Which home loan is right for you?
What is a home loan pre-approval?
A home loan pre-approval takes the uncertainty out of searching for a property by providing you with an excellent guide to how much you can afford to spend and allowing you to negotiate strongly on price. It is suitable for both auction and vendor-negotiated purchases, and is definitely worth securing before you begin to search for the right property. Most banks and lenders will offer a home loan pre-approval, which generally lasts for three months.
Introductory/Honeymoon Rate Loans
These loans offer a low interest rate for an introductory period, usually for the first year. The introductory rate may be fixed, variable or capped, meaning if interest rates rise, your rate won't go up, and if rates fall you may still benefit. Once the introductory or honeymoon period is finished, the interest rate usually reverts to the standard variable rate, which may be higher than a basic home loan interest rate.
Basic Variable Rate Loans
These are sometimes referred to as 'no frills' loans and offer a lower interest rate but with fewer features and less flexibility. If you require extra flexibility you may have to pay for it.
Standard Variable Rate Loans
The standard variable interest rate quoted by most banks and lenders is the lenders' assessment rate. It will vary between lenders and with market interest rate fluctuations. This type of loan is traditionally the most flexible and may include features such as the ability to make extra repayments, redraw funds or split your loan, and may have a 100% Offset Transaction Account. Some Standard Variable Rate Loans with extra features have a monthly or annual fee.
Line of Credit
Also known as Equity Loans or Revolving Credit, a Line of Credit allows you to draw the loan balance up to a set limit at any time. The lender assigns you a credit limit secured against your property and when you need cash you draw against that limit, usually online, by cheque or debit card. As you pay back the loan, the funds become available again. Repayments can be flexible, however the loan balance, including interest charged, must not exceed the set limit. A line of credit facility forms part of your total loan home loan borrowing amount.
Some lenders offer a discounted interest rate to borrowers dependent on profession, income or the amount of borrowings. This discount is usually a set percentage off the benchmark standard variable rate. Some professional packages may also require you to take out a credit card and transaction account. There is normally an annual package fee for a Pro Pack home loan.
100% Offset Transaction Account
A 100% Offset account is a normal bank deposit account where you can deposit and withdraw your savings and income, the offset transaction account is linked to your home loan account, so that the Interest on your home loan will be calculated on the difference between the balance owing in your variable Home Loan Account and the current balance in your 100% Offset Account. There is no minimum balance for the Offset arrangement to apply and no credit interest is payable on the deposit Offset Account balance at any time. Loans with a 100% Offset Account normally have a monthly or annual fee.
A construction loan operates slightly differently to your standard home loan. With a standard home loan, all loan funds are advanced at settlement. However, with a construction loan, the lender will usually retain all of the funds to construct your property (this is usually for a fixed price building contract amount). Construction funds are progressively drawn down at each stage of construction and paid to your builder.
Family Equity, Family Pledge or, more commonly, a Limited Guarantor Loan, allows a family member usually your parents - to guarantee a portion of your home loan. Your family member offers their property as security for part of your home loan, usually around 20 per cent. This is good for reducing extra costs such as Lender Mortgage Insurance (LMl).
Low-Doc Loans are designed for self-employed or small company borrowers who are unable to provide the required documentation to support a standard loan application. Generally speaking, the less information required, the higher the interest rate and the greater the deposit required.
A Relocation Loan is a temporary loan providing financial cover which allows you to complete the purchase of a new property before selling your existing property. It is also useful for borrowers wanting to finance construction of a new home while still living in the old one. Bridging loans sometimes attract a higher interest rate, as they cover your old loan and the new loan.
Interest Rates on home loans
There are two types of interest rates that apply to home loans - variable and fixed. You can choose whether you’d like a variable or fixed interest rate, or a combination of both, depending on the type of loan product you decide on.
Variable Interest Rates
The majority of home loans in Australia have been taken at a variable interest rate. As the name implies, variable loan rates will fluctuate as the market and the official cash rate does. Therefore, if the official cash rate rises, your loan interest rate may rise and so does your repayments on the loan, and vice versa. Loans with variable interest rates tend to offer more features and flexibility in payment options.
Fixed Interest Rates
This type of interest rate allows you to fix the interest rate you borrow at for a certain period of time within the overall loan term. Fixed terms tend to be from one to five years, however some lenders may offer a 10 year terms. With a fixed interest rate you have the certainty of a set monthly repayment as you are not affected by changes in the official cash rate. This is positive when the official cash rate rises, as your repayments would not increase; however you cannot reap the benefits of a reduced repayment if the official cash rate falls. With a fixed interest rate your loan provider is taking the risk on the market, which is based on their assumptions about future interest rate movements.