Variable Rate
The most common interest rate type in Australia is the variable rate. Under this form of interest rate, the initial and ongoing rate is set by the lender. The lender has the right to change the interest rate during the life of the loan.
Advantage: Variable rate loans generally have no restrictions or penalties for making additional repayments on your loan; therefore you may be able to pay off your loan sooner. Subsequently, variable rates will obviously advantage you if interest rates fall as your monthly minimum repayment will also decrease.
Disadvantage: Variable rate loans will disadvantage you in a rate rising environment, because your repayments will increase.
Standard Variable
This is the most common form of loan account, which generally includes a number of features that some clients may find useful.
Basic Variable
Basic loans generally have an interest rate lower than a standard loan. These loans provide less features than the standard variable option. In comparing between a standard and basic loan product, you will need to consider your expected usage patterns. Most Basic Variable products have a Redraw facility.
Packages
Many lenders offer packages that provide a range of products such as a loan account with a discounted rate, credit card and savings account. These products usually come with an annual fee, typically ranging from $300 to $500 per annum. In order to determine whether these packages are for you it is always best to undergo a cost comparison.
Fixed Rate
Most lenders offer fixed rate loans with the most popular being for 1 to 5 year terms. At the end of the term, the interest rate usually converts to variable. On a fixed rate loan, your interest rate remains the same during the entire fixed rate term. The fixed rates offered by lenders can be either higher or lower than the variable rate at any given time; therefore you need to make a comparison when considering this option.
Advantage: With fixed rate loans you are not impacted if the variable rate increases. Fixed rates provide the borrower with certainty of payments for the fixed rate period.
Disadvantage: If variable rates decrease you will not receive any benefit, as your fixed rate will remain the same. If market variable rates fall over time, it is possible that your fixed rate could be higher than the current variable rate, so a fixed rate loan could cost you more. Furthermore, you generally cannot make additional repayments on the loan without incurring penalties.
Breaking fixed rate contracts within the fixed rate period can also incur Economic/Break Costs by the lender.
Introductory / Honeymoon Rates
Advantage: Many lenders offer reduced interest rates for a limited time at the beginning of your loan, generally for periods between the first 6 to 24 months. This can provide a useful benefit for you, by freeing up some cash to help get your new home established.
Disadvantage: The revert rate after the introductory period can sometimes be higher than the prevailing market rate. Therefore, you need to weigh up the pros and cons, to work out whether the benefit of a reduced rate at the beginning, is worth the additional cost of a higher rate later. It is essential that you conduct a mortgage check after the introductory period.
Lo Doc / No Doc Loans
Suitable for borrowers who are unwilling or unable to provide verification of their income. Generally only available to people who are self employed, or casual employees. For these loans, you may need to provide the lender with a statement confirming your income or a statement that you are able to meet the proposed loan repayments, with little or no requirement to provide documented evidence. Compared to full doc, these loans generally carry a higher interest rate and are available only at lower Loan Valuation Ratios (LVRs) meaning a greater deposit/equity must be available.
Line of credit / equity access
These accounts provide you with a “reserve” of credit on your account, than canbe drawn down at any time. Some line of credit loan accounts provide flexible repayment alternatives allowing you to manage your cash flow. Most lenders charge extra for line of credit accounts, either by way of a facility fee, undrawn funds fees and/or a higher interest rate. In many cases, a standard loan with redraw can provide features similar to a line of credit at lower cost, so make sure you compare the options carefully.
Loan Product Features
Top-Ups
This facility allows you to increase the credit limit of your existing loan account. Most lenders will require an updated application and they will reassess their credit decision, following all or some of the steps that were taken when the loan was initially approved.
Portability
This facility is designed to help if you decide to sell your existing home and buy a new one. Portability allows the new property to be set up under the old loan. Before utilising the portability facility, it’s probably a good idea to shop around, because it is possible that there may be more competitive loan products on the market. An advantage of portability is a potential ability to avoid deferred establishment fees in discharging your old loan and to avoid establishment fees in setting up a new loan. However, keep in mind that there may still be some government fees to be met.
Redraw
A redraw facility allows you to make additional withdrawals from your loan account. The amount you can redraw is generally limited to any additional repayments that you have made during the course of the loan. Some lenders impose a minimum redraw amount, limited number of free redraws, or fees per redraw.
Offset
Helps reduce interest costs on a loan by linking the loan to a transaction or deposit account. The balance in the transaction facility ‘offsets’ the loan principal amount. Interest is then calculated on the loan principal minus the balance in the transaction/deposit account.
Principal & Interest vs Interest Only
The most common loan type is principal and interest where you repayments are applied to pay interest and also to pay off the loan principal over the life of the loan. It is also possible to obtain an interest only loan, which have lower repayment requirements because you only have to pay the interest. With an Interest Only loan, the loan balance does not get “paid off”. Some lenders will apply special conditions to IO loans, such as a restriction on the term of up to 5 years and restricting availability only to finance investment properties.
Split Loans
Most lenders will allow you to take out a split loan, which is a combination where part of the loan balance is treated as variable rate and part is fixed rate. This can offer the advantage of hedging if you’re not sure about which option is suitable.
Lenders Fees & Charges
Application fees – payable at the time of application.
Establishment / settlement fees – payable when the loan is settled.
Loan documentation / Lender’s legal fees – payable to cover the lender’s cost of producing the loan documents.
Valuation fees – payable to cover the lender’s cost of assessing the value of your property.
Lenders’ Mortgage Insurance (“LMI”) premiums – payable to cover the lender’s cost for LMI premiums.
Mortgage registration, transfer fees & mortgage stamp duty – payable to the applicable state government.
Interest – this is a most important cost to consider in your mortgage purchase decision. The interest rates offered by different lenders are highly competitive and may vary considerably. Different rates may apply depending on the product that you select and even a small difference may enable you to save substantial amounts of money over the life of the loan.
Account keeping fees – Some lenders charge a fee, usually monthly, to operate your loan account.
Annual facility fee – Some lenders charge an annual fee for your loan account, or for a package of different financial products.
Transaction fees – Some lenders charge fees when you transact via your loan account. These fees might be to withdraw extra money (for example, redraw fees or EFTPOS/BPay transactions), or to pay extra money into your loan account.
Penalty charges – Many lenders impose penalties under certain circumstances. These include fees for missing a scheduled loan repayment and making an inward payment that is dishonoured. Penalty interest rates generally apply if you have missed scheduled repayments.
Lender’s discharge fees – these fees cover the lender’s cost of paying out your loan.
Deferred establishment fees – these fees may apply if you decide to pay off your loan early, usually within 3 to 5 years of establishing the loan. The fees are generally calculated as a % of the initial loan amount and sometimes reduce over time. The costs can be substantial; therefore you should consider them carefully if it is possible that you will pay off the loan within 5 years.
Discharge registration fees – these government fees are charged for the releasing the mortgage/s held against your property/ies.