Standard variable rate home
loans
What are they? These are the most popular type of loan in Australia
and offered by most lenders. It's a variable rate loan, like a basic
home loan, but offers a few more features and flexibility so the
rate is slightly higher.
Pros: if rates fall, so will your minimum repayments.
However, if this happens, it's a good idea to keep repaying at the
old level and pay off the loan faster. They have a lot more flexibility
than basic loans. Most come with the features discussed earlier
such as redraw; the option to split between fixed and variable;
allowing you to make extra repayments without penalty; and portability.
Cons: if interest rates go up, so will your loan
repayments.
Who they suit: most people, from home buyers to those refinancing
and anyone who wants flexibility.
Fixed-rate home loans
What are they? The interest rate is set for a particular
term — usually one to five years so your repayments are set
for that period. At the end of the term you can lock in another
fixed rate, switch to variable or go for a split loan.
Pros: you have the security and peace of mind
of knowing exactly what your repayments will be and can budget accordingly.
Plus, if interest rates go up your cost of funding will look cheap
by comparison.
Cons: if rates fall, you'll miss out. Fixed loans
also often have limited features and lack the flexibility of variable
loans. Make sure you find out about any exit fees or penalties for
early pay out and whether you're allowed to make extra repayments.
Who they suit: ideal for risk averse borrowers
who like to know exactly what their repayments will be or those
who worry about rates rising or consider that the medium term outlook
for rates is higher.
Equity line of credit home loans
What are they? These loans let you use the equity in your home to
finance other things such as renovations or to invest in other assets
such as shares, property or other funds. You generally need to have
a large deposit or good equity in your home to be able to take advantage
of this.
Pros: the extra funds are there when needed without
having to apply for a separate loan or get special approval. If
you're buying shares, unlike a margin loan there're no margin calls.
There are also no set repayments.
Cons: they are sometimes more expensive than standard
products, so check whether you'll really benefit. If you're not
disciplined, you could only pay interest and not reduce the principal
or even eat into the equity you've built. You could end up with
a mortgage for the rest of your life!
Who they suit: they are only appropriate for those
who are disciplined and have strong budgeting skills. They suit
people who are thinking about renovating or investing.
Packaged home loans
What are they? Packaged home loans are offered by banks to people
in a particular profession or those borrowing over a certain amount
— sometimes it's over $150,000 but more commonly over $250,000.
They were originally introduced to cater to high income earners
but have now become more widely available to certain professional
groups, those who need to borrow a higher amount or those who have
a good relationship with the bank. Features include rate discounts,
reduced ongoing fees, fee-free credit cards and transaction accounts.
Pros: you get a discounted rate not only on the
home loan but benefits on other products as well, depending on the
institution.
Cons: Resi mortgage warns that yearly fees for
these packages are often around $300 and the benefit of the reduced
interest might be much less. So make sure you get value for money.
You're also tied to the one institution for a range of services
which can be limiting.
Who they suit: These are great for people who
need to borrow large sums or are a member of a particular professional
group, says Senlitonga. It's also ideal for those who need a whole
suite of products.
No deposit home loans
What are they: normally you have to save at least a five percent
deposit before applying for a loan. With a no-deposit loan you can
borrow 100 percent of the purchase price. Some lenders go as high
as 107 percent so you can also borrow the money to pay for the extras
such as stamp duty.
Pros: you can buy property sooner, as you don't
have to wait until you save an adequate deposit. They often come
with features such as additional repayments and redraw.
Cons: they have stricter lending criteria and
approval can be harder. Plus you can only get them on certain types
of properties. In essence you're borrowing more money so you'll
end up paying more interest in the long term. You'll also have to
pay mortgage insurance.
Who they suit: these are ideal for people with
a good income and credit history who, because of rent, have not
been able to save for a deposit. Great for first home buyers.
Non-conforming home loans
What are they? Non-conforming lenders will lend money to
people who don't meet the banks' strict lending criteria including:
• Self-employed people likely to have difficulty verifying
their last three years of income.
• Older borrowers (over 55) for whom a 25-year loan may not
be appropriate because they are close to retirement.
• Those who wish to borrow more than 90 percent of the property's
value.
• People with a bad credit history, for example those with
a history of late repayments, loan default or possibly even bankruptcy.
• Seasonal or casual workers who have infrequent or variable
income.
• New migrants with no borrowing record.
Pros: the rates are much lower than they were
in the past for these types of loans. Non-conforming loans are fully
featured, so you don't miss out on any of the extras. They're a
great way to build your credit rating.
Cons: the rates are usually at least one percent
higher than a traditional loan. The rates depend on your level of
credit impairment. You might be up for a hefty deferred establishment
fee if you pay out the loan — particularly if refinancing
in the first three years.
Who they suit: small business owners, older people and those with
a bad credit history.
Next Steps
The home loan market is very competitive. There are literally thousands
of home loan options to choose from and the fastest way to get to
the best decision for you is to get assistance.
Use the internet as your initial research tool. Go to sites like
www.cannex.com.au
and www.infochoice.com.au
Finally, we are in the process of developing a number of very useful
calculators that will assist you in your choice, so visit this site
regularly to see what other interesting information has been posted.
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