loan types
Variable Rate loans
This is a common offer by banks and has been used by many people to buy their first homes. These loans have repayment periods of up to 30 years and are regularly used by home buyers today.
Don't be caught by start-up lures!
Often lending institutions will offer a discounted start-up period with lower interest rates to motivate you to choose the loan. The benefits of this discount (or honeymoon period) can be short-lived as the remaining years on your loan are charged at a standard variable rate. You need to be certain of the reasons why you might choose this type of loan
Advantages
- Discipline - regular monthly, fortnightly or weekly repayments help you with budgeting.
- Redraw - most institutions will allow you (subject to terms and conditions) to withdraw additional repayments you have made over and above the minimum repayment.
- Offset - it may have the ability to offset credit balances held in other accounts at the same institution against the principal of the loan.
- Extra repayments - these are usually allowed at any time.
Disadvantages
- The interest rate is variable (apart from any start-up period) and the loan will be subject to interest rate fluctuations.
- The interest rate is always higher than Low Frills Home Loan rates.
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Fixed Term Home Loan with Fixed Interest Rate
This loan has a set interest rate for a period of time. This means you know exactly what your repayments will be for your fixed rate term.
If you are unsure about whether to take a fixed or variable rate - you should consider a Split Loan.
Advantages
- Fixing the interest rate for a period of time insures against future rate rises.
- It is easy to budget for the same regular repayment each month.
Disadvantages
- If interest rates fall you may pay more for your loan than borrowers on variable rates.
- Most lending institutions penalise you for making additional repayments.
- You may be penalised if you pay off your home loan before the due date.
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Basic Loans
One of the most popular loans, the Low Frills Loan has the lowest running costs - and less extras - so you pay a lower interest rate. Before you choose this loan make sure that you don't need any extras (such as fee free credit cards and accounts etc) and compare the costs of getting them separately.
Advantages
- Discipline - regular repayments help you with budgeting.
- The interest rate is always lower than traditional loans.
- Extra repayments are usually allowed.
Disadvantages
- Money held in normal savings accounts with the same institution will not reduce your home loan rates.
- The interest rate is variable and you are vulnerable to interest rate fluctuation.
- Other facilities such as loan redraw may not be available.
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Line of Credit (LOC)
With this type of loan, you can access funds up to your approved limit at any time. Your salary can be paid directly into the loan account and you can access the balance of the loan at any time - like a credit card. You can use these funds to purchase shares, go on holiday, buy a new car, start home renovations or so much more!
If you are interested in this loan the first thing you should do is ask your Choice Home Loans Consultant. You should thoroughly check all the facts before committing to this type of loan.
Advantages
- Money is easily accessed by cheque or ATM card linked to this loan. You can use it for living or for other investments.
- By depositing your salary and savings into this loan you reduce the interest charge.
- Extra repayments are allowed at any time.
- A mortgage reduction programme can be helpful in managing this type of loan. Ask your Choice Home Loans Consultant.
Disadvantages
- Ease of withdrawal means if you are undisciplined this loan can get out of control.
- The interest rate is usually higher than Traditional Variable Rate
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Bridging Loan
This can simplify the transition between properties. If your home is for sale - and you find a property to buy, or wish to build - the lender advances the money so you can purchase your new home.
Depending on the equity in your current home, you may be able to include all the fees too. The interest charged to your loan can be paid by you or capitalised (added to the loan amount).
When your original property is sold, the proceeds are deposited to the new loan. The amount owing becomes your end loan and normal repayments commence.
Advantages
- You can buy or build your new home before you sell your existing home.
- You can avoid moving into a rental property and move directly into your new home.
Disadvantages
- Interest is charged on the full amount of the new loan.
- If you don't sell your existing home quickly, the interest bill can really add up.
- It may force you into selling your existing home at a price lower than you want to.
- You must have sufficient equity in your existing property to support the purchase of both.
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Split Loan
This loan is a way of hedging your bets. If you are unsure as to whether interest rates are going up or down, you can choose a Split Rate Loan.
With this type of loan, you nominate how much of the loan you would like to fix and how much you would like to put on a variable rate.
The Split Loan is a cautious way of borrowing for your home.
Advantages
- Having part of your loan at a fixed interest rate protects you against interest rate rises.
- Leaving part of your loan on variable interest rate leaves you less vulnerable if rates reduce.
- Additional payments are allowed on the variable portion of the loan.
Disadvantages
- You may not benefit greatly from any interest rate fluctuations.
- You may be charged set-up fees, account fees and discharge fees on both the fixed portion and the variable portion.
- You may be penalised for making higher repayments on the fixed portion.
- You may be penalised if you pay off your loan before the due date on the fixed portion.
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Low Document loans (Lo Doc)
Today, more people are self-employed or employed on contract, so their income patterns are not as regular as PAYG earners.
With a Lo Doc Loan you can "self-certify" your income, which avoids the trouble of asking your accountant to provide up-to-date financials every time you wish to borrow money.
You pay a little bit more in interest and fees - but it saves you a lot of time and stress. Some lenders also offer Lo Doc Loans to investors and PAYG earners too.
Advantages
- There is no need to provide financials to the lender.
- You receive faster access to your loan and greater flexibility.
- Non-traditional and irregular income sources are considered.
Disadvantages
- You pay higher interest rates and fees.
- You may be at risk of over committing yourself if your income varies.
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Non Conforming or Sub Prime Loans
If you have experienced financial problems in the past, this is the loan to help you re-build your bad credit rating and obtain a mortgage. Its not just bad credit that requires people to use non conforming lenders, sometime it could be the loan amount or your total lending exposure to a particular lender. Non-conforming lenders are very flexible - even if you have been bankrupt or just have a bad credit history, this type of product will make it easier for you to secure your wanted mortgage.
Advantages
- You will get a fresh start and the chance to re-build your credit rating.
- Non judgemental lending rules with flexibility.
Disadvantages
- You'll pay higher interest rates and fees.
- You will require a larger deposit than normal.
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Professional Package Loans
A professional package loan got its name because originally, you had to be a professioanl to obtain one (a doctor, architecht etc). This type of loan is now available to any borrower depending on loan size. This type of loan can offer things like Fee free transaction accounts, and credit cards free of charge and a range of other special offers. The only requirement you need to access these loans is to meet the lender's minimum loan amount.
Advantages
- Interest rate discounts on the standard variable rate and some line of credit products.
- You may be eligible for other benefits such as fee free transaction accounts and the annual fee waived on some credit cards.
- Some lenders also offer no establishment fees and no ongoing monthly fees on your loans.
Disadvantages
- An annual fee can apply to this type of loan.
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Reverse Mortgage (Equity Release Loan)
These days, there is more responsibility on individuals to fund their own retirement. Many people find that their super and other income sources, such as the pension, don't provide enough money to support the lifestyle they want. An obvious option is to sell their biggest asset - their home, but that too may be part of the way they want to live.
This is where a reverse mortgage may provide the answer. A reverse mortgage is available to residential property owners over 60. It allows you to release funds using the equity in your home. You can use these funds as an income stream or for personal lifestyle needs like travel, home improvements etc.
Like a traditional mortgage there's interest to pay, but you don't have to make monthly repayments. The interest is capitalised, which means it's added to the amount of the loan. When your home is eventually sold you'll pay back the amount of the loan (the cash you received) plus the interest owing.
There are a range of reverse mortgage options available. Which one is the most appropriate for you depends on your individual circumstances and other factors. If you are considering this kind of option as a means to improve your cash-flow in retirement, it is extremely important that you consult your family and solicitor and get quality advice about whether a Reverse Mortgage is right for you.
PLEASE NOTE: EquityLend has chosen not to provide a service for accessing Reverse Mortgage products but as they are an important finacial product we can help you if you have any questions. We would be more than happy to refer you to a financial planner or other finance professional for further information.
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