PROPERTY LOAN TYPES
Variable Rate * Line of Credit * Fixed Rate
Standard Variable
Interest rates on these loans vary with the economic climate of the time. The variance is generally a reflection of the official Reserve Bank rates. As one of the most flexible loan types, it can apply to a wide spectrum of loan situations. In most cases, Variable loans will enable you to offset your loan, make additional repayments and redraw, which may help you to finalise your loan earlier and on most occasions is less likely to incur penalties.
Basic Variable
A very popular loan, similar to a Standard Variable but generally offered without the extras that come with a standard variable loan, such as credit card sweep, offset accounts etc; Interest rates are normally lower and are favoured by borrowers who are confident that they don’t require the additional features.
Line of Credit
For borrowers with a high surplus budget position for rapid debt reduction, it is essentially an overdraft where monies paid against the loan can be withdrawn up to the original limit. Technically an Interest only loan, however most people make higher repayments enabling them to finalise the loan quickly and redraw for investment purposes up to the original loan limit. Interest rates may be slightly higher for this style of loan for the features or have additional account keeping fees.
Fixed Rate
Locks in an interest rate for a defined period of time. When you choose a fixed rate loan you have the comfort of knowing if rates rise, your rate will remain stable. However, if interest rates drop you will remain at the higher rate. If you require the assurance of a fixed rate but would like to take advantage of the fall in rates you can split your loan into two separate loans, Part Fixed – Part Variable ( see Split Loans). Most fixed loans do not allow you to make additional repayments or if so a minimum amount or refinance during the fixed period unless penalties apply.
Construction Loan
If you decide to build your own home (using a Licensed Builder), a construction loan is the way to go. With a normal home loan the money is generally received in one lump sum, with a Construction Loan the money is drawn down as per the building contract in a series of progress payments to the builder on a needs basis and closely follows a progress schedule requiring regular inspections by the lender. Usually repayments are on an interest only basis during the course of construction, whilst after construction variable rates and principal & interest repayments generally apply.
Package Loans
Package loans sometimes known generically as Professional Package Lans offer special features including discount on interest rates of the standard variable rate loan for loans that are above a minimal amount and where the borrower also takes up other bank products such as a savings account and a credit card. These packages usually have an annual fee that in return offer discounts on interest rates on a sliding scale of the amount borrowed and or loan to value ratio and no account keeping fees on the home loan or savings accounts, no annual fee on the credit card and discounts on other bank services such as insurance.
LOAN FEATURES
Introductory • Redraw • Mortgage Offset • Interest Only
Split Loans • Low / No Doc Loan • Deposit Bonds
Introductory Loan
Introductory loans (sometimes known as Honeymoon Rate loans) generally enable you to commence with a lower rate for a fixed period “normally 6 – 12 months” and then revert to a higher rate (usually a standard variable loan) for the remaining loan period. These loans can be either fixed or variable rate and on most occasions have higher upfront and ongoing fees.
Redraw
A redraw facility on a loan allows you to access any additional repayments that you have made into your loan account. This facility can save you interest charges while allowing you easy access to any extra repayment monies that you have paid. Some lenders place conditions on the minimum amount that can be redrawn at any one time. Generally, redraws will attract a fee or free if redrawn electronically.
Mortgage Offset
Is another way to reduce your mortgage by attaching another account (normally a daily transaction account) to the loan and using the daily balance in that account to reduce the interest payable on your mortgage. Have your earnings paid straight into the Offset account, which is linked to your loan account and can have a credit card sweep.
Interest Only
Requires no principle repayments to be paid during the interest only period; you only pay the interest portion of the loan. You cannot have a balance outstanding higher than the original loan, so repayments have to keep the balance lower or equal to the original loan amount. It is commonly used for investment loans where interest can be included as a tax deduction.
Split Loans
Allows the one loan to be split into 2 or more sub loans. Useful for separating different portions of the loan for separate purposes for example, investment and home loan. It also allows you to nominate a portion of your loan to be fixed and a portion to be variable or principal and interest payments and interest only repayments or a combination of all. The variable component enables you to make additional repayments while the fixed component provides the comfort of protecting this portion against rate rises whilst in the defined time period.
Low / No Doc Loans
Generally geared to self employed persons where limited proof of income is required, the lender accepts self or accountants certification of income. An Interest rate margin to the standard variable rate may apply to cover the higher risk these loans present to the lender and early repayment penalties may apply.
Deposit Bonds
If you do not have the cash available to pay the deposit to purchase your property because it is coming from the sale of an existing property or you do not want to tie up your cash in a deposit because it is earning you interest where it is then a Deposit Bond is the solution. This is like an insurance product to the seller that you take out to guarantee that the deposit will be paid at settlement or earlier. The deposit bond provider will ensure you can come up with the deposit at settlement and for a small fee issue the seller with a certificate on your behalf to guarantee the deposit. Great for off the plan purchases or long term settlement contracts.
LOAN FEES
Application Fee
A fee charged by the lender to cover their administration and assessment costs for a loan application Usually includes the property valuation. These vary from lender to lender.
Deferred Establishment Fee (DEF)
Some lenders charge a deferred establishment fee if the loan is paid out within the first few years of the loan to cover some of their losses in setting up the loan. This varies greatly from lender to lender and loan to loan and some are a flat fee while others have a sliding scale. If you intend to sell or not have your loan on your property for very long then the DEF will be a major consideration when choosing a lender. The DEF has now been abolished by government legislation applicable to loans approved after 30th June 2011 however loans approved and settled prior to this date may still have a DEF.
Account Keeping, Annual Package & Ongoing Fees
These can add significantly to the cost of your loan and once again vary from lender to lender and loan product type to loan product type.
Valuation Fee
Usually included in the application fee however not always and the fee to cover this cost may be asked for upfront with the loan application. The more expensive the property, for instance for properties valued at $1M plus, then the more expensive the valuation fee. Some lenders offer a free valuation prior to application as they see this as preventing loan application rework for them when a valuation comes in under the borrower’s expectation and the loan application has to be re-assessed or does not proceed.
Lenders Mortgage Insurance
This is an insurance the lender takes out against the borrower defaulting on their loan. If a borrower defaults on their loan then at the end the lender will recover their losses from the insurance company and the borrower is then indebted to the insurance company. The lender will insure higher risk loans such as High Loan To Value loans (LVR) above 80% or Low Doc loans. The borrower usually pays the premium which can be included in the loan amount. The premium is a once of fee and varies depending on the LVR, the borrower risk type and the loan amount. If loans are paid out within 12 months of taking out a loan where the borrower paid Lenders Mortgage Insurance then the borrower may claim a portion or all of the fee back.
Non Bank Fees Associated With Property Transactions
Other non bank fees, usually government fees you need to consider when purchasing property would be Land Transfer Stamp Duty, Land Transfer Registration Fee, Registration of Mortgage Fee, Discharge of Mortgage Fee, your solicitor fee, Rates and Water adjustments. Your solicitor will help you with these.
