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Types of Loans and Loan facts

** This information is provided as information only and does not constitute advice or opinion.

It is very important to appreciate we have set out to provide you with an overview only of the different types of home loans available. Your SJButler Broker will provide you with various loan options based upon the information provided to us by you. If you proceed to the Mortgage Broking stage, your certified Broker will conduct detailed analysis of your specific loan requirements when preparing your loan application to your chosen lender.

Our website provides you with a lot of information, easy to use and in plain easy to understand terms.

Variable (Principal and Interest) Rate Home Loans

Variable (floating) rate home loans are very common in Australia. The rate charged on a variable loan generally (but not always) moves up or down consequent upon movements in the official cash rate set by the Reserve Bank of Australia. Home loans with variable interest rates usually have the most repayment flexibilities and allow for faster repayments and lump sum payments. Generally variable rates are lower than fixed rates and include facilities such as redraw and 100% offset options.  Some lenders offer very basic (discount) variable rate loans which lack flexibilities such as repayments and redraw options but are competitively priced although they generally allow for additional repayments.

Usual features

  • Repayments fall when lender interest rates fall.
  • Standard variable loans offer flexibility and additional features, such as the ability to make additional payments, a redraw facility (take out any extra money that you have put in), low introductory or honeymoon rates.
  • Allows borrowers to pay off the mortgage quickly by not having any penalty for advance payouts.

Things to look out for

  • A higher interest rate! It is higher for standard variable loans than basic loans because of the additional features usually offered.
  • Repayments rise when lender interest rates rise.

Fixed Rate (Principal and Interest) Rate Home Loans

A fixed rate loan is a loan that has a fixed interest rate and therefore fixed loan repayments. The time period of these loans can vary, but you can usually "lock in" your fixed loan repayments for between 1-5 years.  Although the fixed rate period may be 1-5 years, the total length of the loan itself may be 25 or 30 years. At the end of the fixed loan period you can decide whether to fix the loan again for another period of time at the then current market fixed rates or convert the loan to a variable interest rate for the remaining time of the loan.

Fixed Rate loans usually have higher interest rates than variable loans as lenders ask for a higher price for a fixed rate loan to pay for their hedge against the interest rate risk over the selected time period. In many cases redraws and extra payments are restricted or not available; also there are usually penalties for ending the loan before the fixed term.

Usual features

  • Repayments do not rise if lender interest rate rises. 
  • Provides peace of mind for borrowers concerned about rate rises.
  • Allows for more precise budgeting.

Things to look out for

  • Repayments do not fall if lender interest rates fall.
  • Allows only limited additional payments off the loan.
  • Penalties for early payout of the loan - these can be substantial.

Split Rate and Blended Home Loans

A split rate and blended loan is a loan that has one portion of the loan fixed and one portion variable. You can select how much to allocate to each. They provide repayment flexibility with some interest rate security. With these loans you can access variable loan features like redraws and extra payments but have some comfort and certainty in your long term budgeting.

Usual features

  • Provides some peace of mind for borrowers concerned about lender interest rate rises. 
  • Provides more certainty in budgeting than full variable loans.
  • You can make additional payments on the variable portion.

Things to look out for

  • Repayments will rise with lender interest rate rises. 
  • Allows limited additional payments only.

Interest Only Home Loans

You repay only the interest on the principal during the term of the loan; therefore, repayments are lower than with a standard principal and interest loan. At the end of the interest-only period - selected by you, but usually 1-5 years - you must start making principal and interest repayments over the remaining term of the loan, or you must refinance the loan entirely.

Usual features

  • Lower repayments initially so you have more money to renovate/improve the property.
  • Cuts the cost of buying a residential investment property in the short-term, which could allow you to make greater contributions to your principal place of residence.

Things to look out for

  • There will be a sudden increase in repayments at the end of the Interest Only period if the loan converts to principal and interest repayments.
  • Depending on the type of interest only loan, you may be required to refinance the loan entirely at the end of the interest only term.
  • Lenders will assess your ability to repay the loan using a higher (principal and interest) serviceability calculation for the shorter term of the loan. This can reduce your borrowing power, as these repayments will be higher than a loan calculated on principal and interest repayments for a normal full term.

Line of Credit Home Loans

This type of property loan revolves around equity built up in your property and allows access to funds when needed. A comparison for these loans would be like having a credit card with a big limit and your property acting as security. The borrower can draw down funds on this loan up to a set limit. This product is a creative way to raise funds for property investments by providing cash up to a pre-arranged limit. Each month the loan account balance is reduced by the amount of cash coming in and increased by the amount drawn down (eg, it could be your credit card, cash withdrawals, interest on the loan, regular debits). As long as there is consistently more cash coming in than going out these accounts can work well. However, they can be very costly if the balance of the line of credit is not regularly reduced. It requires an interest-only payment as a minimum each month, which can add up to a lot of interest over the long term.

Usual features

  • Use the money you need and pay it back when you can.
  • Home loan interest rates tend to be lower than rates for credit cards or personal loans.
  • Offers flexibility.

Things to look out for

  • Possibly reduces equity in your residential property.
  • Usually higher interest rates.
  • Need to be disciplined to make principal payments regularly.
  • Can be very expensive if not used carefully.

Honeymoon (Introductory Rate) Home Loans

The interest rate is usually low to attract borrowers; this interest rate generally is 1% to 1.5% below the standard variable rate and lasts only for the first 6 to 12 months of the term of the loan before it reverts to more standard interest rate. Interest rates for these loans are normally fixed during the discount period. Most of these loans revert to the standard variable rate at the end of the honeymoon period.  The borrower should consider the overall cost of the loan over the whole period of the loan; there could be fees if the borrower chooses to refinance at the end of the honeymoon period. The idea behind these loans is that the lender uses low interest rates to attract new customers. These loans may not provide the flexibility of other loans.

Usual features

  • Usually the lowest available rates.
  • Interest rate is usually fixed for the honeymoon period.
  • The borrower may be advantaged during the honeymoon period if interest rates rise during that period.
  • When payments are made at the introductory rate, the principal may be able to be reduced more quickly.
  • Some lenders provide an offset account against these loans.

Things to look out for

  • Payments usually increase after the introductory period.
  • The borrower may be disadvantaged if interest rates reduce during the honeymoon period.

Low Doc & No Doc Home Loans

Low-Doc or No-Doc mortgages are ideally suited to investors or self-employed borrowers who may have difficulty in providing all the documents needed to secure a home loan. No tax returns or financial reports are generally required.  However the borrower will need to sign a declaration stating their capacity to service the loan and also provide an income declaration. These loans generally require a larger deposit than traditional loans and most features and loan types are available.  With these loans the starting interest rate is normally higher than for "full-doc" loans, but rates can be reduced after a few years if your payment history is good.

Low-Doc home loans are available to investors and owner occupiers while No-Doc loans are only available to residential property investors.

Usual features

  • Simple income declaration form.
  • No tax return or financial records required.
  • Fully serviceable loan options, redraws, line of credit, variable or fixed rates.
  • Principal & Interest or Interest-only loans.

Things to look out for

  • Generally higher interest rates as you are seen as a higher lending risk.
  • Larger deposit required (ie: lower loan to value ratios approved).

Non-Conforming Home Loan

People with poor credit ratings often have trouble sourcing a home loan. Many lenders now offer what are known as 'non-conforming loans' for people in this situation. While lenders are willing to overlook prior credit problems, they will want to see some evidence of your ability to repay the loan. A larger deposit than is required for traditional loans will generally be required. These loans generally offer all features and options including redraw, line of credit, fixed and variable rates.

Usual features

  • Overlooks poor credit rating.
  • Full loan features and options available.

Things to look out for

  • Higher interest rates than traditional loans.
  • Higher deposit generally needed (i.e. lower loan to value ratios approved).

Reverse Mortgages

A Reverse Mortgage allows a home owner to withdraw certain equity from their home instead of selling it and moving house. It is essentially a first mortgage over the property.  However the reverse mortgage is the opposite of a mortgage used to purchase the property. This is evident in the fact that with a "forward" mortgage the home owner/borrower makes payments to reduce the debt and increase the equity in the home whereas with a "reverse" mortgage the lender makes payments to the home owner/borrower reducing the home owner/borrower's equity in the home, and the home owner/borrower is not obliged to make any repayments on the loan.

The amount which can be borrowed under a reverse mortgage will depend on several factors, including but not limited to the property value and the age of the borrower. The amount you may borrow is limited and generally between 15% to 40% of the property value. The interest rate can be variable, fixed or even capped.

The amount you may borrow increases with the age of the borrower. Usually the minimum age is 60 with no upper age limit. Cash flow from a Reverse Mortgage may possibly affect the borrower's pension entitlements so it is advisable to seek independent financial advice with respect to a Reverse Mortgage. If you are in anyway unsure simply drop us an email and we will provide you with information about seeking independent financial advice.