HOME LOAN TYPES:
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These notes have been written to provide you with a simple guide to the most common loan types. If you have any questions please email or phone us for more information. There may be variations on these types with different lenders. You should always read your loan contract thoroughly before signing. Always use independant legal advice.
Standard Variable :
Not one of our favourites as better rates can usually be found. These loans were the standard some years ago, but are now rarely used.
Basic Loans :
We like these loans. They are a no frills loan at very good rates and low fees. They have the essential features such as redraws via the internet or phone, and we can usually find a loan with free redraws and no monthly charges. Whilst you can get lower rates for the first year with a Honeymoon Loan (see section below) generally those loans increase to the standard variable rate after the honeymoon period, which is above the basic rate. Most borrowers have their loan for quite a few years, so the savings in the first year is more than offset by costs in later years. Time and time again these loans shape up as the most economical over the long term.
Honeymoon Rates :
These loans have a reduced rate for the first 6 or 12 months of the loan. We consider them to be OK especially if you have the option to switch to a basic variable loan after the end of the honeymoon period. Usually there is a fee for this which takes the joy out of the savings in the honeymoon period. These loan usually sound impressive because of the reduced initial rate, but are usually dearer than most basic loans.
100% Home Loans:
These loans are not available as at January 2009, but we have left the information here for you to read. We hope to see these loans return for selected clients in the future. (These loans are especially popular with first time borrowers. Why? because the idea of borrowing the whole amount required to buy their first home seems attractive. But did you know that mortgage insurance cost is much lower on a 97% loan. To the point where often a 97% loan gives you more in the hand than a 100% loan, plus it leaves you with a lower debt and lower repayments. Don't talk to inexperienced brokers, talk to us so that we can examine your different options to save you money in the long run)
FIXED RATE HOME LOANS:
You can fix an interest rate for a term of 1 to 5 years, and sometimes beyond that. You should really think about these before you jump in. Yes they are attractive when interest rates are rising, and many people do lock in rates for a fixed term. However if have to sell or refinance in the meantime and therefore break your contract, you will be penalised financially by the lender. It can be a problem for them as they have also borrowed in the market at fixed rates to cover your loan, and they will pass any costs on to you. If you have any concerns about "going the distance" with the fixed term think twice before committing. Also if you lock in for more than 12 months, no-one can really predict what may happen with rates over that time. You could be stuck on a high rate while everyone else is enjoying low variable rates.
There are the possible benefits, and these are: -
- You may save considerable interest if you fix at low rates and then the rates rise for the term of the fixed rate.
- You may be able to afford a larger loan if you fix for a longer term as lenders will take the fixed payments into their calculations, instead of using payments that include a buffer.
Interest Only Loans:
If you borrow money, it has to be repaid at some point. That said, we consider that there are occasions where paying interest only has a real benefit.
- If you think that you will struggle to meet commitments, you can take your loan "interest only" for the first year or two. By then your income should have increased sufficiently enough to handle the higher payments. This can be a good option for your first home.
- It can be a good tax option for investors. Discuss this with your accountant if in any doubt.
Line of Credit:
This was the preferred option for borrowers some years ago, but really a basic loan with an offset account is cheaper, and if used correctly has the same benefits. It still seems to be a bit of a status symbol for some borrowers, but you will pay for that status.
When you are building a house, your loan will be called a "construction loan" until such time as construction has been completed. You are not usually asked for repayments during the construction period, unless the work is unduly delayed (eg builder goes into liquidation). In that case the lender may look for interest only payments to keep the loan balance in check. At the end of the construction, the loan will revert to whichever type of loan that you have chosen, and regular payments will commence.
Most lenders offer the ability to split loan amounts. IE if you borrowed $50,000 for your house, and $50,000 for your business, instead of taking out one loan of $100,000 you can set your loan up as two loans of $50,000. This is ideal for borrowers who need or want to isolate loan amounts for tax or other reasons.
Yes we do arrange these loans, however you must be at least 60 years of age before you can access them. You do not need an income and credit defaults don't usually matter. We only use reputable banks and members of SEQUAL for these loans so that the borrowers are protected at all times. These loans have become accepted by the public, and will grow in popularity with finance savvy retirees who want to maintain their lifestyle.
Incredibly popular loans with the self employed, investors, and now even wage earners are using them to access finance that was until recently denied to them. You do need good equity in a house, but only need to sign a declaration stating your income. Excellent for income earners who know what they earn, but cannot prove it in the normal manner.
Similar to Low Doc but you don't state you income. You just declare that you are able to meet your existing and proposed commitments. Generally these loans are for borrowers with substantial assets. These loans are now very difficult to obtain, if at all.
All of the above loans are available through non-conforming lenders. The difference is that non conforming lenders will accept defaults and credit problems that mainstream lenders won't accept. They may also accept income streams that banks won't. Interest rates are usually higher and scale up according to the risk evaluation. You will really need a broker (preferably us) to guide you through these lenders as product profiles and lending policies vary greatly.
Also see vendor loans below. We do have some private lenders, and some institutions that we deal with who also have private label loans that they manage. We prefer to use these lenders for short term situations, or as a stop gap measure to clean up a bad credit situation before we arrange traditional finance. There are no hard or fast rules here, and each one is taken on a case by case basis. We urge you to take your own solicitors advice before you accept private finance.
Vendor Loans :
This is really here for information only. We don't arrange these loans. This is when a vendor will lend either in full or part, and may take a first mortgage to secure that loan, or a second mortgage where another lender is involved. We have seen examples of these loans where the transaction has been completely upfront, transparent, and beneficial to all concerned. We have also seen examples where this is not the case. Use your own solicitor if you wish to use this method of finance. Do not use the vendors solicitor even if it is free. A solicitor can only act for one party at a time. If the vendor is paying the legal fees, guess who the solicitor is acting for. Be warned...
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