Standard Variable Rate Loan
This is a traditional variable rate home loan initially offered by banks and used by 'baby boomers' to buy their first homes. The Standard Variable Rate Loan has a repayment period of up to 30 years and many homebuyers still have this type of loan today. The best feature of this loan is that at the end of the full term you'll have a freehold home.
Mortgage repayments are paid on a monthly, fortnightly or weekly basis and most payments are used to first pay accumulated interest on the loan with the remainder going towards paying off the principle of your loan.
Most lending institutions offer a discounted start-up period where lower interest rates are offered as an incentive for you to take up this type of Loan. The benefits of this discount (or honeymoon period) for the borrower are short-lived as the remaining years on your loan are charged at a standard variable rate.
Whilst this is a popular type of home loan, borrowers risk the effects of fluctuating interest rates as these rise and fall over the life of the loan. The interest rate for Standard Variable Rate Loans is higher than the No Frills Loans as you will generally have a little more flexibility.
Benefits
- Discipline
Regular repayments help you with budgeting
- Redraw
Most institutions will allow you (subject to terms and conditions) to withdraw additional repayments you have made over and above the minimum repayment
- Extra Repayments
Usually allowed at any time
Pitfalls
- Interest Rate
Variable (excluding the start-up period) and you will be at the mercy of interest rate fluctuations
- Interest Rate
Always higher than Low Frills Home Loan rates
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Low Frills Loans
The Low Frills Loan is one of the most popular loans of all. Quite simply, this is the loan that has the lowest running costs so you pay a lower interest rate.
In fact, the interest rate is always lower than standard loans because you receive less bells and whistles. So check carefully to see which benefits you may be missing out on. With the No Frills Loan you can't reduce your home loan by offsetting any money held in another account with the same bank or institution. The interest rate - whilst staying low - will also still have you at the mercy of market rate fluctuations. Remember, your financial situation today may not be the same in the future and the overall cost of a loan is not determined by the interest rate, rather by how quickly you can pay it off.
Benefits
- Discipline
Regular repayments help you with budgeting
- Interest Rate
Always lower than traditional loans
- Extra Repayments
Are allowed
Pitfalls
- No Offset
Money held in normal savings accounts with the same Institution will not reduce your home loan rates (see 100% offset loans)
- Interest Rate
Variable and you are at the mercy of interest rate fluctuations
- Cost
Minimal bells and whistles can come at a cost
- Penalties
Usually on early exit
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Line of Credit
This type of loan can be either your best friend or your worst enemy. If you have the discipline to use it correctly, you will enjoy the benefits of paying your whole salary into this loan and instantly reducing the interest charge.
If you are interested in this loan a Mortgage Maximizer is crucial and together with the correct budgeting and discipline, you can dramatically reduce the time it takes you to pay out your home loan.
In using this loan you will always have access to your original loan limit (just like you do on a credit card) and this can lead to financial self-destruction if you are not careful. You should thoroughly check the facts before committing to this type of loan.
Benefits
- Easy Access
Money is easily accessed by writing out a cheque or using your ATM card, as both are linked to this loan. You can use this money for living or for other investments
- Reduce Interest Payments
By placing your salary and savings into this loan you will dramatically reduce the interest charge
- Extra Repayments
Allowed at any time
- Mortgage Maximizer
This can be attached to this loan to assist you with budgeting and show you exactly how quickly you can pay out your loan
Pitfalls
- Easy Withdrawl
If you are undisciplined this loan can get out of control
- Interest Rate
Usually higher than Traditional Variable Rate and Low Frills Loans
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100% Offset Loans
If you like the idea of a Line of Credit Loan, but feel it is too easy to withdraw your funds, then this loan is the answer.
It is similar to the Standard loan (principle and interest repayments reducing over time) and has the benefit of reducing the interest component of your loan by 100% of the amount of money you have in your savings account - which is linked to your home loan.
It works like this:
Your current home loan is $145,000, if you had $10,000 in your savings account, you are only charged interest on the difference i.e. $135,000. This gives you a nice tax effective form of savings without the risk of a revolving line-of credit limit. Which is why it is a very popular type of loan.
Benefits
- Easy Access
Money is easily accessed from your savings account (offset account) simply by writing a cheque or using your ATM card
- Loan Reduction
Your loan reduces every month as repayments are required to pay off the loan over a set period of time
- Loan Balance Lowered
Your loan balance - and the interest charged - is effectively lowered by your savings in the offset account
- Interest Payments Reduced
By placing your salary and savings into this loan you will dramatically reduce the interest charge
- Mortgage Maximizer
This can be attached to this loan to assist you with budgeting and show you exactly how quickly you can pay out your loan
Pitfalls
- Interest Rate
Usually higher than a No Frills Loan. Yet it is lower than a Line of Credit Loan
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Bridging Loan
This type of loan has come a long way. If you have your home up for sale - and you find the home of your dreams - this loan can really help you. It used to be seen as a scary and expensive option, but the Bridging loan has come a long way with a lot of enhancements.
This is how it works.
The lender advances the money so you can buy your new home. Depending on the equity in your current home, you may be able to include all the fees too. The interest charged to your loan can be paid by you or capitalized. Capitalized means it gets added to the loan.
When your original property is sold, the proceeds are deposited to the new loan. The amount owing becomes your end loan and you start to make normal repayments as soon as it replaces your old loan.
Benefits
- Buy or Build before Selling
You can buy or build your new home before you sell your existing home
- No Need to Rent
You can avoid moving into a rental property and move directly into your new home
Pitfalls
- Interest Charged in Full
Nothing comes for free and interest is charged on the full amount of the new loan
- Interest Can Add Up
If you don't sell your existing home in due course, the interest bill can really add up
- May Be Forced to Sell
It may force you into selling your existing home at a price lower than you want to
- Equity Required
This loan relies on you having sufficient equity in your existing property to support the purchase of both
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Fixed Rate Loans
This loan is exactly as it sounds. Your interest rate gets fixed for a period of time. This gives you insurance against rate fluctuations so you know exactly what your repayments will be for your fixed rate term.
This is a positive if rates go up. If however, rates go down, you may find yourself locked in to paying a much higher rate than those borrowers on variable rates. You may also be penalized if you pay off your loan prior to its due date. If you are unsure about whether it is better to take a fixed or variable rate - you can always take a split loan. This gives you the option to take a part variable and a part fixed rate loan.
Benefits
- Lock-in Interest Rate
You can "lock in" the interest rate for a period of time and insure yourself against future interest rate rises
- Easy to Budget
It is easy to budget for the same regular repayment each month
Pitfalls
- Interest Rates may go Down
If interest rates go down you may end up paying more for your loan than borrowers on variable rates
- Fixed Everything
Fixed Rate also means, fixed term, fixed loan amount, fixed repayments and most lending institutions will penalise you for making additional repayments
- May be Penalized
You may be penalized if you pay off your home loan before the due date
- Flexibility
Minimal
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Split Loans
This loan is a way of hedging your bets. If you are unsure as to whether interest rates are going up or go down, you can choose a Split Rate Loan. With this type of loan, you nominate how much of the loan you would like to fix and how much you would like to put on a variable rate.
The reason for this is simple.. If interest rates increase, then the portion of the loan, which is fixed, will give you peace of mind, that portion will not go up. If interest rates go down, then you will feel at ease knowing that the variable portion of your loan will go down too.
The Split Loan is a cautious way of borrowing for your home.
Benefits
- Lock-in Interest Rate
You can lock in part of your interest rate to give you peace of mind against future interest rate rises
- Fixed & Variable
You can leave part of your loan on variable which will leave you less vulnerable if rates reduce
- Extra Repayments
Additional payments are allowed on the variable portion of the loan
Pitfalls
- Benefit - Maybe Not
You may not benefit greatly from any interest rate fluctuations
- Fees
You may be charged set-up fees, account fees and discharge fees on both the fixed portion and the variable portion
- May be Penalized
You may be penalised for making higher repayments on the fixed portion
- May be Penalized
You may be penalised if you pay off your loan before the due date on the fixed portion
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Lo Doc Loans
Australia has a new economy. More and more people are self-employed or employed on contract. This means that their income patterns are not as regular as PAYG earners.
A Lo Doc Loan will enable you to "self-certify" your income, so you can avoid the hassle of asking your accountant to provide up-to-date financials every time you wish to borrow money. You could pay a little bit more in interest and fees - but it saves you a lot of time and stress. Some lenders also offer Lo Doc Loans to investors and PAYG earners at standard rates.
Benefits
- No Financials Required
There is no need to provide financials to the lender
- Faster Access & Greater Flexibility
You receive faster access to your loan and greater flexibility
- Irregular Income Considered
Your non-traditional and irregular income sources are considered
Pitfalls
- Interest Rate & Fees
You could pay higher interest rates and fees
- Risk
You could be at risk if your future income varies
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No Doc Loans
This loan is very similar to the Lo Doc loan with some exceptions, income verification is not required at all. The term of the loan is normally 2-3 years and interest only. The loan purpose is for investment only and cannot be used for owner occupied. This is purely an equity lend with a higher interest rate and fees than a standard loan, but with no questions regarding income or asset position. You must however have a clean credit rating.
Benefits
- No Financials Required
There is no need to provide any financial details to the lender
- Faster Access & Greater Flexibility
You receive faster access to your loan and greater flexibility
- Equity
Purely an equity lend
Pitfalls
- Interest Rate & Fees
You will pay higher interest rates and fees
- Renegotations
You need to renegotiate the loan after the initial term 2-3 years
- Repayments
Interest only repayments
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Non-Conforming Loans
If you have experienced financial problems in the past, this is the loan to help you re-build your credit rating
Non-conforming lenders are very flexible - even if you have been bankrupt in the past. You will need a 10% minimum deposit - and you will pay more in interest and fees for a Non-Conforming Loan - yet you will get a fresh start.
Benefits
- Re-Build Credit Rating
You will get a fresh start and the chance to re-build your credit rating
- Non Judgemental
Non judgemental lending rules with flexibility
Pitfalls
- Interest Rate & Fees
You will pay higher interest rates and fees
- Deposit
You will require a minimum deposit of 10%
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