Home Loans Explained
There are many types of loans available for you to consider, and sometimes deciding on which one would suit your needs can be a little difficult. We can provide added value in helping you narrow down your choice of loans based on your circumstances. We will listen to your needs.
Below are some of the common loan types which you might come across.
Variable Rate Home Loan (Principal and Interest)
The most common interest rate type in Australia is the variable rate. Under this form of interest rate, the initial and ongoing rate is set by the lender. The lender has the right to change the interest rate during the loan's life.
The Reserve Bank of Australia (RBA) sets the official cash rate. The cash rate forms part of the cost (the rate) to the lender. However, because of intense competition between lenders in the variable rate market, most lenders will only change variable rates for existing loans when the RBA increases the cash rate.
Advantage: Variable rate loans generally have no restrictions or penalties for making additional repayments on your loan. Therefore you may be able to pay off your loan sooner. Additionally variable rates will obviously advantage you if interest rates fall, as your monthly minimum repayment will fall.
Disadvantage: If the interest rate increases, your repayments will also increase. This may be a disadvantage to you.
Fixed Rate Home Loan (Principal and Interest)
On a fixed rate loan, your interest rate remains the same during the entire fixed rate term, even if variable market rates change. The fixed rates offered by lenders can be either higher or lower than the variable rate at any given time therefore you need to make a comparison when considering this option. Most lenders offer fixed rate loans, generally for 1 to 5 year terms. At the end of the term, the interest rate usually converts to variable.
Advantage: With fixed rate loans you are not impacted if variable rates increase, because your fixed rate will not change. This means that fixed rate interest can work out cheaper compared to variable rate interest.
Disadvantage: However, if variable rates decrease, you will not receive any benefit, as your fixed rate will remain the same. If market variable rates fall over time, it is possible that your fixed rate could be higher than the current variable rate, so a fixed rate loan could cost you more. Furthermore, you generally cannot make additional repayments on the loan or end your loan without incurring costs for doing so. These costs can be substantial.
Split Loan (Principal and Interest)
Most lenders will allow you to take out a split loan, which is a combination of having one portion of your loan on a variable rate and the other portion on a fixed rate.
Advantage: This can offer the advantage of having an "each way bet" if you're not sure about which option is suitable. This option could give you some peace of mind if you’re concerned about rate rises affecting your entire loan amount. You can also make additional payments on the variable portion of your loan.
Disadvantage: Repayments will rise as the variable rate changes and there is a limit to the amount of additional payments you can make on your fixed rate portion.
Interest Only Home Loan
The most common loan type is principal and interest loan where your repayments are applied to pay interest and also to pay off the loan principal over the loan's life. With an interest only loan your repayments only pay the interest, which have lower repayment requirements.
Advantage: You will have lower repayments because you only have to pay the interest. You could use more money to renovate, improve the property or use the extra cash for other personal finances.
Disadvantage: With an Interest Only loan, the loan balance does not get "paid off" so it may take you longer to repay the loan. Most lenders will apply special conditions to Interest Only loans, such as a restriction on the term of up to 5 years and restricting availability only to finance investment properties.
Introduction Home Loan or Honeymoon Rate
Many lenders offer reduced interest rates for a limited time at the beginning of your loan. Also known as a ‘honeymoon rate’, the low interest rate generally applies to the first 6 to 12 months of the loan. The interest rates can be fixed or capped.
Advantage: The rates can be lower than the standard variable rate. This can provide a useful benefit for you, by freeing up some cash to help get your new home established.
Disadvantage: You should be aware that there is generally a catch with introductory rates. Usually after the end of the introductory period, when the rate returns to a variable rate, that rate can be higher than the normal variable rate offered by the lender. Therefore, you need to weigh up the pros and cons, to work out whether the benefit of a reduced rate at the beginning, is worth the additional cost of a higher rate later.
Non-Conforming Home Loan
These are specialised loans for people who have some form of blemish in their credit history, such as a default, or to finance a property that has unusual characteristics. The interest rate on these loans is generally higher than traditional loans.
Advantage: You can still apply for a loan even if you have poor credit ratings.
Disadvantage: The interest rate will be higher than traditional loans.
Low-Doc or No-Doc Home Loan
Suitable for borrowers who are unwilling or unable to provide sufficient information of their income. Generally, therefore, these loans are only available to people who are self-employed, or casual employees.
Advantage: For these loans, you may need to provide the lender with a statement or other documents confirming your income, in addition to a statement that you are able to meet the proposed loan repayments.
Disadvantage: Compared to a traditional loan, these loans generally carry a higher interest rate and are available only at lower Loan Valuation Ratios (LVRs).
These specialised loans are most suitable for retirees who own their home, but are looking to release cash.
Advantage: Unlike a traditional loan, there are no periodic repayments required. As a borrower you can choose to get your money out in one lump sum or as a line of credit. You can unlock equity without having to sell your home or assets. The loan generally doesn't have to be repaid until the property is sold or the owner dies.
Disadvantage: There are interest charges that are accumulated against the outstanding loan balance which could get expensive over time. In addition, there might be numerous fees and insurance costs associated with reverse mortgages which might be added towards the up-front fees.
When choosing a suitable loan, there are a broad range of different features and benefits to consider. Knowing what’s available can help you make a well informed decision based on your financial situation and needs.
This is the most common form of loan account, which generally includes a number of the features below, with no extra charges for usage.
Basic loans generally have an interest rate somewhat lower than a standard loan, however, the loans either come with less features, or there are fees to use selected features. In comparing between a standard and basic loan product, you will need to consider your expected usage patterns.
Line of credit / equity access
These accounts provide you with a "reserve" of credit on your account, than can be drawn down at any time. Some line of credit loan accounts have more flexible repayment alternatives, providing a benefit of allowing you to manage your cash flow better. Most lenders charge extra for line of credit accounts, either by way of a facility fee, undrawn funds fees and/or a higher interest rate. In many cases, a standard loan with redraw can provide features similar to a line of credit at lower cost, so make sure you compare the options carefully.
A redraw facility allows you to make additional withdrawals from your loan account. The amount you can redraw is generally limited to any additional repayments that you have made during the course of the loan. Some lenders impose a minimum redraw amount, limited number of free redraws, or charge fees per redraw.
Some loan accounts allow you to withdraw money from your account, as a redraw. The ways you can do this include: internet, telephone, cheque, direct debit, Bpay, ATM and EFTPOS. Many lenders restrict the number of free transactions, for different withdrawal methods, that you can make each month.
Lenders provide many different options for depositing money into your loan account, to make the minimum repayments and extra repayments. Most loan accounts allow you to do this in a number of ways including: salary crediting, direct credit, internet, telephone, cheque and Bpay. Because of the flexibility and ability to save interest, some people choose to use their loan account like a transaction account, by paying all of their salary in and then making outward payments as required.
This facility offers a sub-account into which you can deposit spare money. Prior to calculating the interest charge on your loan account, the balance of the offset account is netted off against your loan account, meaning that you save interest.
Many lenders offer packages that provide a range of products, such as a loan account, credit card and savings account, along with a discount on your home loan. The downside is an annual fee, which typically ranges from $300 to $500 per annum. Whether these accounts will work for you is really a game of algebra; to be worthwhile, the interest savings and other fee savings must outweigh the annual fee.
This facility allows you to stop making repayments for a while, provided that you have extra funds available as a result of making additional repayments.
This facility allows you to increase the credit limit of your existing loan account. Most lenders will require an abridged application and they will reassess their credit decision, following all or some of the steps in "How will the lender make the decision to lend me money".
This facility is designed to help if you decide to sell your existing home and buy a new one. Portability allows the new property to be set up under the old loan. Before utilising the portability facility, it's probably a good idea to shop around, because it is possible that there may be more competitive loan deals on the market. An advantage of portability is a potential ability to avoid deferred establishment fees in discharging your old loan and to avoid establishment fees in setting up a new loan. However, keep in mind that there may still be some government fees to be met.
A loan specifically to purchase vacant land, often combined with options for construction.
Construction & renovations
A loan to finance construction or renovations. Usually will include conditions that you must draw down the funds in stages, coinciding with the completion of different stages of the building activity. Be sure to check if the lender charges fees for progress payments.
Besides the major banks, there are other types of lenders which can also provide funding solutions when considering a loan.
There are four very large locally owned banks in Australia that serve a large proportion of the market. Each of the large banks offer the advantage of a well known name, extensive national branch network and comprehensive product range.
Apart from the "big 4" there are a number of other banks in Australia that can be summarised as follows:
There are four very large locally owned banks in Australia that serve a large proportion of the market. Each of the large banks offer the advantage of a well known name, extensive national branch network and comprehensive product range. Apart from the "big 4" there are a number of other banks in Australia that can be summarised as follows:
Other Australian banks - these banks are locally owned and have tended to be most successful in their original state of origin, but they are increasingly expanding their branch networks into other states.
Overseas banks - there are a number of large overseas banks that operate either via local Australian subsidiaries, or as a branch of the overseas parent. Some of these players specialise in loans distributed via brokers, or even directly via the internet.
Building societies and credit unions
Building societies tend to serve a local geographic area, while credit unions serve groups of people who share a common characteristic such as an employer, occupation, or local geographic area. Given that these organisations are not-for profit, they don't have to pass on profits to external shareholders, which means that their interest rates and fees can be quite competitive.
Retail lenders (via wholesale non-banks)
There is a multitude of smaller lenders who offer their own loans under their own brand, using funds that are sourced from a wholesale non-bank. It's just like goods retailing, where a shop sells a product under its own brand, using a product that is supplied by a third-party wholesaler or manufacturer. The benefit of this arrangement is that the retailer has access to wholesale rates and can pass on the savings to you.
Some people are concerned about getting a loan from a lender that may not be very well known. It's important to remember that wholesale non-bank lenders are regulated by the National Consumer Credit Protection Act and are required to be licensed or registered with ASIC. So provided that the retail lender can offer you the features you require, a competitive interest rate, good service and low fees, they are well worth considering.
It's also worth remembering that it was these lenders who opened up the home loan market in the early 1990s, creating competition that has led to vastly cheaper interest rates for everyone. This form of lending is now a very large, well established and stable part of the Australian home loan market.
There are a number of lenders available that specialise in offering loans to people who don't fit the normal mould. In particular, non-conforming lenders offer loans to people who may have a blemish on their credit record, or who are looking to purchase a property with unusual characteristics. Another source of lending is via solicitors' funds. In general, these forms of lending are considerably more expensive than standard loans, but they offer the benefit of offering finance to people who may otherwise be ineligible.
Below are just some of the lenders we work with.
Fees, Costs & Charges
When applying for a loan, you will most likely be liable for a range of fees and charges in relation to that loan. Make sure you are aware of all of them before making your decision. Enlisting the expert assistance of our services may help ensure you aren’t hit with any surprise expenses and will make trailing through the array of products and their associated fees a lot less work.
Below are just a few examples of upfront set up costs, ongoing costs and discharge fees that you should consider and plan for, when applying for a loan. We do not charge any fees for our home loan services.
Upfront set up costs
Application fees – payable at the time of application.
Establishment/settlement fees – payable when the loan is settled.
Loan documentation/Lender's legal fees – payable to cover the lender's cost of producing the loan documents.
Valuation fees – payable to cover the lender's cost of assessing the value of your property.
Lenders' Mortgage Insurance ("LMI") premiums – payable to cover the lender's cost for LMI premiums.
Mortgage registration, transfer fees & mortgage stamp duty – payable to the applicable state government.
Interest – this is an most important cost to consider in your mortgage purchase decision. The interest rates offered by different lenders are highly competitive and may vary considerably. Different rates may apply depending on the product that you select and even a small difference may enable you to save substantial amounts of money over the life of the loan.
Account keeping fees – Some lenders charge a fee, usually monthly, to operate your loan account.
Annual facility fee – Some lenders charge an annual fee for your loan account, or for a package of different financial products.
Transaction fees – Some lenders charge fees when you transact via your loan account. These fees might be to withdraw extra money (for example, redraw fees or EFTPOS/BPay transactions), or to pay extra money into your loan account.
Penalty charges – Many lenders impose penalties under certain circumstances. These include fees for missing a scheduled loan repayment and making an inward payment that is dishonoured. Penalty interest rates generally apply if you have missed scheduled repayments.
Lender's discharge fees – these fees cover the lender's cost of paying out your loan.
Deferred establishment fees – these fees may apply if you decide to pay off your loan early, usually within 3 to 5 years of establishing the loan. The fees are generally calculated as a % of the initial loan amount and sometimes reduce over time. The costs can be substantial; therefore you should consider them carefully if it is possible that you will pay off the loan within 5 years.
Discharge registration fees – these government fees are charged for the releasing the mortgage/s held against your property.