Housing Loans Explained…
Basically there are only 5 generic types of home loan with several slight variations on these. Each lender names or brands it’s own product which creates an illusion that there are many more thus clouding the water for the everyday person. Detailed below is an overview of these loan types and some of the subtle variations.
Variable Rate Loan
Most Lenders offer a 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.
Introductory or Honeymoon Rate
Introductory or honeymoon rates give the customer a special reduced rate for the first part of their loan contract. It can be either fixed or variable. Generally the rate reverts to a standard or special variable rate when the honeymoon period ends. The benefit of the introductory rate is that repayments are lower during the honeymoon period. This can give first home buyers or renovators some breathing space.
Basic or ‘No Frills’ loans:
Many lenders offer a class of home loan which has a lower variable interest rate than their standard variable rate loan. The trade off is that these discount loans generally have less flexibility and fewer features, eg. no extra repayments can be made, the repayment level cannot be varied or no redraw is available.
Fixed Rate Loan
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 know that their repayments will not change for the fixed period and that if interest rates rise or fall, their rate will remain the same. Features such as redraw or mortgage offset are usually not allowed during the fixed period of a loan.
Line of Credit
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. If used properly, the borrower may not have to take out new loans for future purposes thereby saving in loan setup cost and government charges. 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 may be a better option.
When initially introduced, these loans were for certain professional bodies who had agreements with Banks whereby their members would receive an interest rate discount. These days the Professional Packages are available to almost anyone depending on whether you qualify. Providing you borrow a minimum loan amount and/or meet household income requirements, you can qualify for this loan package. Essentially the loans are a variable rate loan but offered at a discounted interest rate and often with reduced application fees.
Bridging finance allows borrower to purchase a new property while he waits for his current property to sell. 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, several weeks apart, bridging finance can help fill that gap.
Splitting a loan is a great way to reduce the effects of interest rate movements while you retain the flexibility offered by a variable rate loan. Your variable rate loan accesses to featured afforded by a variable rate loan and your fixed rate portion is protecting you against interest rate movements on that portion of your borrowings. Split loans are sometimes called “combination loans”.
Low Doc Loan
Low Documentation (or No documentation) loans are designed for the self-employed or small company borrower whose financial statements may not be available for many different reasons i.e. the accountant has yet to complete their tax returns. The borrower must have a sizeable deposit or equity in existing real estate to qualify.
A borrower may have experienced difficulty in meeting their financial commitments due to lack of work, suffered unexpected business losses or had a difference of opinion with a former credit provider. Unfortunately, in these cases the creditor may have lodged a payment default (or black mark) on their credit report with a credit recording agency. When applying for finance, a default lodged on a credit report may cause some frustration as some lenders, due to “policy restraints” may be prevented from lending to the client due to the default. Credit-Impaired Loans are designed especially to assist a borrower in these circumstances. Usually these loans attract a higher interest rate and higher fees and charges.
A number of lenders now offer “reverse mortgage” loans for retired people who own their own home but have little cash to live on. They are termed “reverse mortgages” because instead of borrowing money to buy a home, borrowers are using the home that they already own to secure borrowings to spend elsewhere.
This style of loan allows the ‘cash poor, asset rich’ to create a cash flow out of the equity in their home, without having to sell it. The beauty of the arrangement is that you can generate money to live on and still remain in your house. No repayments are required during the loan term with the total interest, fees and charges being taken out of the estate on the borrower’s death or sale of the home when they decide to move.
Being able to tap into the equity in your home allows you to purchase goods you may have had to do without through lack of funds. For example, a new car, holiday or even to pay for house repairs. However, there are plenty of issues to consider before you decide to sign up.
While the concept of a reverse mortgage is tempting they are not for everyone. Although borrowings are limited to a small proportion of the overall value of the home, borrowers should realise that unless the rate of growth in property values is high, the borrower will see their equity in the asset being eroded each year, leaving less available to pass on in their will.
Interest is capitalised onto the loan and builds up each year so that eventually the debt amounts to a lot more than the original loan. For example, someone borrowing $100,000 at 8 per cent will owe $220,000 in interest and principal after 10 years, plus any fees. While repayment is not required by the borrower while they remain alive and living in the home, it must be repaid eventually, usually out of the estate upon death.
Loans for any worthwhile legal worthwhile purpose, ie purchase a motor vehicle, household goods. Holiday. May be Secured or Unsecured.