Finding the right home loan

Standard Variable Home loans are Australia’s most popular type of home loan and fast loan. The interest rate varies throughout the loan term generally synced with Reserve Bank of Australia movements. 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.
• Often have access to a 100% offset account.

Disadvantages:

• If interest rates rise your repayments will rise.

Basic variable Home loans typically offer lower interest rates and fewer features than the standard variable loans, and generally with lower or zero fees as well. You often have the option to pay for any additional feature required. Interest rates and repayments will vary throughout the loan term, and fluctuate with movements to the Reserve Bank Cash Rate. They are a great mortgage suited to clients that want a “no frills” mortgage product with fewer bells and whistles.

Advantages:

• Relatively low-interest rate.
• Lower repayments.
• Zero or very low fees.

Disadvantages:

• Many of these loans do not have the same features or flexibility as other variable loans  (typically lack an offset account).

Under a fixed rate home 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 during this fixed rate term. However, you won’t benefit if rates go down during the fixed term. They prove to be very popular in a low-interest rate environment, as they can often lock in the current low rates for an extended period of time.

Advantages:

• Guaranteed rate, if interest rates rise your repayments won’t.

Disadvantages:

• Reduced flexibility with repayments and redraw often unavailable.
• Extra repayments may incur a fee or be limited.
• You may be stuck with a higher rate if the variable/cash rate reduces during your fixed term, and sometimes large early repayment penalties may apply.

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 the 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.

A 100% offset loan gives you the ability to have savings offset against the principal of your 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 a substantial amount of interest if used correctly.
• Operates like a normal transaction account and has a cheque-book, ATM card, etc. attached.

Disadvantages:

• May have higher monthly fees attached to the account.
• May require a minimum balance in the account

Far less popular these days, Line of credit Home loans 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 much lower than a personal loan or credit card.
• Very Flexible allowing for unlimited transactions and can be used as your main transaction account, thereby saving interest on all of your funds deposited.

Disadvantages:

• Typically an interest only loan and care needs to be taken to ensure that you reduce your overall debt over time, which can be mitigated my using alongside a P&I term loan.

A low documentation (or no documentation) loan is suited to investors or self-employed borrowers who do not meet the ‘standard’ lending criteria. This may include; those with an impaired credit history, those who are unable to provide the required documentation in support of their loan application or those who wish to borrow more than 100% of the property value.

Advantages:

• Simple income declaration form.
• No tax returns.
• No financial statements.
• Allows a significant amount of flexibility and great benefits from having salary credited directly to the loan and paying monthly living expenses with a credit card.
• For Debt consolidation, the single repayment will be much lower than the combined repayments of shorter-term loans.

Disadvantages:

• Usually a higher interest rate than available on a traditional loan.