Loan Types

There are hundreds of different home loans on the market, each with their own jargon and buzzwords.

It helps to know some of the key types of loans you may hear being discussed as part of your loan process.

No one loan type is better or worse than another. Each one depends on you and your unique situation.

Standard Variable Rate Home Loan

Most Lenders offer a standard variable rate loan. The interest rate on these loans does exactly what the name suggests. It can vary with time depending on the market. Variable rates are based on official Reserve Bank rate and generally won’t change unless there is an official change. Variable loans include basic, standard, or revolving line of credit products and are traditionally the most flexible. Variable loans generally allow you to offset your mortgage, make extra repayments and have access to redraw. It also allows you to pay your loan out early.

Basic Variable Home Loan

This is similar to a standard variable rate loan, but without additional features such as offset and portability, etc. The interest rate is typically lower then a standard variable loan, making them attractive to people who are sure they won’t require the additional features. The major difference is that most organisations charge a fee to access redraw.

Fixed Rate Home Loans

Fixed loans generally allow a borrower to lock in an interest rate for a particular period of time, normally 1-5 years. Customers who choose a fixed rate get the comfort of their repayments not changing during the fixed term. Fixing an interest rate does, however, mean a trade-off in respect of the flexibility of a loan. A fixed rate loan generally has more restrictions than a standard variable. Many fixed rate loans do not let you make extra repayments or restrict the additional repayments during the fixed period. Features such as re-draw or mortgage offset are usually not allowed during the fixed period.

Split Rate Home Loans

Split Loans are sometimes called “combination loans”. Splitting your loan can be an effective way to cover yourself against interest rate movements. You divide your loan into two portions – part fixed and part variable. The variable part of you loan will move when the market does, but the rate on the fixed portion of your mortgage remains static.

Most institutions require a minimum dollar amount in each split portion and some charge per split so you should check with your mortgage broker about all costs beforehand.

Interest Only Home Loans

Interest only home loans require no principle reduction to be made. You only have to pay the accrued interest each month. Theoretically, the loan need never be paid out as long as interest payments are made. Many lenders only allow a maximum period of 5 years for this type of loan. Interest only repayments are commonly used for investment purposes where the interest repayments are deductible.

Lines of Credit Home Loans

A revolving line of credit is essentially an overdraft where you can at any time draw the loan balance up to the original amount borrowed. Usually, minimum repayments on a Line of Credit facility are interest only. Lines of Credit often have higher interest rates than variable rate loans and can be a trap for those who aren’t good at budgeting. So if you want the flexibility but would prefer the safety of set monthly repayments, an offset facility is probably a better option.

Bridging Finance

Bridging finance allows the borrower to “bridge” the gap between the sale of one property and the purchase of another. This can be useful if the settlement date of the new property purchase takes place before the sale of the original property. If these two transactions are, say, 30 days apart, bridging finance can help fill that one-month gap.

No Doc or Lo Doc Home Loans

These are normally for self-employed applicants who either have not prepared their financials, or have lodged their financials but minimised their profit through their legally entitled cash and non-cash deductions (expenses).

The borrower is required to sign a statement confirming the loan repayments can be met from the businesses cash flow. Lenders with this style of facility usually charge a higher interest rate.

Reverse Mortgage

If you are over 60, own your home and need some extra cash, using the equity in your home, by way of a reverse mortgage is one option that may be available to you.

Doing this is a big step though. Your home is probably your most valuable asset so you must work out whether the benefits outweigh the risks.

Not everyone will be able to obtain this type of loan but our representative can work this out for you.

What is a Reverse Mortgage

A reverse mortgage is a type of home loan that allows you to borrow money using the equity in your home as security. The loan can be taken in different ways.

Interest is charged like any other loan, except you don’t have to make repayments while you live in your home – the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want.

You must repay the loan in full (including interest and fees) when you sell your home or die or, in most cases, if you move into aged care.

The home equity you have in the future will depend on the following factors:

  • The future value of your home
  • How much you borrow and when
  • The effect of Interest and fees

Before you decide to go ahead our representative will provide you with information that will help you work out:

  • how much your debt will increase over time and what this means for the equity in your home
  • how changes in interest rates and house prices could affect the equity in your home

A reverse mortgage should not be entered without careful consideration. Consider your future needs, whether there there are alternatives more appropriate for you. Always speak to your family and obtain financial and legal advice before proceeding.

The risks

  • Interest rates are generally higher than average home loans
  • The debt can rise quickly as the interest compounds over the term of the loan – this is the effect of compound interest and is something you need to be aware of before making any decisions
  • The loan may affect your pension eligibility
  • You may not have enough money left for aged care or other future needs
  • If you are the sole owner of the property and someone lives with you, that person may not be able to stay when you die (in some circumstances)
  • If you fix your interest rate then the costs to break your agreement can be very high

To find out more about reverse mortgages ask our representative or head to ASIC’s MoneySmart website.

Contact us to be connected to the right type of mortgage for your needs

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