Home Loans
There are many different option when borrowing money to buy a home. Each option has different features and choosing the best option to suit
your individual needs can save you thousands of dollars over the life of your loan.
Below is a list of the various types of loans and their respective advantages and disadvantages.
For further information contact us now!
Standard Variable Rate Loan
This is the most common loan in Australia. As the name implies the interest rate may vary either up or down over the period of the loan. They
also tend to be the most flexible type of home loans with extras such as redraw, offset and the ability to make additional repayments readily
available.
Pros
If interest rates fall so should your repayments.
Probably the most flexible of all home loans allowing you to redraw funds, make additional repayments and offset credit balances against your
loan balance.
These extras may reduce the amount of interest you have to pay meaning you may be able to repay your loan faster.
Cons
If interest rates rise so will your loan repayments.
Make sure you require the added benefits as lower interest rates are available if you don't need them.
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Basic Variable Rate Loan
This is a no frills version of the Standard Variable Rate Loan. Basically the extras offered under the Standard Variable Rate Loan are removed
thereby allowing the lender to reduce the interest rate charged. The less features the cheaper the rate! It is ideally suited to customers who do
not have any surplus cash flow.
Pros
If you are not going to use the features of the Standard Variable why pay for them?
Cons
If interest rates rise so will your loan repayments.
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Fixed Interest Rate Loan
As the name implies you fix in a rate on your loan which cannot change for the agreed term, usually 1 to 10 years. These loans are ideal for
customers who want the security of knowing that their loan repayments will not increase during the term they have chosen. They are especially
popular with investors seeking to fix in the cost of their investment.
Fixed rate loan repayments can either be Principal and Interest or Interest Only. Interest Only loans tend to be used by investors where the
ability to calculate future interest can assist with taxation planning.
Pros
Allows you to fix in the cost of maintaining your loan. In other words you know the cost of your repayments for the life of the loan.
If the variable interest rate increases you can smile because yours won't!
Cons
Fixed loans tend not to be as flexible as variable rate loans. For instance you may not be able to make additional payments, redraw or offset
credit balances.
If the variable interest rate falls yours won't.
You may be up for early repayment penalties if you wish to repay, refinance or switch to a variable rate before maturity.
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Line Of Credit Loan
A Line of Credit is an ongoing source of low cost finance that is secured against the equity that you have in your home. It is similar to an
overdraft facility in that funds can be withdrawn up to a certain limit with no principal repayment deadlines.
Lines of credit are generally used for investment purposes; i.e. as equity for an additional property investment or for investment in shares
or managed funds.
Pros
You can use the funds as and when they are required and only pay interest on the outstanding balance.
Cons
You need to be budget conscious to operate this type of loan. If you are unable to budget or have a tendency to spend any money available then
this may not be the loan for you.
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Bridging Finance Loan
If you have enough equity in your current home, we can arrange for a Bridging Loan. These loans enable you to buy your new home now and sell
your current home later. The good news is these loans can be arranged at Standard Variable rates.
These loans work by enabling you to split the loan two ways; i.e. a portion is locked into a fixed rate for a fixed term and the balance is
charged at the variable rate. It is an excellent way of reducing the effects of interest rate movements; if the variable rate falls, you benefit
from the fall on your variable rate portion; if they increase, you benefit from your Fixed Rate portion which will not increase.
Pros
Creates a sense of interest rate stability.
The variable portion can give you flexibility such as redraw, offset and the ability to make extra repayments.
Cons
If interest rates rise your variable rate and therefore your payments will still increase.
If interest rates fall you will still be paying interest on your fixed rate loan at the original rate.
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Offset Loan
An Offset Loan allows you to repay extra amounts off your loan and "redraw" them when you really need them. The benefit is that if you make
additional repayments above the minimum required your loan balance will fall and so will your interest payments. The Loan operates like a normal
cheque account with salaries etc being credited to the account and funds withdrawn via cheque book, ATM or Eftpos as per usual.
Some lenders do not have All-in-One accounts but instead operate Offset accounts. This is a stand-alone credit account that acts as your
day-to-day transaction account. The outstanding balance on the account is "offset" against your mortgage and you only pay interest on the net
amount. Most Offset accounts provide a 100% offset but you should confirm this before entering into any deal.
Pros
Best value for money as credit balances (or deposits) will reduce the balance on which you pay interest. Whist repayments won't decrease you
will be paying your loan off sooner.
Operates like a normal bank transaction account.
Cons
Interest rates may be slightly higher due to the offset feature. Ensure the offset will be of greater benefit to you than the higher interest
cost.
Check the terms under which the Offset works - i.e. do you have to keep a minimum balance in the account.
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