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Understanding the Mortgage Maze

BANNER mortgages 

Finding the right home loan is as important as finding the right property. 

Understanding the type of loan best suited to your needs is becoming increasingly important as the mortgage lending market changes with the rapid growth in mortgage types which are now an everyday part of the home buying maze. So as a member we want to help you find the loan that best suits your particular needs, and then have the right expert help complete the paperwork necessary, and then submit it professionally packaged with all your supporting documentation to your chosen lender.

The following is a brief explanation of the type of loans available to choose from and some things you need to consider, so you can make the best loan choice for your needs.

Introductory/Honeymoon Loans

Originally designed for first-home buyers, but now available more widely, introductory loans offer a discounted interest rate for the first 6 to 12 months, before the rate reverts to the usual variable interest rate.

These loans usually offer the lowest interest rates in the market in a bid to entice new customers who for the first year make lower than normal repayments so they can adjust to the regime of servicing a mortgage. After this introductory period, the loan reverts to the standard variable rate. However, making repayments based on the variable rate right from the beginning enables you to more rapidly cut into the principal. Homebuyers should be aware that payments might increase when the introductory period ends, and with fixed introductory loans it is possible you will be locked into higher rates if official interest rates fall. Some institutions provide an offset account on these loans.

Standard Variable Loans

Are the most popular loan type in Australia. The loan term is usually 20 to 30 years, during which time interest rates can fluctuate both up and down. As the name suggests, repayments on these loans can vary. You will enjoy a reduction in repayments if official interest rates fall. However, borrowers must take the risk that if interest rates go up they will have to make higher repayments. Additional repayments can be made without penalty. These are a very flexible loan and often have more features than other types.

Basic Variable Loans

Are available from many institutions, offering lower interest rates than the standard loan but also providing fewer features and flexibility. As is the case with all variable loans, interest rates and repayments can go up or down over the term of the loan. Shop around and you can find basic variable loans still providing features such as redraw facilities.

Capped Loans

Offer an interest rate ceiling over a fixed period of time and the rate you pay cannot go above the ceiling during this period. Capped rates normally apply for a year and then default to a standard variable rate, although in some cases the default rate is actually higher than the standard. If official interest rates come down during the capped term, you can pay beneath the ceiling (although it is a good idea to maintain the higher payment to more rapidly reduce your principal). If official rates go up, you don't have to pay any more until the capped period expires.

Fixed Rate Loans

Have a fixed interest rate and repayment schedule over a predetermined period, usually between one and five years. At the end of the fixed term, most of these loans automatically revert to the standard variable rate, although they can be rolled over to another fixed term. These loans provide security and a buffer if official interest rates increase. They also allow borrowers to more accurately budget their future expenses.

However, there are some disadvantages. Fixed loans are generally about a percentage point higher than the variable rate and it remains difficult to foresee whether official rates will go up, remain stable, or fall in the next few years. They carry the risk that you'll miss out on an unforeseen fall in official interest rates, although the odds currently appear good that variable rates will increase at least one per cent within a couple of years. It is also usually not possible to pay off lump sums from the principal of a fixed loan without being charged a penalty. Penalties also apply if you switch from a fixed to a variable loan or change lenders before the fixed term has expired.

Interest Only Loans

You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold, having achieved capital growth. If it is not a fixed rate loan, you have the flexibility to pay off, and often redraw, the principal at your convenience.

However, at the end of the interest only period you have the same level of debt as when you started. If you’re not able to extend your interest-only period, you could face the possibility of increased repayments. You could also face a sudden increase in regular repayments at the end of the interest-only period.

Split Rate Loans

Are a product wherein a portion of the repayment is variable and the remainder is fixed, providing flexibility so you can structure repayments to meet your needs. You can decide what proportion of the overall loan is fixed and variable and, after five years, the loan can be restructured to suit the prevailing circumstances. You are usually given the choice of either re-fixing your fixed portion or swinging everything back to the variable rate, although there may be fees involved.

Split loans enable you to devote all your income to paying off the variable portion, knowing there will be no penalties for extra repayments. If rates go up within five years - as they almost certainly will - you will have a good portion of the variable loan paid off. If official rates rise above the fixed portion, you will be partially buffered.

Split packages are on offer for both home and investment loans. Most lenders don't impose any special eligibility requirements and the start-up costs are usually about the same as for standard products. The variable portion of split loans often has other features such as a redraw facility whereby you can make extra lump sum repayments to eat away at your capital or redraw at a later date if the need arises.

Home Equity Loans

Provide a line of credit which is effectively an overdraft secured by a registered mortgage over a residential property - i.e. your home. Equity is basically the market value of a person's home minus the balance outstanding on that person's loan. Most equity loans allow you, the homebuyer, to use the money as you need it and repay it when possible.

The overdraft can be accessed, usually with a chequebook, at any time. Repayments can be principal and interest or interest only. Credit limits are usually higher than for credit cards or personal loans and the interest rates tend to be lower. However, you must be careful you do not reduce the equity you have built up in your home.

All In One Loans and 100 percent offset accounts are products which allow customers to deposit all their income into one account, reducing the balance of the loan and thus the interest you pay on it.

Homeswest's keystart loans are suitable for homebuyers who can not save sufficient deposit to get finance through the normal commercial outlets. Keystart First Homebuyer loans are available up to $120,000 on a deposit of $3000 or 2%, whichever is greater. Eligible borrowers can also enjoy fee assistance. Loans up to $150,000 are available under certain circumstances.

Line of Credit Loans

You can pay into and withdraw from your home loan every month, so long as you keep up the regular required repayments. Many people choose to have their salary paid into their line of credit account. This type of loan is good for people who want to maximise their income to pay off their mortgage quickly and/or who want maximum flexibility in their access to funds. So there are advantages, you can use your income to help reduce interest charges and pay off your mortgage quicker. They can provide great flexibility for you to access available funds and you can consolidate spending and debt management in a single account.

However, without proper monitoring and discipline, you won’t pay off the principal and will continue to carry or increase your level of debt. Furthermore, line of credit loans usually carry slightly higher interest rates.

Low Doc Loans

Popular with self-employed people, these loans require less documentation or proof of income than most, but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk. In most cases you will be financially better off getting together full documentation for another type of loan. But if this isn’t possible, a low doc loan may be your best opportunity to borrow money.

These loans accept a lower requirement for evidence of income, and in some case may overlook non-existent or poor credit rating. However, you will more then likely pay higher interest than with other home loan types and may need a larger deposit, or both.

We want to ensure you get the best advice and support possible

With the combination of solid lending experience and a flexible, open-minded approach to mortgage finance, our alliance partners can custom design the home or investment loan you need. As your needs and circumstances will vary, there is peace of mind in knowing that your home or investment loan can remain flexible to accommodate the changes that happen in your life.

For further information and the options available,  contact us with any queries and we will have a service provider consultant contact you personally to discuss your needs.

 

About PPL Finance Services

We offer access to a broad range of finance services, through a network of carefully selected alliance relationships with service providers that have the experience and the level of expertise required to provide guidence, assistance and innovative advice to best serve and protect the interests of our members. Learn more...

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