There are a range of home loans available in Australia, so it can be hard to understand their features and whether they are right for you. This guide explains all you need to know.
Variable loans are loans that are subject to interest rate fluctuations. Whenever your bank increases or decreases interest rates, you will end up either paying more or less for your loan, depending on what the bank has decided to do.
A typical owner-occupied mortgage is taken out over 25 or 30 years, although you can reduce the overall term by making higher or more frequent payments. Mortgages are either based on principal (the amount you borrowed from the bank) and interest (the amount you pay back for having borrowed that money) loan repayments, or interest-only repayments (generally available for 1-5 years for owner occupied loans and 1-10 years for investment loans) where none of the principal component of the loan is paid down.
Fixed loans allow you to lock in a specific interest rate over a set period of time, generally between one and five years. This loan is popular among borrowers who want to ensure their repayments don’t rise. The main risk is that if variable rates fall, you are locked in at a higher rate. The cost of breaking a fixed rate loan contract can be substantial, and there can be financial penalties for making additional payments.
You can take out a mortgage with one portion of the loan variable, and the other fixed. In many ways, this offers the best of both worlds and you have the flexibility to repay more on the variable loan and reduce risk through the fixed loan.
Mortgage lenders require you to provide evidence of your ability to meet loan repayments, but this can be a problem for non-salaried workers such as the self-employed. Low-doc loans require less proof-of-income paperwork, but the interest rate levied is often higher than the standard variable rate.
Professional or packaged loans
Some lenders offer mortgages that provide ‘lifetime’ discounted interest rates, fee waivers and linked savings accounts and credit cards. These options are generally offered on high loan amounts.
Non-genuine savings loans
Lenders prefer borrowers to show they have the ability to save funds over time to cover their repayments. If a deposit is accrued quickly due to an inheritance or from other sources, lenders may provide less funding and require lenders mortgage insurance. Lenders mortgage insurance is a one-off insurance payment that covers the bank in case you can’t make your repayments. It is usually required for home loans with a loan-to-value ratio (LVR) over 80%.
These loans allow amounts of finance to be drawn down progressively to cover the various stages of a construction project. Repayments (generally only on interest for the first 12 months, then principal and interest thereafter) are only made on the amount of the loan facility that has been drawn down. However, there are line fees on the undrawn amount, or in most cases on the total facility limit.
This is a way of tapping into equity in an existing home and drawing down funds as required for different purposes, such as renovations. Similar to a credit card, repayments are only made on the amount drawn down. Line-of-credit loans are often interest-only for a significant period, but can revert to principal and interest repayments down the track. Most lenders charge extra for line of credit accounts, either through a facility fee, undrawn funds fees and/or a higher interest rate.
Bridging loans are designed as short-term financing options for borrowers who need funding to buy a new residence before selling their existing home. The interest rates on these loans are higher than the standard variable interest rate.
The rules around borrowing funds within a self-managed superannuation fund are complex. Borrowings with a SMSF must be undertaken through a limited recourse borrowing arrangement, which limits the recourse of the lender to a single asset.
With mortgage lenders offering so many different products, getting professional advice is a must. A mortgage broker will support you with recommendations about what’s best for your personal circumstances.
For more information on home loans, talk a mortgage broker today.
Refinancing could save you thousands – and give you greater flexibility
It’s often said that Australians are more likely to divorce their spouse than switch banks. But with plenty of competition in the home loan sector, refinancing can be a good move.
There are a number of reasons why you might want to refinance: you can consolidate debt from high-interest credit cards into a home loan with a lower rate of interest; you can release cash from your home loan equity for other major purchases; or you might want to simply save on your repayments by moving to a loan with a lower interest rate.
What’s my rate?
If you aren’t 100% sure exactly much you’re paying, how can you find a better deal?
Luckily, finding out your interest rate can be as simple as logging on to your bank’s online banking portal and checking the account information for your home loan.
What do I need?
Make a shopping list of the features you want in a new loan.
These might include:
Variable rate or fixed rate: a fixed rate gives you more certainty over the longer term; a variable rate can save you money when the market is down, but it fluctuates with the market and in the past has been as high as 18 per cent.
Offset account: cash in hand can be offset against your loan balance until you need to spend it, potentially saving interest.
Line of credit: if you have a lot of equity in your house, a lender might be prepared to offer you a useful (and cheap) line of credit secured against the property.
Repayment flexibility: repaying a loan fortnightly rather than monthly can save thousands. There are 26 fortnights in a year, but only 12 (not 13) calendar months, so you pay the principal off quicker (and therefore pay less interest) when you make fortnightly repayments.
Ability to pay the loan out early with minimal penalty.
What’s on offer?
A good broker will be able to help you choose the type of loan you want, how much you want to borrow and what extra features you need, then compare loans from many different lenders, with information on interest rates and fees and charges. This can help you weigh up the costs and benefits of each loan.
They’ll do all the legwork for you, providing you with a list of solutions that cater to your particular financial needs, getting rid of any confusion and hassles throughout the process.
Check out the costs of getting out – and getting in.
If you took out your loan before 30 June 2011, the lender might be able to charge you an exit fee for terminating early. And if you’re on a fixed rate mortgage, you might have to pay a break fee.
There may also be establishment fees for the new mortgages you’re considering, and you may find yourself paying higher ongoing fees, sometimes called administration fees. Some lenders also charge a fee each time you redraw on your loan.
The best thing to do is speak with your broker, as they’ll be able to advise you of any and all fees that are involved.
Do the maths – it is quite important.
Use an online mortgage calculator to work out what the repayments will be for different loan amounts at different interest rates.
Compare the fees and charges, too – these can add up, and may offset any interest rate savings over the life of the loan.
The Australian Security and Investment Commission’s MoneySmart website has a
useful mortgage switching calculator that can help you assess the cost of switching your mortgage.
You can also ask lenders for key facts sheets, which explain the total amount to be paid back over the lifetime of a loan, repayment amounts and fees and charges.
Speaking to a broker provides a clear advantage.
At the end of the day, a good broker is able to guide you through the entire refinancing process, from start to finish. They have in-depth knowledge and understanding of mortgages, and will help you get the best possible outcome.