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Which loan is right for you?

The best product for you will be determined by your individual circumstance. Each lender has different lending criteria, interest rates, fee structures etc, so trying to find the "best" product can be a minefield for the general public.

Our aim is to discuss with you your needs and objectives and then find the product that will match those objectives.

Remember, to determine the right loan, you must consider more then just interest rates and fees. You must first qualify for that particular loan based on equity or savings and income. Secondly, the loan must have the features you need and thirdly, the lender must be able to deliver the level of service you require.

Things which will influence your borrowing capacity and the products available to you will include:

  • Purpose of the loan.
  • Are you a First Home Buyer eligible for the First Home Buyer's Grant.
  • The amount of the loan compared to the value of the property (LVR).
  • The property location.
  • Your income and employment history.
  • The number of dependants you have.
  • Do you have proof of income?
  • Is your Credit history good or bad?
  • Amount of deposit available.
  • Other Loan or Credit Card commitments.
  • Have you retired?

Some examples of how the above will influence the type of loan available to you:

  • Little or no deposit available

There are a number of options available:

For First Home Owners, a number of lenders have 100% Home Loans. That means that you can borrow the full purchase price of the property and the First Home Owner's Grant will usually be sufficient to cover the associated purchase costs such as Legal Fees, Stamp Duty etc.

If you are not a First Home Buyer and don't have sufficient funds to cover the purchase costs, some lenders will allow you to borrow 105% of the property value which is usually sufficient to to also cover purchase costs.

Family Pledge loans allows family members with equity in their own property, to help customers bridge the deposit gap and cover up front borrowing expenses by providing a limited guarantee in support of the loan application. An excellent option if parents are willing to assist.

Self Employed and / or no proof of income:

A Low Doc or No Doc Loan means that you can self certify as to your income and don't need to provide documented proof. These loans are now widely available.

Credit Problems:

If you have had previous credit problems, the major banks probably will not want to know you. However, there are a number of non- bank lenders who specialise in giving people a second chance.

Debt Consolidation:

If Credit Cards and Personal Loan repayments are draining your pockets dry, refinancing your home loan to payout these debts can allow you to make a fresh start and bring your finances under control.

Loans for Retirees:

Ideal for retired people who may be Asset Rich but Cash Poor. An Equity Release or Reverse Mortgage is available to homeowners over 60 and provides funds either as a lump sum or by regular monthly installments without the need to make any regular repayments. Used mainly to provide funds for a one-off expenditure or so supplement the monthly pension income to provide a better quality of life. No income details required to qualify. Refer to "Types of Home Loans - Reverse Mortgages" for more information.

Types of Home Loans

The Honeymoon Introductory Loan

This loan was designed initially as a marketing ploy to allow banks to quote and advertise an artificially low rate in order to achieve sales. The loan gives you a cheaper rate usually for the first 6 or 12 months and then reverts to the standard variable rate for the rest of the term of the loan. Penalties normally apply should you wish to break the term of the loan within the first 3 years. This type of loan is generally not a good long-term choice. The loan may be suitable for those who have a definite short-term need.

Standard Variable Loans

The most common loan in Australia with repayments normally calculated as principal and interest generally over a 30-year term.

The interest rate may vary either up or down with market fluctuations over the period of the loan. These loans are flexible, usually with features such as extra repayments and redraw facilities.

Basic Variable Loan

This variable rate loan was introduced by the banks as a no-frills discounted rate in order to combat the entrance of the non-bank mortgage managers who were, at the time, offering lower rates. Over time and with increased market competition this loan has evolved to include some extra features such as extra repayments and redraw facilities. These loans certainly have their place, particularly suiting the rate shopper or those on a tight budget with little extra cash for extra loan repayments.

Fixed Rates

Fixed rate loans allow the borrower to lock in the interest rate for a pre-determined term usually from 1- 5 years, ensuring that loan repayments will not change over that term. This product provides a degree of comfort for those concerned about their ability to make loan repayments if interest rates were to increase.

The disadvantage is that, if interest rates were to fall, those savings will not be passed on.

Generally, Fixed Rate products are inflexible. While most lenders either do not allow or limit extra repayments and redraw facilities, there are a few with full flexibility including Offset Accounts.

At the end of the fixed rate period, the loan normally reverts to a Standard Variable Loan at the lender's then prevailing rate.

Penalties for early payout of the loan within the fixed rate term usually apply.

Professional Packages

Some lenders offer discounts either to professionals or to those applying for loans greater than $150 000.00. A very popular style of borrowing since the loan has all the features of a standard variable loan with a permanent discount varying from 0.5% to 0.7% of the lender's Standard Variable Rate. Most lenders normally charge an annual fee of approximately $300.00 and then deliver a set of benefits for the package including a discount off the normal rate, no application fees and banking discounts.

Line of Credit

Traditionally an overdraft facility, these loans were brought into the consumer arena by financial planners designing quick, non-tax deductible, debt reduction for their high-income earning clients.

A line of credit is essentially a giant credit card where funds can be drawn up to a pre-determined approved limit. Any funds paid into the loan can be drawn out again up to the limit. Used properly, this style of loan can significantly reduce interest costs.

This loan is suited firstly to diciplined spenders and controlled budgeters who have fairly significant excess monthly savings and are looking to pay their loan off as soon as possible. It is commonly used by investors for flexible access to unutilised equity in their own home in order to make further property or share market investing. An excellent tool for wealth creation.

Low Doc Loans and No Doc Loans

" Low Doc" means "low documentation" ie minimising the paperwork required to support the application for a loan. Normally, the only documentation required in relation to income is the completion of a Declaration by the borrower stating his/her annual income.
" No Doc" means even less paperwork, ie simply complete an application form without any supporting paperwork.

While these loans are ideal for the self employed who may not have up to date Tax Returns or Business Financials but have the capacity to repay debt some lenders will also accept PAYG income earners.

The loans can be restricted by the Loan to Value Ratio (LVR) and may be more expensive than traditional loans, particularly where the Loan to Value Ratio exceeds 80%.

Credit Impaired Loans

Also referred to as "Non-Conforming Loans". There are a number of lenders who specialise in providing loans to individuals who have a poor credit history, ie a history of defaults, judgments or bankruptcy.

These loans are designed to provide credit to individuals who would otherwise not be able to borrow, the objective being to get the borrower back on track so that in a couple of years the borrower is able to re-enter the mainstream mortgage market. The interest rates are dependent upon the applicant's credit rating and are obviously higher than normal bank interest rates.

Reverse Mortgage/ Equity Release

Although relatively new to Australia these loans have been available overseas for over 20 years, particularly in the U.K. and are ideal for retired people who may be Asset Rich but Cash Poor.

An Equity Release or Reverse Mortgage is available to homeowners over 60 and there is NO requirement to be earning an income or have a level of savings. Funds can be made available either as a lump sum or by regular monthly installments without the need to make any regular repayments. These loans are used mainly to provide funds for a one-off expenditure such as Home Renovations, Overseas Travel, retiring Credit Card debt or assisting Family Members, or, by receiving a monthly installment, to supplement the monthly pension or superannuation income to provide a better quality of life.

To protect the borrower and the home asset, a number of safeguards have been put in place by the better lenders and these include:

  • Fixed for Life Interest Rates - the interest rates can never increase.
  • Capped Interest rates - the interest rate can fluctuate up and down but can never exceed a set limit.
  • No Negative Equity Guarantee - the loan balance can never exceed the value of the house.

A booklet -" A Practical Guide to Reverse Mortgages" - explains in detail all aspects of these types of loans. For your Free Copy, please contact us on Ph 07 3849 9822.

Loan Features

Redraw

A loan with a redraw facility allows access to advance or extra payments made to the loan account. You can make extra payments to the loan, helping to reduce interest costs, whilst still having access to the funds in the future. A fee is often charged when the funds are redrawn and some lenders have minimum redraw limits.

Tip: Always try and apply for an extra $5000 or more which you can pay straight back into the loan after settlement. These funds will then be available for redraw.

 

100% Offset Accounts

A loan with a normal transactional account linked to it with any funds deposited into that account, offsetting the balance on the home loan and thereby reducing the interest charged on the mortgage. For example, if your home loan balance is $150,000 and you have $10,000 in your offset account, you will only be charged interest on $140,000.

This feature suits borrowers with good disposable income and disciplined spending habits. All monies earned be it salary, rent or investment income can be deposited directly into the offset account to immediately reduce the interest being charged on the home loan. It is also possible to delay expense withdrawals from this account by utilising a credit card for monthly bills, thus enhancing the benefit of an offset account.

Mortgage offset is tax effective because the account itself earns no interest thereby legally minimising taxable income. Please refer to your financial planner or accountant before making tax related decisions.

 

Split Loans/ Combination Loans

It is possible to combine different loan types from one lender. The usual scenario is to have 50% of the loan variable to allow flexible repayments with potential for redraw, the other 50% fixed in order to reduce the risk of rising or fluctuating interest rates. However, any combination is possible. Investors may wish to separate tax-deductible debt from non-tax deductible debt via the use of a combination loan. Entry costs on combination loans differ significantly.

Interest Only Loans

Interest only loans require no principal payments. The maximum term allowed is usually 5 years with either a variable or a fixed rate option. These loans are useful for investments where the interest charged is deductible and the investor is not looking to reduce the loan balance because the priority may be to reduce other non-tax deductible debt.

Bridging Finance

These loans allow a borrower to bridge the time gap between the sale of their home and the purchase of another. Particularly useful if the purchase property has to settle prior to the sale of the existing home. Lenders qualify your maximum borrowings based on the final debt after sale, whilst taking into account interest charges that will occur on the whole debt for six to twelve months..

Pre-Approved Loan

Where a loan that has been approved to a certain limit prior to purchase of a property. A pre-approval allows the borrowers to negotiate the purchase of a property, up to the approved limit, with confidence.

For more information - Please CONTACT US