Home And Investment Loans

Types of loans and features

Types of Interest Rates

Types of lenders

Fees, costs and charges

Loan Types

Full Doc

This is the standard loan type, where you provide documented proof of your income. Suitable for permanent employees and established self-employed business owners who can provide full financial records.

Low doc and no doc

Suitable for borrowers who are unwilling or unable to provide verification of their income. Generally only available to people who are self employed, or casual employees. For these loans, you may need to provide the lender with a statement confirming your income or a statement that you are able to meet the proposed loan repayments, with little or no requirement to provide documented evidence. Compared to full doc, these loans generally carry a higher interest rate and are available only at lower Loan Valuation Ratios (LVRs).

Reverse mortgages

These loans are most suitable for retirees who own their home, but are looking to release cash. Unlike a traditional mortgage, there are no periodic repayments required, but there are interest charges that are accumulated against the outstanding loan balance. The loan generally doesn’t have to be repaid until the property is sold or the owner dies.

Non-conforming

These are specialised loans for people who have some form of blemish in their credit history, such as a default, or to finance a property that has unusual characteristics. The interest rate on these loans is generally higher than traditional Full-Doc loans.

Loan product features

Standard

This is the most common form of loan account, which generally includes a number of the features below, with no extra charges for usage.

Basic

Basic loans generally have an interest rate somewhat lower than a standard loan, however, the loans either come with less features, or there are fees to use selected features. In comparing between a standard and basic loan product, you will need to consider your expected usage patterns.

Line of credit / equity access

These accounts provide you with a “reserve” of credit on your account, than can be drawn down at any time. Some line of credit loan accounts have more flexible repayment alternatives, providing a benefit of allowing you to manage your cash flow better. Most lenders charge extra for line of credit accounts, either by way of a facility fee, undrawn funds fees and/or a higher interest rate. In many cases, a standard loan with redraw can provide features similar to a line of credit at lower cost, so make sure you compare the options carefully.

Redraw

A redraw facility allows you to make additional withdrawals from your loan account. The amount you can redraw is generally limited to any additional repayments that you have made during the course of the loan. Some lenders impose a minimum redraw amount, limited number of free redraws, or fees per redraw.

Outward payments

Some loan accounts allow you to withdraw money from your account, as a redraw. The ways you can do this include: internet, telephone, cheque, direct debit, Bpay, ATM and EFTPOS. Many lenders restrict the number of free transactions, for different withdrawal methods, that you can make each month.

Inward payments

Lenders provide many different options for depositing money into your loan account, to make the minimum repayments and extra repayments. Most loan accounts allow you to do this in a number of ways including: salary crediting, direct credit, internet, telephone, cheque and Bpay. Because of the flexibility and ability to save interest, some people choose to use their loan account like a transaction account, by paying all of their salary in and then making outward payments as required.

Interest offset

This facility offers a sub-account into which you can deposit spare money. Prior to calculating the interest charge on your loan account, the balance of the offset account is netted off against your loan account, meaning that you save interest.

Packages

Many lenders offer packages that provide a range of products, such as a loan account, credit card and savings account, along with a discount on your home loan. The downside is an annual fee, which typically ranges from $300 to $500 per annum. Whether these accounts will work for you is really a game of algebra; to be worthwhile, the interest savings and other fee savings must outweigh the annual fee.

Repayment holidays

This facility allows you to stop making repayments for a while, provided that you have extra funds available as a result of making additional repayments.

Top-Ups

This facility allows you to increase the credit limit of your existing loan account. Most lenders will require an abridged application and they will reassess their credit decision, following all or some of the steps in “How will the lender make the decision to lend me money”.

Portability

This facility is designed to help if you decide to sell your existing home and buy a new one. Portability allows the new property to be set up under the old loan. Before utilising the portability facility, it’s probably a good idea to shop around, because it is possible that there may be more competitive loan deals on the market. An advantage of portability is a potential ability to avoid deferred establishment fees in discharging your old loan and to avoid establishment fees in setting up a new loan. However, keep in mind that there may still be some government fees to be met.

Vacant land

A loan specifically to purchase vacant land, often combined with options for construction.

Construction & renovations

A loan to finance construction or renovations. Usually will include conditions that you must draw down the funds in stages, coinciding with the completion of different stages of the building activity. Be sure to check if the lender charges fees for progress payments.

Types of Interest Rate

Variable Rate

The most common interest rate type in Australia is the variable rate. Under this form of interest rate, the initial and ongoing rate is set by the lender. The lender has the right to change the interest rate during the loan’s life.

Because of intense competition between lenders in the variable rate market, most lenders will only change variable rates for existing loans in response to movements in the official cash rates, as announced by the Reserve Bank of Australia (“RBA”). Therefore, you can generally be confident that your rate will change only in response to movements in the RBA’s official cash rate.

Advantage: Variable rate loans generally have no restrictions or penalties for making additional repayments on your loan; therefore you may be able to pay off your loan sooner. Additionally variable rates will obviously advantage you if interest rates fall, as your monthly minimum repayment will fall.

Disadvantage: Variable rate loans will disadvantage you if rates rise, because your repayments will increase.

Fixed Rate

Most lenders offer fixed rate loans, generally for 1 to 5 year terms. At the end of the term, the interest rate usually converts to variable. On a fixed rate loan, your interest rate remains the same during the entire fixed rate term, even if variable market rates change. The fixed rates offered by lenders can be either higher or lower than the variable rate at any given time; therefore you need to make a comparison when considering this option.

Advantage: With fixed rate loans you are not impacted if variable rates increase, because your fixed rate will not change. This means that fixed rate interest can work out cheaper compared to variable rate interest.

Disadvantage: However, if variable rates decrease, you will not receive any benefit, as your fixed rate will remain the same. If market variable rates fall over time, it is possible that your fixed rate could be higher than the current variable rate, so a fixed rate loan could cost you more. Furthermore, you generally cannot make additional repayments on the loan without incurring penalties.

Introductory / low start / honeymoon rates

Advantage: Many lenders offer reduced interest rates for a limited time at the beginning of your loan, generally for periods between the first 6 to 24 months. This can provide a useful benefit for you, by freeing up some cash to help get your new home established.

Disadvantage: However, you should be aware that there is generally a catch with introductory rates. Usually after the end of the introductory period, when the rate returns to a variable rate, that rate will be higher than the normal variable rate offered by the lender. Therefore, you need to weigh up the pros and cons, to work out whether the benefit of a reduced rate at the beginning, is worth the additional cost of a higher rate later.

Split Loans

Most lenders will allow you to take out a split loan, which is a combination where part of the loan balance is treated as variable rate and part is fixed rate. This can offer the advantage of having an “each way bet” if you’re not sure about which option is suitable.

Principal & interest (“P&I”) / Interest Only (“IO”)

The most common loan type is principal and interest where you repayments are applied to pay interest and also to pay off the loan principal over the loan’s life.

It is also possible to obtain an interest only loan, which have lower repayment requirements because you only have to pay the interest. With an Interest Only loan, the loan balance does not get “paid off”.

Most lenders will apply special conditions to IO loans, such as a restriction on the term of up to 5 years and restricting availability only to finance investment properties.

Types of Lenders

Major banks

There are four very large locally owned banks in Australia that serve a large proportion of the market. Each of the large banks offer the advantage of a well known name, extensive national branch network and comprehensive product range.

Other banks

Apart from the “big 4″ there are a number of other banks in Australia, that can be summarised as follows:

Other Australian banks – these banks are locally owned and have tended to be most successful in their original state of origin, but they are increasingly expanding their branch networks into other states.
Overseas banks – there are a number of large overseas banks that operate either via local Australian subsidiaries, or as a branch of the overseas parent. Some of these players specialise in loans distributed via brokers, or even direct via the internet.

Building societies and credit unions

Building societies tend to serve a local geographic area, while credit unions serve groups of people who share a common characteristic such as an employer, occupation, or local geographic area. Given that these organisations are not-for profit, they don’t have to pass on profits to external shareholders, which means that their interest rates and fees can be quite competitive.

Specialist non-banks

There are a number of lenders available that specialise in offering loans to people who don’t fit the normal mould. In particular, non-conforming lenders offer loans to people who may have a blemish on their credit record, or who are looking to purchase a property with unusual characteristics. Another source of lending is via solicitors’ funds. In general, these forms of lending are considerably more expensive than standard loans, but they offer the benefit of offering finance to people who may otherwise be ineligible.

Fees Costs and Charges

Upfront setup costs

Application fees - payable at the time of application.

Establishment / settlement fees – payable when the loan is settled.

Loan documentation / Lender’s legal fees – payable to cover the lender’s cost of producing the loan documents.

Valuation fees - payable to cover the lender’s cost of assessing the value of your property.

Lenders’ Mortgage Insurance (“LMI”) premiums – payable to cover the lender’s cost for LMI premiums.

Mortgage registration, transfer fees & mortgage stamp duty – payable to the applicable state government.

Ongoing costs

Interest - this is a most important cost to consider in your mortgage purchase decision. The interest rates offered by different lenders are highly competitive and may vary considerably. Different rates may apply depending on the product that you select and even a small difference may enable you to save substantial amounts of money over the life of the loan.

Account keeping fees – Some lenders charge a fee, usually monthly, to operate your loan account.

Annual facility fee - Some lenders charge an annual fee for your loan account, or for a package of different financial products.

Transaction fees - Some lenders charge fees when you transact via your loan account. These fees might be to withdraw extra money (for example, redraw fees or EFTPOS/BPay transactions), or to pay extra money into your loan account.

Penalty charges – Many lenders impose penalties under certain circumstances. These include fees for missing a scheduled loan repayment and making an inward payment that is dishonoured. Penalty interest rates generally apply if you have missed scheduled repayments.

Discharge costs

Lender’s discharge fees – these fees cover the lender’s cost of paying out your loan

Deferred establishment fees – these fees may apply if you decide to pay off your loan early, usually within 3 to 5 years of establishing the loan. The fees are generally calculated as a % of the initial loan amount and sometimes reduce over time. The costs can be substantial; therefore you should consider them carefully if it is possible that you will pay off the loan within 5 years.

Discharge registration fees – these government fees are charged for the releasing the mortgage/s held against your property/ies.