Types of Loans

Fixed or variable?

The traditional interest rate on home loans is known as the standard variable rate. This is based on the interest rate set by the Reserve Bank of Australia, which changes according to economic criteria set by the Bank.

Fixed rate loans protect you from increases in interest rates. This means that as interest rates go up your interest rate and repayments remain the same. But remember you also miss out on the savings if the rates go down.

The certainty of a fixed rate can help with budgeting in the early years of a mortgage, it’s good protection against the unexpected.

Normally you are also limited to the amount of extra repayments you can make and if you want to pay extra repayments or pay out your loan early, the break costs can be considerable. Fixed rate loans revert to the standard variable rate at the end of the fixed rate period.

Split loans

If you are attracted by the certainty of a fixed rate, but would like some flexibility, then you might consider a split loan. You can choose which proportion of your loan you would like at a fixed rate, and which you would like at a variable rate. You benefit from the lower rates and flexibility of a variable loan, but also give yourself some protection against potential rate increases.

Professional Packages

Professional packages can offer substantial discounts and special benefits, but are only available to those who satisfy specific criteria.

The key criteria for most professional packages are that the mortgage be in excess of $150,000. You do not actually need to be a white collar ‘professional’ to qualify.

The benefits vary between lenders, but in general can include interest rate discounts of between 0.50 and 0.70 per cent for the life of the mortgage, lower fees and discounts on other bank products.

These are generally great products and well worth considering if you qualify.

The standard variable loan is a flexible loan that is normally packed with features such as an offset account, a redraw facility, and the ability to make additional repayments without penalty.

The maximum loan term is 30 years and the interest rate can vary throughout the term of the loan. This means as interest rates go up so do your repayments, however when interest rates go down your repayments are reduced as well.

However realise that they do come a cost, the interest rate is normally close to 0.5% higher that the basic variable rate.

Basic Variable

A Basic variable rate loan is stripped of many of the features that come with a standard variable loan; such as a redraw facility. However you generally still have the option to pay for them when you need them.

The great thing about a basic variable loan is that the interest rate is generally half a percent lower than the Standard Variable rate.

Line of Credit

Line of Credit Loans provide a revolving credit facility. Similar to credit card you can withdraw funds up to a set limit at any time.

The interest rate is variable and the only repayment required is the interest. They are generally used for investment purposes, such as investing in shares or managed funds. You can also use a line of credit for personal use. You pay all your income into your loan account. Essentially it all goes to pay off your loan, but you also use your account as your cheque, credit and savings accounts combined. Keeping money in the account can reduce your loan amount and your interest payments.

These loans are more difficult than standard loans for most people to manage so this loan is only recommended for people who can budget well.

Reverse Mortgages

If you are aged 60 or over, a reverse mortgage could provide funds to cover your living expenses without requiring you to sell the family home.

It’s a common plight for seniors to find that although they are asset rich but they are cash poor. This is where a reverse mortgage comes in.

Reverse mortgages are designed to improve the living standards of seniors by providing cash for everyday living expenses and luxury purchases, such as a new car or a holiday. They let you convert some of the equity that is tied up in your home into cash.

No repayments are required until you no longer use your home as your principal residence. The amount that you can borrow is based on your age and the value of your home. Funds can be advanced in one payment on settlement or taken as needed. There are no repayments required over the life of the loan, with all interest fees and charges added to the loan.

Lenders apply strict conditions to reserve mortgages. For instance, before funding can take place, all applicants are required to seek independent financial and legal advice.

You should have a full understanding of the financial implications of this product before proceeding, including how it may affect your social security and financial position.

Applicants are also advised to discuss the long term effects of a reverse mortgage with immediate family members.

Non-conforming

Non conforming Loans are designed for borrowers who for one reason or another do not meet the traditional lending criteria of most banks and other lenders.

Whether you have an impaired credit history or you wish to borrow to repay a tax debt, non conforming lenders listen to your individual circumstances and assess the loan on its merits.

However, interest rates and fees are generally higher for non conforming loans compared to standard loans.

Loans for the self employed

A little help from an expert can make it much easier to get the right home loan if you are self employed.

Self employment is a growing trend that can offer adventure, flexibility and a certain amount of freedom. The downside is that securing a home loan when self employed can be difficult.

Traditionally the majority of lenders would expect you to have been trading for at least two years and you would be asked to provide two years of financials.

One new initiative is the emergence of Low Doc and No Doc loans, designed for borrowers who would not normally qualify for standard home loan products because they can’t provide the usual proof for income verification.

An application requires no tax returns or financials, just a simple income declaration form is usually sufficient.

The complexities for a self employed person usually mean that to get a home loan through you need an expert to put it together. It makes it easier to use an experienced mortgage broker who knows which lenders apply which rules.