Home Loan Types & Structures

Basic Home Loans

One of the simplest ways to own your home sooner is to pay the lowest rate possible and as few bank fees as possible. If you don’t need the ‘bells and whistles’ that come with many loans (at a price), then a basic home loan could be the answer. Lower interest rates. Popular with first home buyers, basic home loans typically offer interest rates of half to one per cent below the standard variable rate. Many also have lower ongoing fees. In return for a lower interest rate, basic home loans have fewer features and can be less flexible. Some lenders may offer the option to pay for extra features when you need them. There may also be fees and charges if you decide to switch loans or lenders, or pay off the loan sooner.

Basic Home Loans at a glance:

*lower interest rates

*lower ongoing fees

*minimal features

*less flexibility

*no additional repayments

*or owner/occupiers only

Standard Variable Rate Home Loans

A standard variable rate home loan is one of the most popular mortgages around. For many borrowers, a standard home loan offers the right mix of features, flexibility, interest rate and fees. This type of loan is particularly suitable if you want to make extra repayments without penalty, split your loan or access a line of credit. In return for these benefits, a standard variable rate mortgage will have a higher interest rate than a basic home loan.

Standard Variable Rate Home Loans at a glance:

*repayment flexibility

*ability to make additional repayments

*redraw facility

*split loan feature

*portability

*may offer direct deposit salary, rental or dividend income, credit/debit card and line of credit facility

*can be used for building purposes

*higher interest rates

Fixed Rate Home Loans

If you’re worried about rising interest rates, then a fixed rate home loan may be the solution. Fixed rate home loans offer a fixed interest rate for a set period of time. Because of this, repayments remain the same for the duration of the fixed rate period, usually between one and five years. At the end of the fixed period, you can switch to a variable rate loan or negotiate a new fixed rate or even opt for a split rate loan.

Benefits

Stability – fixed repayments allow you to plan your finances and stick to your budget, even in times of economic uncertainty. Cost – when interest rates rise, repayments won’t increase. However, fixed loans generally have limited features and often charge hefty fees for early payout or for making additional payments. Time to fix. Knowing when to fix and when to float is difficult. Even the best economists can’t predict with absolute certainty when interest rates will rise or fall. For this reason, many borrowers opt to fix for periods of less than three years. That way if rates do fall, you are only paying a higher rate of interest for a relatively short period. When considering a fixed rate home loan, spend some time researching recent rate movements, speak to your lender about where rates are headed and brush up on your general economic news. As a rule of thumb, it is best to fix at the bottom, or near the bottom of an interest rate cycle before rates start rising again.

Fixed Rate Home Loans at a glance:

* monthly repayments remain the same

*interest rate fixed

* some lenders charge hefty exit fees

*less flexible features

*limited repayment and redraw options

Split Rate Home Loans

If you need the security of a fixed rate home loan but want the flexibility of a variable rate loan, then a split loan may be the answer. A split or combination loan brings together the benefits of variable and fixed interest rates into a single home loan. What makes this type of loan attractive for first time and existing borrowers is the ability to customise the loan and add as many features as required. The loan can be split many ways: 60% variable, 40% fixed or 50/50 splits are most common. Split loans are useful in times of economic uncertainty, particularly when interest rates are rising. By splitting a loan, borrowers can hedge against the risk of higher rates whilst still keeping part of their loan at the lower variable rate.

Benefits

Take advantage of different features various loans have to offer, create your own customised loan package, split your loan to suit you. Most borrowers choose 50 per cent fixed and 50 per cent variable, select different repayment options for each split and use the split loan for investment and home property purposes

Interest Only Home Loans

If you’ve ever purchased an investment property, chances are you’re familiar with the concept of an interest only home loan. Offering lower repayments and many of the same features as traditional loans, interest only loans are particularly suitable for investors. However interest only loans are also suitable for general home buyers, refinancing an existing loan, as bridging finance or to pay for home renovations. How it works? A principal and interest loan is still the most common type of home loan. Loan repayments include interest and principal, allowing home owners to repay the loan in full by the end of the loan term, assuming they make the minimum repayments. With an interest only home loan, repayments only cover the interest component. The principal is repaid in full at the end of the loan term. Because borrowers only repay the interest component, interest only loans have lower repayments than principal and interest loans.

Interest Only Home Loans at a glance:

*lower repayments

*loan terms typically between two and five years

*repay principal in full at the end of the loan term

Line of Credit Home Loans

Today’s home loans let you do more than simply buy a home. Consider a line of credit loan for example. Also known as a revolving line of credit, these loans have become popular due to their flexibility and features. A line of credit home loan is a credit facility secured with a first mortgage on a residential property. Similar to a credit card, they allow you to withdraw funds up to a set limit at any time. Repayments can be made in full or on a monthly basis. This type of loan can be used to purchase most types of property, from the family home to an investment property. As long as you make the minimum monthly repayments, you can use the line of credit to carry out renovations, invest in shares or pay the bills.

Line of Credit Home Loans at a glance:

*easy access to funds, with most line of credit facilities offering cheque books, plastic cards, Internet and phone banking and a range of transactions

* withdraw up to your credit limit without having to gain pre-approval

*credit limit amounts are usually higher than credit cards

*interest rates are generally lower than credit cards

*interest on the credit facility can be minimised by directing all your income into your home loan account.

*consolidate your debts by transferring other debts such as personal and car loans into your mortgage

Risks

While these loans give borrowers considerable freedom, they are not for everyone. Like any credit card account, line of credit loans require financial discipline and good budgeting skills to stay within your financial limits. However if you are careful with your money and want the flexibility a line of credit offers, this type of loan may suit you.

Lo Doc Home Loans

Having trouble finding the right loan? Don’t despair. Today, many lenders offer alternatives for self-employed people and others with no traditional proof of income. Lo-document loans are quick and comparatively trouble-free finance product or lo-doc loan for short. This type of loan caters mainly for self-employed borrowers who are unable to provide full financial statements and other evidence of their income. There is a growing range of lo-doc products on the market with many lenders offering standard and premium lo-doc loans with the choice of fixed or variable interest rates. Borrowers also get access to a range of loan features and options never previously available. However, most lenders require lo-doc borrowers to take out lenders’ mortgage insurance when borrowing up to 80 per cent of the property value. Some lenders also charge a higher interest rate for these products. These rates may be reduced after a certain time period or when you are able to provide tax returns.

The challenge is to find the best loan with the best features for your particular circumstances. That’s where a team of experts can help.

Lo Doc Home Loans at a glance:

*less paperwork - requires self-certification instead of traditional proof of income

*streamlined application process

*can only borrow up to 80 per cent of property value

*interest rate discounts may apply after specific time period

*may be eligible for lower interest rate if able to supply tax returns at a later date

*requires clean credit history

*lenders may not lend in high risk areas such as inner city high-rises or large rural allotments

*generally higher interest rates with less features than a traditional loan

*may require lender’s mortgage insurance, adding to cost of loan

No Doc Home Loans

For many self-employed people, the biggest barrier to buying a home is gathering all the documents necessary to qualify for a home loan. In most cases, self-employed applicants must provide several years of tax returns, financial reports and/or pay slips. This can be very time consuming and costly. However with a no-document home loan (or no-doc loan for short), applicants simply fill out an income declaration form stating their income and assets. This process is called self-verification.

Types of loans

There is a growing range of no-doc products on the market, with many lenders offering standard and premium no-doc loans with the choice of fixed or variable interest rates. Borrowers also get access to a range of loan features and options never previously available. However, most lenders require lo-doc borrowers to take out lenders’ mortgage insurance when borrowing up to 80 per cent of the property value. Some lenders also charge a higher interest rate for these products. These rates may be reduced after a certain time period or when you are able to provide tax returns. The challenge is to find the best loan with the best features for your particular circumstances. That’s where our team of experts can help.

No Doc Home Loans at a glance:

*less paperwork - requires self-certification instead of traditional proof of income

*streamlined application process

*can only borrow up to 80 per cent of property value

*may be eligible for lower interest rate if able to supply tax returns at a later date

*requires clean credit history

*lenders may not lend in high risk areas such as inner city high-rises or large rural allotments

*generally higher interest rates with less features than a traditional loan

*may require lender’s mortgage insurance

Professional Packages Home Loans

When it comes to home loans, there is often more than meets the eye. This is particularly the case for professional packages. In an effort to attract people on higher incomes or those regarded as low-risk borrowers, lenders offer special loan deals known as professional packages. Once restricted to professionals such as doctors, lawyers and accountants, these packages are now available to a wide variety of purchasers with sufficient income and/or assets. If you think you qualify, it pays to apply. Professional packages generally offer discounts of 0.5 per cent off lenders’ standard variable interest rate and up to 0.25 per cent off fixed interests rates. Depending on the size of the loan, bigger discounts may apply. Typically lenders require the borrower to bundle all their personal banking into the one package. Most charge an annual fee ($300 is common) but offer a range of range of discounts on accounts such as credit cards, transaction, margin loans and insurance. Some will even waive account fees in order to get your business.

At a glance:

*suit low-risk borrowers

*don’t have to be a professional

* must have sufficient income or assets

*discounted interest rates and account fees

*most include all-in-one or offset account facilities as standard.

Home Equity Home Loans

Buying your own home is probably the biggest investment you’ll ever make. Your home is also likely to be your biggest asset. Why not put this asset to work by taking out a home equity loan? What is equity? Equity is simply the difference between what your property is worth and what you owe. For example, if you have $200,000 to pay off on a home worth $500,000, you have $300,000 worth of equity. You may be able to borrow against this amount to renovate, invest in shares or managed funds, buy another property or refinance your mortgage.

How it works?

An equity home loan gives you a line of credit on your mortgage up to an approved amount. The loan can be taken in full or in stages, making it particularly useful for renovating or investing. How much you can borrow depends on your situation - your existing borrowings, income and assets are taken into account. And if the equity is for an investment property, your new and current property values will be assessed.

Benefits

Saving for renovations or a deposit can take time. Taking out an equity home loan means you can start your renovations or buy an investment property sooner. However, it is important to remember that all debt needs to be carefully managed to maximise investment returns and minimise risks.

First Home Buyer Home Loans

While finding the perfect first home can be challenging, finding the right home loan can be even more so. Today, first home buyers can choose from a wide range of lenders and loan products. Before signing on the dotted line, it pays to do your homework and think about the type of features you need and how much you are prepared to pay. Here is a quick overview of the major loan types recommended for first home buyers. Standard variable or fixed rate home loan? If you don’t need the ‘bells and whistles’ that come with many loans (at a price), then a basic home loan could be the answer. Popular with first home buyers, basic home loans typically offer interest rates of half to one per cent below the standard variable rate. Many also have lower ongoing fees. In return for a lower interest rate, basic home loans have fewer features and can be less flexible. Some lenders may offer the option to pay for extra features when you need them. There may also be fees and charges if you decide to switch loans or lenders, or pay off the loan sooner.

Split rate home loans

If you are concerned about where interest rates are headed, you can choose a split rate home loan, whereby part of the loan is on a floating or variable interest rate and the other part is at a fixed rate. These loans generally offer all the features of a normal loan, however it there could be penalties for early repayment of the fixed portion.

Honeymoon home loans

Similar to a standard home loan, except offering a lower rate of interest for a fixed period at the start of the loan. This can be particularly beneficial for first home buyers as the lower repayments coincide with the costs of purchasing and setting up a new home. Beware, however, as these loans generally revert to a higher rate of interest after the honeymoon is over.

Features you may wish to consider including in your home loan:

*redraw

*offset

*flexible repayments

*portability

*line of credit.

Investment Property Home Loans

When it comes to making the most of an investment property, finding the right home in the right location is only half the battle; finding the best finance is other half. Many options are available and the choice of home loan will ultimately depend on your particular investment strategy and the type of property.

Here are the three main choices.

1.Standard variable rate or fixed rate home loan - Depending on your circumstances, most lenders will let you borrow up to 90 per cent of the purchase price of an investment property. You may, however, be required to take out lenders mortgage insurance.

2.Interest only home loan - With an interest only home loan, repayments only cover the interest component. The principal is repaid in full at the end of the loan term (usually three to five years). Because borrowers only repay the interest component, interest only loans have lower repayments than principal and interest loans.

3.Equity home loan - If you already own or substantially own your home, you can borrow against the “equity’ your have accumulated. Equity is simply the difference between what your property is worth and what you owe. For example, if you have $200,000 to pay off on a home worth $500,000, you have $300,000 worth of equity. An equity home loan gives you a line of credit on your mortgage up to an approved amount. The loan can be taken in full or in stages, making it particularly useful for property investing.

Important extras

Loan features that may offer tax benefits or help you pay off your investment loan sooner include: interest in advance home loan (lets you pay next year’s interest in the current financial year, thus creating a tax deduction for eligible borrowers) mortgage offset account (lets you use savings and interest earned on savings to pay off the loan principle).

No Deposit Home Loans

Many Australians dream of owning their own home. But with property prices rising faster than incomes, first home buyers are finding increasingly difficult to raise the traditional 5 to 10 per cent deposit required for a standard home loan. To help you get into your new home sooner, many lenders now approve loans of up to 100 per cent of the value of a property. While this can be a good option for some buyers, remember that you still need to save for purchase costs such as stamp duty and conveyancing. And most lenders require you to show a savings history of at least six months.

Check the fine print

When considering a no deposit home loan, check and compare interest rates as most attract higher interest rates and fees. Also check the borrowing requirements as many lenders impose stricter rules than if you were applying for a standard home loan. Remember the more cash you save now, the sooner you’ll own your home, mortgage free.

Second Home Loans

Many Australians own more than one home in their lifetime. When it comes time to sell one home and purchase another, your experience the first time around should make the process a whole lot easier. Every time you buy and sell, however, the market will be a little bit different. The same goes for finding the right home loan second time around. Here are some factors to consider when choosing your next home loan. Portability – if you are happy with your current loan, you may be able to take it with you. Find out if you can substitute a new property as security for your existing loan. There may be a portability fee, typically anything up to $500. Size of loan – if portability seems like a sensible option, check with your lender about whether you can increase the loan amount. Some lenders allow you to transfer a loan only if it’s the same amount as your existing loan. A further restriction may be the need to settle on the same day for both the existing and new properties. New loan, same lender – if you feel a better product is out there, check with your original lender. You may be able to receive a discount or avoid some fees, particularly if you now use more products with the same institution. Switching costs – to make sure you’re getting the best deal possible, find out whether the costs of paying out your loan and switching lenders is going to cost more than remaining loyal. Try to negotiate with your lender. Find another loan – do your research to find a loan that better suits your needs. You can always go back to your original lender, who may be able to match the offer.

Home Improvement Home Loans

There are plenty of good reasons for choosing to renovate rather than move. For most people, the high cost of purchasing a new home outweighs the challenges of renovating. Recent big house price rises also means many home owners have considerable equity in their property. This can make getting a renovation loan easier and reduces the risk of over capitalising. The right finance. When you decide to renovate, finding the best loan to suit your needs is particularly important. Renovation loans can streamline the whole process and save you money. Be clear about your needs, plan for the future, and brush up on your handyman skills.

Range of options

Home owners can choose from a range of finance options available. Which one you choose will depend on the size and scope of the project: whether it is a simple kitchen update, emergency repairs, home extension or full renovation

*Redraw facility – for smaller projects such as a new room or sun deck

*Home equity loan – for medium sized projects such as kitchen or pool

*Line of credit – similar to a home equity loan

*Construction loan – for larger scale projects such as complete renovation that require council approval and the services of a licensed builder.

Construction Home Loans

If you’re building a new home or planning major renovations to your existing home, a construction loan is generally the most appropriate funding option. The difference between a construction loan and a standard home loan is that instead of a lump sum payment at agreement signoff, the loan is usually drawn down in stages. Payments (or draw downs) coincide with the initial purchase of the land followed by a number of key construction stages.

Interest payments

This type of loan is ideal for building, as you only pay interest on the amount you draw down. For instance, if you have borrowed $250,000 for a house and land package, but have only drawn down $100,000 to pay for the land, you only pay interest on the $100,000 not the full amount.

Process

Before building starts, you will need to pay a deposit to your builder as well as paying a deposit for the land if you are buying land. As work progresses you will need to make payments to the builder. Certain loans can be structured for progress payments to be made during construction.

Disclaimer:

No investment advice provided to you.
This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any adviser.