Types of Loans

Standard Variable Rate Loans Basic Variable Rate Loans Fixed Rate Home Loans
Honeymoon or introductory rates Line of Credit Construction Loans
Low Doc Home Loans? Split Home Loans What is Refinancing?
What is Debt Consolidation? First Home Buyers  

Standard Variable Rate Loans

AI Mortgage Services

Probably the main advantage of variable rate loans is that there is no penalty in paying the loan off quicker by making additional payments.

Importantly when interest rates are reducing, reductions in your loan repayments may be possible, however if you leave your repayments at the higher level, you will reduce your loan faster as more of your repayment will be going towards the principle and not interest.

Other useful features can include offset accounts, a split loan facility (mentioned below), redraw facility, direct salary crediting, portability and repayment options.

Benefits of Standard Variable Rate Loans

  • The redraw facility means you have easy access to extra funds if required.
  • Increasing your repayments above the agreed amount can shorten the term of the loan and save thousands of dollars in interest.
  • If you want to sell your existing house and buy another one you can often take the loan with you saving on loan fees.
  • It is easy to vary the repayment periods to suit your paydays etc.(weekly, fortnightly, monthly).

Back to Top

Basic Variable Rate Loans

Whilst standard Variable rate loans offer flexibility, low fees and moderate interest rates. With a Basic Variable Rate Loan you generally trade flexibility and low fees for a slightly lower interest rate.

Importantly when interest rates are reducing, reductions in your loan repayments may be possible, however if you leave your repayments at the higher level, you will reduce your loan faster as more of your repayment will be going towards the principle and not interest.

Other useful features can include a redraw facility, direct salary crediting, portability and repayment options. Most Basic Variable Loans do not include offset accounts or a split loan facility. Account keeping fees are usually higher than Standard Variable Loans and so are Redraw fees.

Benefits of Basic Variable Rate Loans

  • The redraw facility means you have easy access to extra funds if required (at a cost).
  • The Interest Rate is usually the lowest of all types of home loans.
  • If you want to sell your existing house and buy another one you can often take the loan with you saving on loan fees.
  • It is easy to vary the repayment periods to suit your paydays etc.(weekly, fortnightly, monthly)

Back to Top

Fixed Rate Home Loans

A Fixed Interest Loan allows you to fix the interest rate for a set term (usually 1 - 5 years) unlike a variable rate home loans where the interest rate varies according to market forces. When the loan reaches the end of its term you may be able to roll over into a new fixed term loan at the prevailing interest rate, or convert to a variable rate loan.

Fixed interest loans are popular when interest rates are rising and borrowers want to lock in a rate that will insulate them from excessive rises in repayments. However no-one has a crystal ball which can accurately predict future interest rate rises. Locking in an interest rate is a two edged sword. Interest Rates can rise or fall. One option available to borrowers is to take out a split loan. (mentioned below) Part of the loan can be taken out as a fixed rate loan and the other part as a variable rate loan.

Property investors often like fixed interest loans as they enable them to sleep at night when interest rates are rising. Knowing their future costs assists in budgeting and forecasting projections for investment planning. It can also provide a breathing space and allow time to build cash reserves and make contingency plans.

The unpredictablity of interest rates make fixed rate loans a gamble, but for some borrowers the comfort and security provided is worth the risk.

Back to Top

Honeymoon or introductory rate home loans

Among the many home loan options available, many lenders are now offering home loans with a low introductory interest rate. These have become known as honeymoon rate home loans.

Many borrowers find the idea attractive, as the honeymoon rate home loan offers a substantially lower interest rate for a set introductory period of around six to twelve months. After this initial term is completed, the interest rate generally reverts to the standard variable rate offered by that lender.

The length of the introductory rate, the introductory interest rate itself and the interest rate you pay once the initial period ends, depends on your chosen lender. It's worth shopping around, as different lenders offer substantially different honeymoon rate products.

Back to Top

Line of Credit

A Line of Credit allows you to use the equity you have built up in your home as collateral for further credit and is characterised by flexibility and ease of use. It operates similar to a credit card and is the equivalent of an overdraft facility.

Equity is the difference between what you owe on your home loan and what the property is actually worth (according to the bank!).

The amount of Credit that is available to you depends on the amount of equity you have in your home and your ability to make repayments. Typically you can borrow up to 80% of your home value (or 90% with Lenders Mortgage Insurance) provided you have the financial resources to service the debt.

Line of Credit loans are commonly used to finance a deposit on an investment property, to renovate and increase the value of the existing home, or to purchase expensive items like a car or boat.

Line of Credit funds which are used to invest in assets that appreciate in value can increase your wealth, but inversely can result in greater debt when applied to items that depreciate or have no residual value like cars, boats, spa's, holidays etc.

Back to Top

Construction Loans

A Construction Loan is for people who are building a new home, although some lenders also provide the same type of loan for renovations.

In each case the loan funds are drawn down in stages as the builder reaches agreed construction milestones. The lender uses an independent expert to monitor the construction process and only makes progress payments when the builder has reached certain objectives and met satisfactory standards.

Most lenders only require interest payments on the loan during the construction phase. Depending on the lender, these loans can be done on either Variable or Fixed rate products.

A construction loan helps to minimise your mortgage repayments until your new home is completed, takes control over payments to the builder.

Back to Top

Low Doc Home Loans?

Low Doc (short for Low Document) home loans are targeted at contractors and the self-employed, who often lack current tax and financial records. Traditionally it has been more difficult for the self employed to obtain loans because banks had a preference for borrowers on guaranteed incomes. (ie Wage earners)

The Low Doc Home Loan helps borrowers with irregular cash flow or who may not have current financial statements, providing they have sufficient equity in an existing property or other assets.

Low Doc loans can be variable or fixed rate loans, or lines of credit, and may include an offset facility.

Low Document loans sometimes attract a higher rate of interest than other types of loans because lenders perceive the risk involved to be greater.

Back to Top

Split Home Loans

Split Rate Loans are popular in times of uncertainty about interest rates, especially if rates are moving up, because borrowers can hedge their bets on whether future rate changes will be up or down.

Taking part of the loan out at a fixed interest rate means no matter what happens to Interest rates your repayments for the fixed interest component of the loan will remain constant. This is obviously a bonus when rates are rising.

The second component of the loan is taken out with a variable interest rate. If interest rates fall then repayments for this section of the loan will also fall.

For borrowers this means you have an each way bet on which way interest rates are going to move. If rates go up you are partially insulated and if rates go down you are also partially protected.

Split loans can take some of the stress out of borrowing during times of volatile rate fluctuations. For those on a tight budget it can help you sleep better at night without having to worry so much about loan repayment increases.

Back to Top

What is Refinancing?

Refinancing allows borrowers to obtain a loan better suited to their current circumstances. The rapid increase in homeowners equity due to rising property values in Australia has resulted in a surge of people investigating refinance options. As many as 33% of all loan applications are by people looking to refinance.

Refinancing can be expensive and time consuming due to the amount of red tape involved. Redrawing on an existing loan is much simpler and less expensive, but isn't always an option.

It is extremely important to consider why you want to refinance. Funds that are used to purchase or improve assets are likely to be a good investment. Funds that are used for liabilities like cars, boats, swimming pools or holidays can leave you worse off than you were previously, and financing new business ventures has been a disaster for many people.

Be sure to find out what your existing loan(s) is costing you and compare that with whatever refinancing you are offered. Also compare features of the new and old loans and factor in changeover costs.

Back to Top

What is Debt Consolidation?

Debt Consolidation can lower monthly loan repayments for borrowers with multiple loans.

A typical borrower in Australia is often needing to consolidate their mortgage, credit card debt, store cards, personal loan and car finance into one loan.

If you have equity in your own property to borrow against it may be possible to use debt consolidation to reduce your collective payments.

The key is to have sufficient equity in your home to cover the additional borrowings. It is this equity that provides your lender with security over the extra loans being consolidated into your mortgage.

For people lacking in financial discipline, debt consolidation is only part of the solution to their problems. The cause of the initial problem also needs to be addressed or debt can still spiral out of control.

Back to Top

First Home Buyers

In July 2000, the Federal Government established the First Home Owner's Grant, designed to assist first time buyers with the cost of purchasing a home.

To be eligible for the First Home Owner's Grant, the following criteria must be fulfilled:

  • The purchaser must be an Australian citizen or permanent resident buying or building their first home in Australia.
  • The property must be a recognised house, home unit, flat or other self-contained fixed dwelling, specifically designed for residential purposes.
  • The Grant must not have been claimed previously.
  • The home must be occupied by the applicant within twelve months of purchase settlement or building completion.
  • Application for the Grant must be made within twelve months of settlement or building completion.

The tax-free, one-off payment of $7,000 is not means tested, so any first home buyer who meets all the criteria is eligible. Applications made in joint names will only be entitled to one payment for the single property.

The different State and Territory Governments around Australia also have additional eligibility criteria, such as minimum age limits and periods of occupancy. All are different so check with your local authority for their specific details.

Back to Top