With increased competition, varieties of products are now offered in the market. Products are broadly distinguished by type of interest rate / features attached to those and the purpose for which the products are tailored. Following is
a summary of products available in the market. To find more information, click the product name below.
Standard Variable Loan
Standard Variable Loan rate is one of the most sought after products in the market, mainly due to the very high flexibility it offers. The rate of this product is variable and is aligned with the economy of the country, which in turn has a direct relationship to the Cash Rate of the Reserve Bank of Australia. Many Lenders consider Standard Variable Loan Rate as the base for comparison with their other Loan products.
- Offers additional repayments without penalty, linkage with off-set accounts which enable to repay the loan faster.
- Option of redraw facilities to use excess repayments already made for any purpose, facilitating access to cash in case of need.
- Allows loans for a longer period, usually up to 30 years.
- Rate moves with the changes of Cash rate of Reserve Bank. As such, there is a risk of increased monthly repayments in a scenario of higher interest rate as well enjoying the lower repayments when rates are low.
- Rate is usually higher compared with other standard loan products. However, many Lenders offer discounts to Borrowers if they subscribe to Professional Packages.
Basic variable Rate Loans
Basic Variable Rate Loan is more similar to Standard Variable Rate Loan with the exception that it offers a comparatively lower rate of interest and less features. This loan type is also called ‘No frills’ Loan due to its fewer features.
- Rate of interest is lower than Standard Variable Rate Loan
- Less features, usually no off-set facility, however additional repayments and/or redraw allowed
Fixed Rate loan
Fixed Rate Loans offer a fixed rate of interest for a given period of time and reverts back to standard variable rate at the expiry of the fixed term. However, the Borrower has the option to choose another Fixed Rate Loan at the rates applicable at that time. Most of the major Lenders offer Fixed interest periods from 1 year to 10 years and sometimes longer where as others usually offer up to 5 years.
Changes in fixed rates are not always related to the changes in variable rate in the market. Variable rates are directly linked to the cash rate of the Reserve Bank where as fixed rates are determined by the demand and supply factors in the market. Therefore, Borrower has to make an informed decision when choosing the fixed term.
- Protects against risk of increasing repayments due to rise in interest rates, for an agreed period of time.
- Provides certainty of amount of repayment duration the fixed term, thus making budgeting easy.
- Some Lenders offer restrictive off-set facilities.
- Usually additional repayments can be made up to a limited amount per annum depending on the Lender. Any additional payments above such a limit attract fees and penalties.
- In the event of settling the loan in full, the same principle as above applies. The amount of the penalty (also known as ‘break cost’) may depend on the contracted rate and the prevailing market rate.
- Reduced flexibility as repayments will be fixed even if general banking rates comes down.
Honeymoon Rate Loans
These loans offer very low rate of interest for a short period, usually one year or little longer. After the concessional rate period it reverts back to a higher interest rate. Therefore, Borrowers should not get attracted to the product based on the advertised rate alone. This is a Variable interest loan product and as such, repayment amount changes according to the movement of variable rate.
- Many Lenders offer discounts on Loan Application Fees. Some features of the Standard Variable Rate Loans may not be available with these loans’
- Appropriate for those who have limited cash flows during the initial period of the loan, but expected to increase thereafter.
- Always check the comparison rate, as advertised rate is only for a short period of the loan.
- If Borrower chooses to change the Loan product at the end of honeymoon rate period, a Switching Fee may apply.
‘Low-Doc’/ ‘No Doc’ Loans
Low Documentation and No Documentation Loans are mainly for self employed borrowers who do not have customary documents called for proving income. Lenders require showing evidence that the Borrower has an ABN number. Though introduced with normally at higher rates than the standard loan products, rates have become more competitive recently.
- Most of the Lenders require ABN number in the Borrower’s name for at least 1 year.
- Simply produce Income Declaration form declaring the Borrower has adequate income to repay the loan instead of providing other documents such as Tax Returns.
- Offers many features available with other standard loan products.
- Requires at least 20% of the loan amount as Deposit.
- Some Lenders require Borrower to pay Loan Mortgage Insurance if LVR is above 60%.
- Usually rate of interest is very competitive at low LVRs.
Full Doc Loans
Full Doc Loan is the standard loan type. Lenders require acceptable documentary evidence to prove income to establish the repayment capacity of the Borrower. Type of documentary evidence and the applicable period of time may vary according to the Lender.
No Deposit Loans
No Deposit Loans have been introduced to meet the requirements of the increasing number of Borrowers who want to purchase their home yet do not possesses the required deposit. This product enables the Home Buyers to own homes, without having to wait for the Deposits and providing an opportunity at an early stage to get away from the rent cycle.
- Enable to borrow up to 100% of the purchase price. Usually the Borrower has to pay for Government Fees and Charges, Bank charges & Loan Mortgage Insurance Fees.
- Some Lenders offer to finance beyond 100% of LVR capitalizing LMI, but at higher rates of interest.Different restrictions are applicable according to Lenders; some restrict this loan to those who are entitled for First Home Owners Grant.
- Loan Mortgage Insurance Fee goes up at a higher rate with the increasing LVR thus increasing the cost of loan.
- This product is still available with some Lenders only.
- Loans are generally restricted to certain Post Code areas and types of properties.
Construction Loan is designed to finance the building of a home, facilitating the Borrower to meet the obligations under the standard building contracts. Unlike the other type of loans, constructions loans are drawn in stages, usually to make payments to the Builder in 5 different stages in line with the progress schedule of the Building Contract. Construction Loan is predominantly a Variable Rate Loan product. Though many Lenders offer construction loans in their product range, some may are not be fully geared to process these loans effectively.
- Drawn in stages usually to pay the Builder directly, after verification of work completed per the Building Contract.
- Borrower need to pay only the interest on the amount of the loan drawn until the loan is fully drawn.
- All the features of the Variable Loan may not be available while the loan is not fully drawn.
Investment on residential properties has been major form of investments of many Australians, as it offers good ongoing income by way of rentals and solid returns due to capital appreciation. In addition, Negative Gearing benefits are also available to Investors. Investment Home Loans are tailored to meet the needs of those Investors. Almost all Lenders offer Investment Loans in their product range.
- Wide range of products is on offer mostly similar to that of Owner Occupied Home Loans.
- A percentage of rental income can be added to the income of the Borrower, in calculating the serviceability of the Borrower.
- Acquiring an Investment Property through financing may not be difficult as the Home Loan, due to the rental returns and negative gearing benefits. However, it is recommended to seek professional advice to ensure how these apply to Borrower’s personal circumstances.
- First Home Owners Grant is not available for investment properties, though investment property is the first home to be owned.
Line of Credit
Line of Credit operates in a similar way to a Credit Card or Overdraft account. A limit is set-up against the equity of one or more properties taken as security and funds can be withdrawn and deposited within in this limit according to the wish of the Borrower. As such, it is one of the most flexible accounts. The Borrower can choose to have the home loan account as a line of credit. Sometimes this account operates as both a Home Loan and a Transaction Account.
- It is one of the most flexible accounts which usually do not have any fixed repayments terms, as far as the balance is within the limit approved.
- Interest is debited to the account, usually at the end of the month, irrespective of whether repayments have been made or not.
- Requires high level of financial discipline to manage this type of an account, as it does not have fixed repayments. However, subject to proper management of finances, the products provides much flexibility to build equity.
- More appropriate to Borrowers who experience fluctuations in their cash flow.
- Usually the limit is restricted to 80% of the value of the security.
- Does not have a defined term.
- Rates are generally higher than standard home loan products, but lower than Personal Loans or Credit Cards.
Bridging Loans are intended to bridge the gap between the purchasing of a new property and selling of an existing property. Both tasks cannot be achieved together in a convenient way, unless there is simultaneous settlement or a Lender is prepared to carry the total debt during a short period of time.
- Usually repayments and serviceability are calculated on the end debt amount though some Lenders calculate serviceability on total debt.
- Some Lenders require servicing the interest of the total debt during the bridging period, where as some capitalize interest in arriving at the residual or end debt, thus requiring no payments to be made during bridging period.
- Some Lenders allow time up to 12 months to reduce the total debt to the level of residual debt amount.
- Bridging loans are complicated compared to other types of loans. The structuring and terms of the loans may depend on specific circumstances of the Borrower and Lender guidelines.
Debt Consolidation Loan
Debt Consolidation Loan provides opportunity to set up a single loan combining several other loans such as Credit Cards, Store Cards, Vehicle Loans and Personal Loans.
The loan is granted against the equity of the Borrower’s home, as a top up of the existing home loan or as a separate loan. Offers the convenience of better management of repayments as only a single repayment will have to be made as against several repayments.
- Less stress of not having to monitor several repayments and sometimes dealing with several Lenders.
- Improvement of cash flow due to lower rate of interest on consolidated loan, which is usually standard home loan rate.
- Since the loan is usually repaid over a longer period of time than that of a Vehicle Loan or Personal Loan, the total interest payments to be made until full settlement of loan tend to be much higher. Such interest payments could be reduced by making additional repayments during the term of the loan.
Reverse Mortgage is a product which allows Seniors to have access to equity in their home. With the increase in aged population of the country this products is gaining popularity as it enable the cash poor Seniors to live their lives according to their expectations, while being able to live in own home.
Generally, Home owners above 60 years of age have access to this Loan product. Usually the Lenders offer lump sum payment or regular periodic payments subject to certain criteria. No repayment of principal or interest is required, unless chosen to, until the sale or transfer of property or the death of the last surviving spouse. The amount that can be borrowed depend on the value of the home and the age of the youngest Borrower (in case of joint Applicants). Younger the age, lesser the percentage of the value of the home, as the Loan amount.
- Borrowers need to be careful regarding the use of loan proceeds.
- Government benefits to retirees may be affected, if proceeds are channeled for investments.
- Unlike other loans, the outstanding loan amount increases over the period of time.
- Borrowers are encouraged to obtain independent legal advice prior enter into a Reverse Mortgage Contract.
Non-Conforming Loans are products offered by specialized Lenders to those who do not fall within the lending criteria of the traditional Lenders. Those with an impaired credit history may not be able to pass through the criteria of Lenders as well as Insurers providing Loan Mortgage Insurance. Specialized Lenders have been actively marketing their products to Self Employed people and people who cannot prove reasonable stability in employment.
However, mainstream lenders are very active in this market now with the introduction of products catering to this segment.
- Provides opportunity to reposition away from the poor credit history.
- Variety of products is now available in the market, including Lo - Doc loans.
- Interest rates are higher than the standard loan products.
- Usually interest rates vary on the level of credit impairment.
- Generally attracts higher establishment fees and /or penalties for repayment within a specific period of time.
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