is usually repaid from sales proceeds. The borrower needs to contribute equity towards the development.
These loans help those clients who have had issues with finances, mainly due to unexpected changes in circumstances, eg temporary unemployment or short term inability to pay debts. We can identify the lenders who can match your personal circumstances. The value of your property and your capacity to repay will determine a non conforming loan, however these loans can attract a higher than normal interest rate.
Loan consolidation is where you are able to combine multiple debts (like credit card and personal loans) into a single loan with one repayment. The lower overall interest rate provides the advantage of using your home loan to consolidate debts.
An offset account is a savings account attached to your loan account. Money in this account is offset against the loan amount thereby reducing interest payable. Significant savings are made by reducing compound interest with the use of these accounts.
Other advantages of an offset account include being able to pay off your home loan faster than the repayment schedule demands and being able to redraw money if the need arises.