Types Of Mortgage Finance
Standard Variable Loan
Basic Variable Loan
Intro Rate ‘Honeymoon’ Loan
Fixed Rate Loan
100% Offset Loan Account
Line of Credit Loan
Low-Doc Loans
Redraw
Reverse Mortgage
Construction Loans
Standard variable loans are Australia’s most popular type of home loan. The interest rate varies throughout the loan term. These loans generally offer excellent flexibility, low fees and often offer great features such as an offset facility, redraw facility, no limits on additional repayments and in most cases, no early pay-out penalties.
Advantages:
- Flexibility
- Lump-sum payments can be made without incurring a penalty.
- If interest rates fall, your repayments will fall.
- Often offer extra features.
Disadvantages:
Basic variable loans typically offer lower interest rates and fewer features than the standard variable loans. You often have the option to pay for any additional feature required. Interest rates and repayments will vary throughout the loan term.
Advantages:
- Relatively low interest rate.
- Lower repayments.
Disadvantages:
- Many of these loans do not have the same features or flexibility as other variable loans.
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Intro Rate ‘Honeymoon’ Loan
An introductory rate loan generally offers a guaranteed low rate for an initial period of time (usually 12 months) after which most will revert to the standard variable rate. The rate can be fixed or variable.
Advantages:
- Usually the lowest rates on the market.
- Some lenders provide offset accounts on these loans.
- Opportunity to reduce the principal quickly during the ‘honeymoon’ period.
Disadvantages:
- Payments will increase after initial introductory/’honeymoon’ period
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Under a fixed rate loan, the interest rate is fixed for a specified period, usually between one and five years. This loan gives you the certainty of knowing exactly what your monthly repayments will be and peace of mind knowing the repayments won’t rise. However you won’t benefit if rates go down during the fixed term.
Advantages:
- Guaranteed rate, if interest rates rise your repayments won’t.
Disadvantages:
- Reduced flexibility.
- Extra repayments may incur a fee or be limited.
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A 100% offset loan is very similar to an all-in-one loan. Rather than putting all your salary and other income into your loan, it goes into an offset account that is directly linked to your home loan. Any balance in the offset account is 100% ‘offset’ against your home loan. This reduces the amount of interest you have to repay, making your money work harder for you.
Advantages:
- Can save you substantial amount of interest if used correctly.
- Operates like a normal transaction account and has a chequebook, ATM card, etc. attached.
Disadvantages:
- May have higher monthly fees attached to the account.
- May require a minimum balance in the account
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A line of credit loan provides you with access to the equity in your home or investment properties up to a pre-approved limit. You access the funds as you need to. The interest rate on a line of credit loan is usually a variable rate and repayments are interest only.
Advantages:
- You can use the money when you need it and pay it back when you can.
- Rates are generally lower than a personal loan or credit card.
Disadvantages:
- Unless care is shown it is possible to reduce the equity you have built in your home.
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A low documentation (or no documentation) loan is suited to investors or self-employed borrowers who do not meet the ‘standard’ lending criteria. Low Doc Loans are generally used by self employed business people with lack of financial statements or complex entity structures making proof of income difficult. Tax returns or financial statements are not required
Advantages:
- Simple income declaration form.
- No tax returns.
- No financial statements.
- Can have features such as redraw, line of credit, variable or fixed rates, principal and interest or interest only.
Disadvantages:
- Generally a higher interest rate.
- Larger deposit is required
Redraw
A redraw facility allows you to make additional withdrawals from your loan account. The amount you can redraw is generally limited to any additional repayments that you have made during the course of the loan. Some lenders impose a minimum redraw amount, limited number of free redraws, or fees per redraw. One of the major benefits to home loan borrowers of a redraw facility is that it allows borrowers to reduce the total interest payable over the life of the loan because they are making extra repayments to their home loan. So, if you make an extra $2,000 in repayments over a year, then in simple terms, your extra repayment of $2,000 will reduce the interest payable on the total outstanding amount of your mortgage.
The other advantage of the redraw facility is that you will still have access to these funds whenever you like. So, if you want to go on a holiday, or buy a new car, you can use the extra funds available in your redraw facility.
Reverse Mortgage
Reverse Mortgages are offered to those clients who are above the age of 65, and who already have considerable equity in their homes. Reverse mortgages allows these applicants to withdraw some of their equity either through a lump sum payment, or through continued and on-going monthly payments
If you are building your own home or investment property, a construction loan may be suitable for you. This loan requires a fixed price building contract from a registered builder. These loans are usually interest only for the period of building and then become principal and interest once building is completed. A construction loan allows you to draw money as is required whilst building. Also, with the usual necessary documents required when applying for a loan, construction loans also require a ‘fixed price building contract’ and ‘council approved plans’.
Advantages:
- Competitive variable interest rates.
- Facility to draw money when necessary whilst building.
- Interest only payments during the building period.
- Additional payments can be made.
Disadvantages:
- Requires a fixed price building contract leaving little room for change whilst building.
- Some lenders charge a fee for every time you draw money whilst building.
- Given it is a variable loan; loan repayments will increase if interest rates go up.
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