Type of Home Loans at Morphett Vale
Variable Loan
The variable rate loan is highly popular in Australia, with its interest rate tied to the official cash rate set by the Reserve Bank of Australia (RBA). Lenders adjust the interest rate based on how global money market forces affect their institution. Consequently, borrowers experience fluctuations in their loan repayments over the loan's duration. For example, if the RBA alters rates by 0.5%, the interest rate on a standard variable loan may change accordingly.
There are two main categories of variable rate loans: standard and basic.
Standard variable rate loans have higher interest rates compared to basic variable loans due to their additional features and flexibility. Lenders may offer varying features with their standard variable loan products, so borrowers should carefully evaluate each loan based on their specific needs.
Basic variable rate loans, on the other hand, lack certain features found in standard variable loans or may have more restrictions and higher fees. As a result, these loans typically have lower interest rates but limited flexibility.
Fixed Rate (Principal and Interest) Loan
A fixed rate loan is a loan that has a fixed interest rate and therefore fixed loan repayments. The time period of these loans can vary, but you can usually “lock in” your repayments for between 1-5 years. Although the fixed rate period may be 3 years, the total length of the loan itself may be 30 years. At the end of the fixed loan period you can decide whether to fix the loan again for another period of time at the current market rates or convert the loan to a variable interest rate for the remaining time left of the loan.
Pros:
- Repayments do not rise if the official interest rate rises
- Provides peace of mind for borrowers concerned about rate rises
- Allows more precise budgeting
Cons:
- Repayments do not fall if rates fall
- Allows only limited additional payments
- Penalises early payout of the loan
Split Rate Loan
A split rate loan lets you divide your home loan between fixed and variable rate components.
This can be a way to enjoy the best of both worlds – the certainty of a fixed rate and the flexibility and features of a variable rate loan.
What are the pros and cons of a split rate loan?
Pros:
- Provides some peace of mind for borrowers concerned about rate rises
- Provides more certainty in budgeting than full variable loans
- Can make additional payments on variable portion of the loan
Cons:
- Allows limited additional payments only
- Repayments will rise with rate rises on the variable part of the loan
- If interest rates fall, repayments on the fixed rate portion of the loan will remain at the higher fixed amount
Interest Only Home Loan
You repay interest only on the principal during the term of the loan; therefore, repayments are lower than with a standard principal and interest loan. At the end of the interest only period – usually one to five years – you must start making Principal and Interest repayments over the remaining term of the loan.
Pros:
- Lower repayments initially so you have more money to renovate/improve the property.
- Cuts the cost of buying a residential investment property in the short-term, which could allow you to make greater contributions to your principal place of residence.
Cons:
- There will be sudden increase in repayments at the end of the Interest Only period and the loan converts to Principal and Interest repayments.
- Lenders will assess your ability to repay the loan only on the principal and interest repayments. This can reduce your borrowing power, as these repayments will be higher than a loan on Principal and Interest for the full term.
Line of Credit Loan
This type of property loan revolves around equity built up in your property and allows access to funds when needed. These products are creative ways to raise funds for investment by providing cash up to a pre-arranged limit. Each month the loan account balance is reduced by the amount of cash coming in and increased by the amount paid on the credit card or withdrawn in cash. As long as there is consistently more cash coming in than going out these accounts can work well. However, they can be very costly if the balance of the line of credit is not regularly reduced. It requires an interest-only payment as a minimum each month, which can add up to a lot of interest over the long term.
Pros:
- Use the money you need and pay it back when you can
- Home loan interest rates tend to be lower than credit cards or personal loans
- Offers flexibility
Cons:
- Possibly reduces equity in your residential property
- Usually higher interest rates
- Need to be disciplined to make principal payments regularly
- Can be very expensive if not used carefully
Non-Conforming Loan
People with poor credit ratings often have trouble sourcing a home loan. Many lenders now offer what are known as ‘non-conforming loans’ for people in this type of situation. While lenders are willing to overlook prior credit problems, they will want to see some evidence of your ability to repay the loan. A larger deposit than is required for traditional loans will generally be required also.
Pros:
- Overlooks poor credit rating
Some people with a poor credit rating may struggle to be approved for a traditional home loan as they are perceived as a greater risk to the lender. But not all is lost, as a non-conforming loan allows these people to secure a loan as lenders can use other evidence of your ability to repay a loan. A larger deposit is often needed as a sign that you are able to repay the loan and a higher interest rate is needed to offset the risk for the lender.
Construction Loan
Construction loans, also known as owner builder loans, are different from regular home loans, due to building works requiring ongoing payments as the construction progresses. In the case of a traditional home loan, the entirety of funds will be made available in a single lump sum, while a construction loan lets borrowers draw on the loan balance when payments need to be made to the builder. These payments are made at key stages of the building process and are known as progress payments.
While work is still in progress, you will only be asked to make interest repayments on money that has been drawn down. This means you will only be paying interest on money that has been used. Therefore, repayments will be smaller at the start of your loan, and will increase gradually as your construction project approaches completion.
Bridging Loan
If you are buying a new property whilst you are still looking to sell your existing property, you might want to look into something called a bridging loan. A bridging loan is a short term loan that gives you up to 6 months to sell the existing property, helping you navigate this awkward time as you transition to your new home. Two key reasons to take out a bridging loan
1. Interest capitalisation
If your servicing capacity is not quite enough to cover the repayments on both properties, a bridging loan with an interest capitalisation feature may be a suitable solution, to allow you some financial breathing space while you wait for the sale of your existing property.
2. 100% loan on the new property
A bridging loan can allow you to borrow up to 100% of the purchase price of your new property, plus the associated costs. This is particularly useful if you've purchased a property that is outside of your current borrowing capacity, but will become affordable once you've sold your existing property.
Low Doc Home Loan
As the name suggests, a low-doc loan is a loan suited to borrowers who may find it difficult to provide the paperwork needed for a traditional home loan such as investors or self-employed borrowers. Lenders will use other sources of documentation to consider your suitability for a loan.
Low Doc home loans are often perceived as higher risk by the lenders, because the income of the borrower cannot be substantiated by conventional means. As a result, a Low Doc loan would usually have a higher-than-average interest rate; plus more limitations in terms of the maximum Loan to Valuation Ratio (LVR), available loan features and package discounts.
What are the pros and cons of low doc loans?
Pros:
- Simple income declaration form
- No tax return or financial records required
- Fully serviceable loan options, redraws, line of credit, variable or fixed rates
- Principal & Interest or Interest-only loans
Cons:
- Generally a higher interest rate and potentially fewer features
- Not every bank or lender offers low doc loans
Introductory Loan
Some lenders will offer home loans with a particularly low interest rate for a short period at the beginning of the loan term to attract borrowers. Also known as a honeymoon rate, this rate generally lasts only for around 12 months before it rises and reverts to standard variable rates.
What are the pros and cons?
Pros:
- Usually the lowest available rates
- When payments are made at the introductory rate, the principal can be reduced quickly
- Some lenders provide an offset account against these loans
Cons:
- Payments usually increase after the introductory period
