The many types of available residential home loans

We have established relationships with over 35 Australia’s home loan lenders, including the big 4 banks. This provides us the opportunity to select a solution and tailor the most appropriate home loan package to meet each client’s needs.

Before we make any recommendations to a client, we first need to assess their current situation and understand their short, medium and long term goals.

Once we have a complete picture of their situation, we can then structure a solution tailored to meet their goals and objectives that is both affordable and manageable.

We then, to ensure success, manage the implementation of our strategy from beginning to end.

Standard variable loans are Australia’s most popular type of home loan. With a Standard Variable Rate Loan the interest rate can vary throughout the term of the mortgage. These loans generally offer excellent flexibility, low fees and often offer great features such as an offset facilities, redraw facility, no limits on additional repayments and in most cases, no early pay-out penalties.

Pro’s

Con’s

– Flexibility.

– Lump sum payments can be made without incurring a penalty.

– If interest rates fall, your interest rate will fall as well, along with your repayments.

– Often standard variable loans offer extra features that other loan types don’t provide.

– You are at the mercy of the ebb and flow of interest rates rising and falling.

– There can be a level of uncertainty with your month to month repayments, the repayment is based on the ebb and flow of the cash rate

Basic variable loans typically offer lower interest rates and fewer features than those offered by standard variable rate home loans. If you want additional features, you will normally have to pay for them.  Interest rates and repayments will vary throughout the loan term.

Pro’s

Con’s

– Relative low interest rate.

– Lower repayments.

 – Many of these loans do not have the same features or flexibility as other variable loans.

An introductory rate home loan generally offers a guaranteed low interest rate for an initial period of time (usually 12 months to 36 months). After the initial discounted period the interest rate will revert to the standard variable rate.  Most lenders offer an introductory rate on fixed and variable home loans.

Pro’s

Con’s

– Usually the lowest rates on the market.

– Some lenders provide offset accounts on these loans.

– Opportunity to reduce the principal quickly during the ‘honeymoon’ period.

– Payments will increase after the initial introductory / ‘honeymoon’ period.

– They can end up being more expensive, so you need to do your homework.

Under a fixed rate home loan, the interest rate is fixed for a specified period, usually between one and five years. A fixed rate home loan gives you the certainty of knowing exactly what your monthly repayments will be and peace of mind knowing the repayments won’t rise. However, you won’t benefit if rates go down during the fixed term.

Pro’s

Con’s

– Guaranteed rate, if interest rates rise, yours won’t.

– Your monthly repayments will remain constant from month to month during the fixed period.

– Reduced flexibility.

– Extra repayments may incur a fee or be limited.

– There can be rather expensive exit fees if you break your fixed term contract.

An Offset Facility is not actually a home loan. It is a transactional account linked to a home loan. Rather than depositing your salary an external bank account or into the mortgage, it goes into the offset account that is directly linked to your home loan. Any balance in the offset account 100% ‘offsets’ the interest being accrued against your home loan. This reduces the amount of interest you must repay, making your money work harder for you.

Pro’s

Con’s

– Can save you a substantial amount of money in interest repayments if used correctly.

– Operates like a normal transaction account and will usually provide additional facilities like cheque books, ATM cards, etc.

– May have higher monthly fees attached to the account.

– May require a minimum balance in the account.

– Some lenders charge a slightly higher interest rate for the facility.

If you are building a dwelling, whether it is your own home or investment property, a construction loan may be suitable for you. This loan requires a fixed price building contract from a registered builder, council approved plans and permits. These home loans are usually interest only for the period of building and then become principal and interest once building is completed. A construction loan allows you to draw money as is required whilst building.

Pro’s

Con’s

– You get to build your own dream home.

– The facility allows you to draw money only when necessary whilst building.

– The loan is usually interest only during the building period to minimize your repayments.

– Additional payments can be made.

– Some lenders charge a slightly higher interest rate during the construction period.

– Requires a fixed price building contract leaving little room for change whilst building.

– Some lenders charge a fee every time you draw money whilst building.

– Given it is a variable loan; loan repayments will increase if interest rates go up.

A line of credit loan provides you with access to the equity in your home or investment property(s) up to a pre-approved limit. You access the funds as you need. The interest rate on a line of credit loan is usually a variable rate and repayments are interest only.

Pro’s

Con’s

– You can use the money when you need it and pay it back when you can.

– Rates are generally lower than a personal loan or credit card.

– Unless care is shown it is possible to reduce the equity you have built in your home.

– They are usually more expensive than a normal loan.

Borrowing 95% can reduce the amount of deposit required and get you into the property market sooner.

Yes, the First Home Buyers Grant can count as part of your deposit.

Pro’s

Con’s

– Allows you to get into the property market with minimal deposit.

– Avoids the game of chasing your tail due to property prices rising, thus increasing your need for a bigger deposit and making it harder to enter the market.

– Some lenders charge a slightly higher interest rate.

– Reduced flexibility.

– You may be charged higher fees for the privilege of borrowing 95%.

– Tighter lending policy, more hurdles to overcome and greater risk.

A low documentation (or no documentation) loan is suited to investors or self-employed borrowers who do not meet the ‘standard’ lending criteria. This may include those with impaired credit history or those who are unable to provide the required documentation to support their loan application.

Pro’s

Con’s

– Simple income declaration form.

– No tax returns required.

– Minimal financial documents required.

– Can have features such as redraw, line of credit, variable or fixed rates, principal and interest or interest only payments.

– Most lenders usually charge a slightly higher interest rate.

– Your loan to value ratio (LVR) is reduced to 60 or 80% depending on the lender.

– Lenders charge mortgage insurance once the LVR exceeds 60% unlike a normal loan where it is only charged when the LVR exceeds 80%.

The deposit options you have available when you don’t have the hard cash.

Deposit Bonds

Deposit Bonds allow you to purchase a home or invest in property without having to provide the deposit in cash.  A Deposit Bond Guarantee is a substitute for the cash deposit required when purchasing a residential property – you simply pay the full purchase price at settlement.

Both short and long term guarantees are offered to suit any settlement terms. They can be either short term or long term.

Short Term Deposit Bonds

Are available for purchases where the settlement terms are up to 6 months.  Short term guarantees are issued subject to issuing guidelines.  Purchasers need to provide evidence they have sufficient funds available to complete the purchase.

Long Term Deposit Bonds

Are available for purchases where the settlement terms are between 6 and 48 months.  These can be arranged for applicants who own existing residential property and demonstrate the ability to complete the purchase.

There is a charge associated with this. Usually it’s around 1.2% of the 10% deposit required.

Bank Guarantee

Is a form of deposit that is used regularly when you are purchasing real estate where the land or plan of subdivision is not yet registered or the dwelling it not yet built.

It is predominantly used as the preferred form of deposit when purchasing a property Off the Plan.

How a Bank Guarantee Works

Normally when you purchase a piece of real estate you are required to pay a 10% deposit. This is usually done by transferring the required deposit into the real estate agent’s Trust Account. When you are purchasing a property Off the Plan or purchasing un-registered land a Bank Guarantee is often the preferred method.

Why?

Instead of handing over your hard-earned cash and letting it sit in the real estate agent’s Trust Account or the vendor’s solicitor’s Trust Account allowing them to earn interest, you deposit the money into a secure savings account that is in your name, usually with one of the 4 major banks. You accrue the interest for the period of time the money is in the savings account.

The account is in your name, however the Title to the savings account is handed over to the vendor’s solicitor and at settlement the funds in the account will be handed over to the Vendor in return to the vendor handing back the Title to the account.

The account may be in your name, but whoever holds the Title to the account owns the money upon release.

If you are purchasing a property Off the Plan then most developers will only accept the deposit being paid in the form of cash credited to their solicitor’s Trust Account, in which it is held until settlement or a receipt of a Bank Guarantee which the developer’s solicitor holds until settlement.