Nila Sweeney

Variable rate
"A smart option in a declining interest rate climate, variable rate loans offer the flexible features such as unlimited voluntary repayments and access to the redraw facility. A basic or ‘no frills’ loan is around 0.7% lower than a standard variable loan, and is ideal for first homebuyers and owner-occupiers, but beware higher discharge fees in the first three years."
Martin Castilla, personal mortgage adviser and franchisee with Smartline, and guest lecturer in property financing with TafeSASA and The Property School (NSW)

Key features
Variable rate loans have traditionally had interest rates which, over the life of the loan, track the interest rate movements set by the Reserve Bank of Australia (RBA ). Due to the increased costs of funding caused by the US sub-prime crisis, many bank and non-bank lenders across Australia have raised rates independently of the RBA.

Despite higher rates, standard variable rates remain the most popular loan product in Australia, with almost half of borrowers opting for this type of mortgage.

There are two types of variable rate loan. These are standard variable and basic variable.

Standard variable rate loans carry flexible features such as offset, redraw, extra repayments and the ability to split the loan.

Basic variable loans carry cheaper rates but often lack flexible facilities.

Advantages
If the RBA cuts interest rates, your repayments will probably also drop. Variable rate loans are generally cheaper than fixed rates. The flexibility in repayment without penalty is handy if you want to pay off your mortgage quicker and reap substantial savings in interest.

Considerations
If interest rates go up, the extra rate rise is charged on a monthly basis and added to the loan, making repayments higher. However, some variable rate loans can be capped.

Suitable for
All types of borrowers who can allow for a marginal rate increase but wish to benefit if rates decrease. First homebuyers should ensure they could service their loan should rates increase.

Introductory rate
"These products look appealing, but borrowers should exercise caution and consider the full details, eg, comparison rate, reversionary rate after the expiry of the introductory rate period and their capacity to meet repayments once the reversionary rate kicks in. It’s important that the borrower understands that any upfront savings could be negated if they pay off their loan early. These loans work best where the borrower’s core debt is likely to be substantially lower than the opening loan balance (due to the sale of other property or shares in the foreseeable future)."
Ken Sayer, MD/CEO, Mortgage House of Australia

Key features
Also known as 'honeymoon rates', these loans usually offer the lowest interest rates available in the market. Interest rates are discounted for a certain period of time, which can vary for the initial months of the loan, depending on the institution and the product structure. After this 'honeymoon' period, the interest rate reverts to the standard variable rate, which is higher.

Advantages
The main benefit is that you have a softer introduction to having a mortgage because you’re paying lower instalments during the intro period. This can help you get ahead financially during those first few months.

Considerations
When the 'honeymoon' period ends, the interest rate is likely to be higher. It's important to find out what the revert rate is to ensure you won't be paying a higher rate than the standard variable rate in the market, thus cancelling out any savings. Also check to see if the loan rolls over to a fixed or variable rate product.

Ask your lender about the costs of discharging or switching the loan, and whether you’re able to make extra repayments during the introductory period. You need to assess what the benefits are going to be over the long term rather than the short term.

Suitable for
First homebuyers who are breaking into the mortgage market would benefit from the lower intro rates while they get used to paying their mortgage. Intro loans are also worth considering if you're refinancing and need a short-term financial boost.

Construction
"Most of those embarking on construction use a mortgage to buy land and hire a builder to construct their home, and a small number owner build. Payments to the builder are made in stages. The required repayments during the construction period, while the loan is still being drawn down, generally only cover the interest cost. At each stage, the borrower must provide the lending institution with a completed Loan Disbursement Authority and a builder’s invoice. The lender may also come out to inspect the progress before paying the builder."
Kristy Sheppard, senior corporate affairs manager, Mortgage Choice Limited

Key features
Designed for borrowers building a new home or planning major renovations to their existing dwelling, these loans carry variable rates and feature an interest-only repayment structure during the construction phase. After the project is completed, the loan reverts to principal & interest (P&I). Unlike standard home loans, the funds will be drawn down in stages rather than as a lump sum payment.

Advantages
You only have to pay interest on the money you've drawn out rather than on the total mortgage amount. You're also allowed to make unlimited repayments during this period.

Considerations
Because construction loans are variable rate loans, if rates go up during construction your repayments will also rise. These loans don't allow you to convert to fixed term during this phase. Since you're only paying interest on the amount you've drawn out, you're not significantly reducing your total debt.

Suitable for
As the name implies, construction loans are suitable for those undertaking major capital works on their property.

Low- and no-deposit
"Commonly known as 100% finance or 95% finance, these loans assist borrowers with little or no deposit to buy a property. They can be a product themselves or a policy applied to a product, like a standard variable rate loan as part of a Pro Pack. As they are a higher risk for a lender, the mortgage insurance cost that goes with these loans is much higher. They are most often used by first homebuyers or investors looking to fully maximise their debt against one property. Depending on your aims, this can be the perfect product (especially if at a discounted rate). Check the exit clauses first."
Sarah Eifermann, mortgage planner, SFE Loans

Key features
Low-deposit loans require a minimum deposit of 3–5% of the purchase price plus costs. Many lenders accept non-genuine savings, which means you can use gifts in lieu of personal savings. Because you have some equity, the lenders mortgage insurance (LMI) fee is also reduced.

No-deposit loans, which come in the form of 100% and 100%-plus, don't require genuine savings, and you can use government grants and gifts to offset the costs incurred. With a 100% loan, you’re borrowing the entire value of the property but still have to pay for the costs involved in buying a home. A 100%-plus loan enables you to borrow the costs if you don’t have enough money to pay for the property and purchase costs, including LMI. Typically, LMI can’t be capitalised on 100% loans and, if it's required, borrowers may need to consider 100%-plus loans.

Advantages
These types of loans enable you to get into the property market sooner. By borrowing the entire value of the property through a 100% loan, you only have to save for the costs associated with buying, or nothing if you take out a 100%-plus loan.

Considerations
The less money you put in upfront, the more you'll borrow, and the more interest you’ll pay in the long haul. Generally, interest rates on higher lend products are above the standard variable rate. You’ll be required to take out LMI to compensate for the added risk in taking out a loan to 100% of the property’s value. Generally, this will be 2.5% of the loan amount.

Suitable for
Those capable of meeting their home loan repayments but whose deposit is small or who haven't saved a deposit

Low- and no-doc
"Low-doc loans are designed to assist people who don't meet the income criteria for a traditional home loan. Low-doc loans require the application to be made in writing, but don't require applicants to provide much paperwork, such as proof of income, assets or liabilities. The low-doc loan relies more on self- verification, where you state your income without the verifying documentation. They are designed to benefit those who have some existing equity or deposit saved and have trouble showing evidence of regular income. This could apply to the self-employed or casual workers"
Lisa Montgomery, head of marketing and consumer advocacy, Resi

Key features
Aimed at self-employed borrowers, a low-doc home loan is exactly that – it requires far less documentation to prove your income, savings history and capacity to repay the loan. No-doc loans operate in much the same way, but differ primarily in the amount of documentation required to convince lenders to write the mortgage.

While low-doc applicants must show evidence of either business or personal income through bank statements or tax returns, no-doc loans operate on the principle of self-verification. A statement signed by you declaring your business income will suffice.

Advantages
Low-doc and no-doc loans allow creditworthy borrowers who are unable to provide full financial documentation to obtain a home loan. They’re extremely handy for self-employed people who, for whatever reason, would prefer not to disclose the source of their income. Borrowers aren’t required to disclose their income or assets and liabilities.

Considerations
Low-doc and no-doc loans may attract higher interest rates, depending on the level of risk perceived by your lender. You may also have to pay extra fees and charges, including 'risk fees'. Low-doc loans of most mainstream lenders also require a clean credit history.

Suitable for
These loans are suitable for those who struggle to verify their income to lenders, including the self-employed – particularly those experiencing timing delays in preparing their tax returns. They're also designed for contract and seasonal workers, or families who have just moved to Australia.

Credit-impaired
"Credit-impaired or non-conforming loans are for people who don't meet mainstream lender's strict lending criteria, including people with a bad credit history, a history of late repayments, loan defaults or possibly even formerly bankrupt. Rates for these loans are much higher then traditional "conforming" loans"
Sebastian Farini, general manager, Austral Credit Union

Key features
Home loans for the credit impaired are in most cases no different from mainstream loans in the variety of choices that are available, such as variable rate, fixed rates or line of credit (LOLOC). They also offer similar functionalities such as redraw and offset facilities. They’re targeted at borrowers who have had credit problems in the past and may have difficulty qualifying for a regular home loan.

Advantages
Borrowers who have been rejected by a mainstream lender due to their poor credit history such as bankruptcy or defaults are now able to obtain a mortgage to fund their home purchase or property investments.

Considerations
Interest rates tend to be higher due to the risk factors taken into consideration. Lenders call this the ‘rate for risk’ model, which means that the higher the perceived risk that you may default on your repayment, the higher the interest rate you'll be charged.

Suitable for
If you have a less-than-perfect credit history and are having some financial difficulties, these loans may be a viable option.

Fixed rate
"As the name implies, the rate is fixed for a particular period, and will not increase or decrease during the fixed rate period. This product is suitable for borrowers who can budget, and know exactly what they do have to pay each month. Ideally you fix and forget. Borrowers must be aware that fixed rate loans can be expensive to discharge, as the penalty for an early discharge can run into thousands of dollars. Early repayment penalties must be fully understood before entering into a fixed rate mortgage"
Iain Forbes, director of sales and marketing and founding director, Australian First Mortgage

Key features
Fixed rate loans are priced according to a pre-determined interest rate, which is independent of fluctuations in the official cash rate. You can fix your entire loan for a period of between one and five years, or you can fix a certain portion and leave the rest variable. When the fixed term expires, the fixed portion will generally revert to the prevailing variable interest rate.

Advantages
If you're worried that interest rates may rise in the next few years, locking in an interest rate by fixing a portion of your loan is an insurance policy against rising repayments. At present, fixed rates are almost on par with variable rates. Although there’s normally a fee charged for fixing a loan, the added certainty fixing brings makes these loans attractive.

Considerations
Besides a fee for setting up the fixed and variable portions should you choose a split loan, you’ll be charged if you leave the fixed term before it expires. Fixed rates have been criticised for their lack of flexibility. They can lack features and charge fees for transactions such as redraw and lump sum repayments. This is changing, but check with prospective lenders to make sure the fixed product contains the features you require. While you’ll be insulated from rate rises, you won’t benefit if rates drop during the term.

Suitable for
Anyone who's concerned that interest rates may rise in the near term, or who needs to know exactly what their repayments will be.

Line of credit
"A line of credit is like having a large revolving overdraft against your home. Used wisely, a line of credit can save you thousands in interest over the term of your mortgage by depositing your income and any additional funds into the account and only drawing out your minimum requirements. This does require a level of discipline. A line of credit also opens up the equity that you may have built up in your home over a period that can be made readily available for any purpose including extending/renovating your home adding further value to your asset"
Robert Slocombe, head of strategy, product and marketing, AMP

Key features
A line of credit (LOC) allows you to access additional funds by drawing on the equity value of your home. Setting up a LOLOC involves fixing a limit on how much you can borrow – generally, it’s a fixed percentage of your loan amount. You direct income from all sources into your LOLOC loan account and then draw down funds as and when required.

Advantages
You'll have greater flexibility in managing the size and the timing of your repayments, enabling access to additional funds and even taking your mortgage with you to a new house. Because your entire income stays in your account until you need it, a major portion of your income stays in your loan account longer, and saves you interest. LOLOCs are a great way to fund projects where you need access to your funds in stages over time – such as a home renovation.

Considerations
These products may seem like the best thing since sliced bread, but be warned – most come at a price, and a loan feature may not actually pay off financially. If you're not disciplined with your money, you’re probably best off not drawing down on your home equity.

Suitable for
A LOC is only a sensible choice if you're extremely disciplined in managing your everyday finances. If you’ll be tempted to use the funds for spur of the moment purchases, a LOC is probably not for you.

Equity release
"At the core of the 'rising interest rate, falling property values dilemma' is the fear of running out of equity. Although those products that offer a NNEG (no negative equity guarantee) will shield the borrower from the consequences of owing more that the net realisable sale value of the property, NNEGs fall short of providing a buffer against the total erosion of a home owner's equity"
Craig Swan, director, Seniors Equity Direct

Key features
An equity release mortgage allows you to borrow an amount equivalent to the equity or cash in your home while you still live there. The most popular type of equity release is the reverse mortgage. Repayments don't have to be made until you die or move into long-term care. Then the loan must be paid out in full, usually out of the proceeds of the sale of the property. If you're 60 years or older and own your home, you can borrow 15–45% of the value of your property.

Advantages
You have access to funds, still live in your own home and retain ownership. You're not solely reliant on a pension or superannuation policy.

Considerations
Reverse mortgages are generally more expensive than traditional loans and can be restrictive. If you're not making regular repayments each month, you're not reducing your debt but accumulating interest. To protect yourself, you need to get a 'no negative equity guarantee' from your lender. Members of the Senior Australians Equity Release Association of Lenders (SEQUAL) are required to offer this assurance. It's vital to get independent legal advice before taking up this type of mortgage, and to check with Centrelink in case it affects your pension. You may also want to discuss this option with your family.

Suitable for
Retirees who own their home but don't have enough cash for living expenses, and Baby Boomers seeking to retire in the next five years. It's also worth considering if you decide to look at reverse mortgages as a form of superannuation or paying for retirement.

Shared equity mortgage
"As there are no ongoing monthly interest and/or principal repayments, a borrower has the choice of increasing their borrowing power or reducing their repayment levels. As the lender receives their payment through a share of the capital gain when the property is sold or refinanced, their interests are aligned to the borrower's. Only if one does well will the other do well."
Tim Piper, chief general manager,wholesale mortgages, Adelaide Bank

Key features
In a shared equity scenario, there's a mixture of debt and equity. A lender will provide debt for the mortgage in partnership with an equity provider, which will effectively be taking a stake in the house, rather than providing money to a borrower which becomes the borrower's 100% debt.

Advantages
A shared equity mortgage enables the borrower to buy a more expensive property as they're not required to make principal & interest (P&I) repayments on the equity slice of the transaction. Shared equity mortgages are designed to give people access to more expensive property, which would be out of their reach using a traditional mortgage.

Considerations
A shared equity mortgage could be right for you as long as you understand all the implications and are happy sharing the future capital appreciation from your property in return for lower monthly repayments throughout the term of the loan. The main products currently on the market will want around 40% of the capital appreciation in the property in exchange for a 20% equity investment.

Suitable for
Shared equity products offer a viable alternative for cash-strapped homebuyers or owners.

 

 

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