Mortgage managers, banks, credit unions, brokers, insurance groups all offer a seemingly endless choice of loan options – introductory rates, standard variable rates, fixed rates, redraw facilities, lines of credit loans and interest only loans, the list goes on. But with choice comes confusion. How does one determine what the simplest sort of home equity credit is for you?
First, set your financial goals, determine your budget and compute how long you would like to pay a mortgage for. you’ll do that yourself or together with your financial advisor or accountant.
Second, make sure the organization or person you select to get your mortgage from may be a member of the Mortgage Finance Association of Australia (MFAA). The MFAA Member logo ensures you’re working with knowledgeable who is bound by a strict industry code of practice.
Third, research the kinds of loans available so you’ll explore all options available to you together with your mortgage provider. Some home equity credit choices are:
Basic home equity credit
This loan is taken into account a no-frills loan and typically offers a really low variable rate of interest with little or no regular fees. remember they typically don’t offer additional extras or flexibility in paying of additional on the loan or varying your repayments.
These loans are suited to people that don’t foresee a dramatic change in personal circumstances and thus won’t got to adapt the loan in accordance with any lifestyle changes, or people that are happy to pay a group amount monthly for the duration of the loan.
Introductory Rate or ‘Honeymoon’ Loan
This loan is attractive because it offers lower interest rates than the quality fixed or variable rates for the initial (honeymoon) period of the loan (i.e. six to 12 months)
before rolling over to the quality rates. The length of the honeymoon depends on the lender, as too does the speed you pay once the honeymoon is over. This loan usually allows flexibility by allowing you to pay extra off the loan. remember of any caps on additional repayments within the initial period, of any exit fees at any time of the loan (usually high if you modify immediately after the honeymoon), and what your repayments are going to be after the loan rolls over to the quality rate of interest .
These loans are suited to people that want to minimise their initial repayments (whilst perhaps doing renovations) or to those that wish to form an outsized dent in their loan through extra repayments while taking advantage of the lower rate of interest.
Tip: If you begin paying off this loan at the post-honeymoon rate, you’re paying off extra and can not need to make a life-style change when the introductory offer has finished.
This loan allows you to place additional funds into the loan so as to bring down the principal amount and reduce interest charges, plus it gives the choice to redraw the extra funds you set in at any time. Simply put, instead of earning (taxable) interest from your savings, putting your savings into the loan saves you money on your interest charges and helps you pay off your loan faster. Meanwhile, you’re still saving for the longer term . The advantage of this sort of loan is that the interest charged is generally cheaper than the quality variable rate and it doesn’t incur regular fees. remember there could also be an activation fee to get a redraw facility, there could also be a fee for every time you redraw, and it’s going to have a minimum redraw amount.
These loans are suited to low to medium income earners who can put away that tiny extra monthly .
Line of Credit/Equity Line
This is a pre-approved limit of cash you’ll borrow either in its entirety or in bits at a time. the recognition of those loans is thanks to its flexibility and skill to scale back mortgages quickly. However, they typically require the borrower to supply their house as security for the loan. A line of credit are often set to a negotiated time (normally 1-5 years) or be classed as revolving (longer terms) and you simply need to pay interest on the cash you employ (or ‘draw down’). Interest rates are variable and thanks to the extent of flexibility are often above the quality variable rate. Some lines of credit will allow you to capitalise the interest until you reach your credit limit i.e. use your line of credit to pay off the interest on your line of credit. Most of those loans have a monthly, half yearly or annual fee attached.
These loans are suited to people that are financially responsible and have already got property and need to use their property or equity in their property for renovations, investments or personal use.
All In One Accounts
This is a loan which works as an account where all income is deposited within the account and every one expenses begin of the account. The advantage of the beat One Account is its ability to scale back the quantity owed and thus the interest payments while providing a one-stop finance shop where your loan, cheque, credit and savings accounts are combined into one. Normally these loans are going to be at the quality variable rate or slightly higher and should incur monthly fees. remember that if the account is split into the loan account, with credit, cheque and ATM facilities placed into satellite accounts, you’ll got to check your access to funds, what percentage free transactions you receive, and what associated fees the loan may have.
These loans are suited to medium to high income earners.
100% Offset Account
This loan is analogous to an beat One Account however the cash is paid into an account which is linked to the loan – this account is named an Offset Account. Income is deposited into the Offset Account and you employ the Offset Account for all of your EFTPOS, cheque, internet banking, credit transactions. Whatever is within the Offset Account then comes directly off the loan, or ‘offsets’ the loan amount for interest. Effectively you’re not earning interest on your savings, but are benefiting as what would be interest on savings is calculated on a discount on your loan. the benefits are almost like the beat One Account. These loans normally have a better rate of interest and better fees thanks to their flexibility.
These loans are suited to people on medium to high income earners, and to disciplined spenders because the extra money kept within the offset account the faster you pay-off your loan.
Partial offset account and an interest offset account also are available.
This is a loan where the general money borrowed is split into different segments where each segment features a different loan structure i.e. part fixed, part varied and part line of credit. Often called designer loans, you enjoy one or more sorts of loans. Splitting the loan offers a saving on stamp tax and other charges.
These loans are suited to people that want minimize risk and hedge their bets against rate of interest changes while maintaining an honest degree of flexibility.
This loan is out there at a minimum amount to people on higher incomes or people of a selected profession if they meet certain requirements. The advantage of this loan is having the ability to borrow higher amounts with a high degree of flexibility and a reduction on the quality variable rate of interest . the extent of discount depends on the dimensions of the loan, and therefore the duration of the discount depends on what’s negotiated and may sometimes apply for the lifetime of the loan. Generally these products combine all fees into the one annual fee. Lenders of this product usually provide tons of added values like credit cards, discounts on their insurance and investment products.
Tip: If you do not need the extra extras other loan types may offer a far better rate of interest .
Non Conforming Loan
These loans are only available from non-bank lenders where interest rates are higher thanks to the greater risk and shorter lifetime of the loan. The advantage is that they are available to people that don’t fill the normal financial institution criteria. There are two sorts of Non Confirming loans:
1. a coffee Doc Loan usually features a slightly higher rate of interest and costs than the quality rate of interest and can have a maximum borrowing amount and/or will usually only lend 70% of the worth of the property. After demonstrating the power to satisfy the payments the rate of interest will often revert to the quality rate.
These loans are suited to people that don’t wish to disclose their income or have the lack to point out a real income i.e. if you’re self employed.
2. Sub-Prime Loans usually have a way higher rate of interest and costs than the quality rate and typically require you to use an asset as security. they’re supported a wage scale in accordance to the extent of risk of loaning the cash . Refinancing is out there once the borrower can establish an honest payment record.
These loans are suited to people with poor credit histories.
Other Loans and Products within the Market Include:
Construction Loans: For those building a home once you don’t need the whole amount from the beginning – you simply pay interest on what you’ve spent over the stages of construction.
Bridging Loans: For when the sale of an existing property takes place after the settlement of a replacement property – once you want to shop for a replacement home before selling the old one, where the funds from selling the old home are paid straight into the loan for the new home.
Consolidation Loans: Enables you to use your mortgage to consolidate other debts like credit cards, personal loans, car loans etc. – interest rates on the mortgage are usually cheaper than personal loans.
Reverse Mortgage Loans: For those that want to use the equity in their home to supplement retirement income. The loan are often paid during a payment or in individual installments and therefore the lender recoups the payments from the sale of the property when the borrower sells the house , moves out of the house or dies.
* Jennifer Schelbert A. Fin. / Dip. Fin. Serv. /FinMBM may be a director of Mrs. Mortgage, a licensee for Choice Aggregation Services, a member of COSL and a Full Member of the Mortgage & Finance Association of Australia.
Phone: 61 3 9315 970
Disclaimer: This document is for information purposes only, and must not be relied upon as a substitute for professional services or legal advice.