Home Loans & Investment
When it comes to home loans at Auswide Credit & Finance, we believe in making sure you are getting the best deal possible. When it comes to finding a mortgage, the possibilities are endless. From standard variable rates to fixed rate loans we are here to help you find the right home loan.
However, being overwhelmed by choice doesn’t mean you should take whatever is offered to you first. Contact us for information about different types of mortgage loans and we’ll be happy to explain them and help you find one that suits your needs and preferences.
Types of Loans
This loan type is the most popular and common type of loan available. Most Advertised loan rates refer to this type of loan.
The loan term is usually 30 years. The interest rate varies with market fluctuations. The interest rate is often referred to as SVR (Standard Variable Rate).
Obviously with a variable rate loan it will be beneficial if interest rates fall and unfavourable if interest rates rise, however the flexibility and features make this type of loan popular.
With any loan, it is vital to consider the features that are available. If the features are not so important, it may be cheaper to us a basic loan product.
The number of features that can be attached with a standard variable rate (SVR) are the following:
- Additional repayments or lump sum payments
- Direct salary crediting
- Monthly repayments, accelerated fortnightly repayments, true fortnightly repayments, weekly repayments. (Repayments may be altered during the life of the loan to suit your needs.)
- ATM access, cheque access, direct debit access, BPAY
- Offset account (Interest offset)
- Interest only repayments
- Repayments holiday if you are in advance (Repayment pause).
Standard variable rate loans suit those who need flexibility and have a need for the features available.
The basic variable rate loan is as it sounds – Basic. It usually has no monthly account keeping fee and offers a lower rate of interest than most standard variable or fixed-rate loan products.
The basic variable loan has less flexibility than that of a standard variable loan. However, can still offer the following features:
- Interest rate movement with the market
- Additional repayments or lump sum payments
- Redraw facility (usually has a charge)
- Monthly repayments, accelerated fortnightly repayments
- Internet, telephone and branch access
These loans suit those that require less flexibility and have no need for the features available on other loan products. They usually suit first home buyers and clients with a lower loan amount.
Fixed rate loans are those where the interest rate is fixed at a certain rate for a specific period of time. This means the repayments are also fixed at a determined amount for the same time frame.
There are a number of time periods over which you can fix the rate: 1,2,3,4,5 years or even up to 15 years with some lenders.
Once the fixed term period is over the loan will automatically return to a variable rate or you have the option to fix the rate for another period of time.
The most commonly recognised benefit of fixed rates is that they reduce the borrowers risk against interest rates rising (known as hedging). Fixed loans buy the borrower security against the market. They allow the client the certainty of their repayments for that period time. Some clients may be balancing their budget tightly and may want to secure their repayments and not have to worry about the risk of a rise in interest rates. In this situation, it may make sense to fix for a good rate for a short period of time.
If the interest rates rise then the client will be paying less interest and their monthly repayment will be less than if they had a variable rate loan. The downside is that if rates fall below their fixed rate they will be paying more than they could have been paying.
They can be very costly to get out of, with penalties for changing to a variable rate or changing lender during the fixed term (break costs).
Fixed rate loans are much less flexible than variable rate loans and sometimes charge a penalty for additional repayments or limit the amount of repayments that can be made during the fixed period.
It is also common to split the loan have a variable and a fixed portion (combination/split loan). We can discuss these options further when discussing your personal financial situation.
Fixed rate loans offer a number of features:
- Less flexible than variable
- Interest rates do not move with the market for the selected fixed period
- Typical fixed term 1,2,3,4,5 years can be up to 15 years depending on the lender
- Redraw rarely available
- Direct salary crediting rarely available
- Monthly, accelerated fortnightly repayments, true fortnightly repayments, weekly repayments can be available but the client must make sure they do not exceed any repayment limits on the loan or they will encounter break costs.
- Usually repayments are set and cannot be change during the fixed term
- Internet, telephone and branch access
- ATM access, cheque access, direct debit access, BPAY rarely available
- Offset account (interest offset) rarely available, sometimes partial offset is offered
- Interest only repayments
- Portability only if the loan does not change at all
Fixed rate loans suit those that are budget conscious, not risk takers, do not require flexibility and do not intend to change their housing situation within the fixed term.
Lenders offer ability to get a discount off the standard variable rate if a borrower opts to take up a package with them. The discounts vary depending upon the aggregate size of the loan. Discounts are also available on fees such as application fees, switch fees, additional loans, additional valuations on security properties, credit card fees and transaction account fees. There may also be discounts on other products such as insurance, personal loans and financial advice.
These packages have an annual fee. The borrower needs to decide whether they will benefit enough from the discounts offered compared to the annual fee charged.
Packaged loans can have the same features as the Standard Variable Loan.
These loans can suit those that benefit from the interest offset, would like a split in their loan (combination/split loan) or more than one loan, intend on purchasing additional property or can save fees by switching their banking needs. They are most beneficial for those with a loan amount more than $250,000.
A combination loan is where a loan is split into more than one loan account. This combination may contain different types of loans. Commonly, the borrower may decide to have a portion of their loan as variable and a portion to be fixed or perhaps a Line of Credit(LOC). This is called a split.
It is more economical to have combination loans under a package to reduce loan management fees. Otherwise the borrower will be charged any relevant fees for each loan.
These loans suit clients who would like the flexibility of a variable loan or line of credit combined with the stability of a fixed portion. This is a good option for those that want to provide some barrier to the risk of rising rates but are willing to chance some of the risk.
The fixed component will allow the borrower some certainty of repayments, however if rates drop, this portion will still be paid at a higher amount. The variable component allows the flexibility of paying off amounts as desired, but is however vulnerable to rate rises.
They also suit investors who like to keep track of interest paid on the investment portion of their loan for ease of accounting management.
Lo Doc loans are for those self-employed clients that cannot provide the last 2 years financial information (tax returns). Do not confuse Lo Doc Loans with Non-Conforming Loans that are for clients with an impaired credit report.
They are called “low docs” because the applicant is not required to submit all of the supporting documentation that is typically required with a “full doc” loan. In the case of a Lo Doc Loan the client does not have to prove their income. Borrowers are only required to supply the lender with a declaration (which comes in different forms) that they can afford the repayments. They do have to provide all other usual supporting documentation. These loans are for the self-employed applicants and the borrower usually must be self-employed for more than 2 years although this varies with each lender. The borrower must have their Australian business number (ABN) registered for two years or more. There are some lenders that will accept less than this but they will usually only lend up to 70% of the property value.
A co-applicant may be PAYG and they still need to provide the normal proof of income such as pay slips and payment summaries.
Lo Doc home loans are usually slightly more expensive than traditional loans due to the higher risk profile as the information the borrower provides to the lender is less verifiable.
A lender will generally only lend up to 80% of the value of the property if a client is applying for a Lo Doc loan. There are exceptions to this but they are not common and are a more expensive option. Lo Doc Loans have the same features and benefits as a regular variable, fixed or combination/split loan.
Now the main difference is the lending criteria as mentioned. All Lo Doc Loans must be underwritten by Lenders Mortgage insurance, with the client paying the premium for this insurance once the loan is more than 60% of the value of the property (as opposed to 80% for full doc loans.)
A line of credit is a pre-approved loan using the available equity in an owner-occupied home or investment property. The set limit is usually no more than 80% of the value of the property. For example:
Home Value: $500,000
80% of above: $400,000
If a borrower already has a mortgage then the available equity is reduced. For example:
Home value: $500,000
80% of above: $400,000
Current loan: $100,000
Available equity: $300,000
The Line of Credit (LOC) is secured by the mortgage over the property and it operates like a credit card.
There is no defined term over which payments must be made because the borrower may use the funds if and when they choose. (Called evergreen) However, the balance outstanding at any time must never exceed the approved limit.
A Line of Credit of requires borrowers to pay interest only on the money they use. Interest rates are variable and usually slightly higher than the Standard Variable Rate but generally lower than credit cards, even though the available credit limits are much higher.
Some lines of credit also allow borrowers to capitalise the interest until they reach their limit. This means a client may not make any repayments and let the interest charged be added to the amount owed until it reaches the credit limit at which time interest payments must be made. Lenders may require Principal and interest after a period of time.
A Line of Credit is set up in s different manner to a Standard Variable Loan. It is one account only and ALL transactions are carried out in that one account. A borrower has the ability to on the account using a cheque book, ATM or direct debit. As with an offset account the client benefits from all of their income being used to reduce the balance their home loan resulting in reduced interest charges.
The Line of Credit is a very flexible loan arrangement and is suitable for those borrowers that are financially responsible and have no problems sticking to a budget and who are not tempted to spend just because money is available.
This loan type suits investors that may want funds available quickly to invest as they wish. It is common for property investors to set up their loans this way so as equity builds in one property they can use this to purchase additional properties.
The disadvantage of a Line of Credit is that the equity in the home loan may be easily reduced if a client is not disciplined in their spending.
A variation of a Line of Credit is the All-in-One loan. It is set up in the same manner except that there is a specific term and a client must make repayments and the principal reduces so that by the end of the loan term the balance must be zero. This is a safer way for clients that may not be disciplined to benefit from the set-up of a Line of Credit but not be exposed by the risks of overspending.
A home equity loan is another name for any loan taken out against a property for personal use such as home improvements, deposit and costs of an investment property, paying for an education and medical emergency.
They are usually a Line of Credit and have the same features.
These loans are used for those clients that do not meet the lending criteria of traditional lenders.
This loan is designed to assist those clients with bad credit or a poor credit history to purchase or refinance a home.
The type of clients for this loan can include:
- Clients with bad credit history
- Unconventional credit history
- New migrant/non-resident Australia;
- Those aged 55 or older that want to buy a home or refinance a property.
At some point in the past, the borrower may have experienced difficulty in meeting their monthly commitments due to lack of work, in suffering an unexpected business loss or by having a difference of opinion with a former credit or service provider. Unfortunately, in these cases the former credit or service provider may have lodged a payment default (or black mark) on their credit report with a credit recording agency.
Credit-impaired Loans are designed especially to assist a borrower in these circumstances. There are various loan types. Speak to us today!
Reverse Mortgages are for clients that are 55 years or older and own their own home unencumbered. Commonly, an applicant is able to borrow between 10% and 45% of the value of their property, depending on their age – The older the age the higher the borrow amount. In the case of couples that are both homeowners of the property, the age is based on the youngest borrower.
The fees and interest rate charges that are normally payable are added to the loan balance. This means that a borrower is charged interest on the interest (compound interest). This builds up the total amount owed. Regular repayments are not usually required until the borrower moves into care.
The benefits to the borrower include:
- Access to cash as a lump sum, a regular stream of income or a combination of both
- A current income not required to qualify
- A client can stay in their home and keep ownership
- No regular repayments made while living in the property
The disadvantages include:
- Interest rates are usually higher than average home loan rates
- There are establishment and ongoing fees to run a reverse mortgage
- Because the interest builds up (or compounds) over the term of the loan, the debt can rise quickly, to the point where it may even be more than the value of the property.
- The loan can affect your eligibility for a pension
- There is no way to know for certain how much you will owe at the end of the loan
Bridging loans are available for clients that want to or have bought a new home prior to selling their existing home. Without the proceeds from the sale of the existing property, there is a financial gap to cover.
Borrowers in these circumstances can apply for a bridging loan. This enables the borrower to finance the purchase of your new home before selling the existing property. The loan is secured by both the existing property and the new property. Usually the applicant has up to 12 months to sell the existing property before repayments will be due for both loans. During the 12-month period allowed to sell the existing property minimum repayments are calculated on interest only and in some cases may be capitalized (added to the loan) as long as the end LVR for both properties is less than 80%.
The disadvantage of this type of loan is the risk involved if the existing property does not sell within the 12-month period. In that case the borrower will have to make repayments on the total loan for both properties. In addition, for the duration of the bridging loan, the client will be paying interest on two loans until the existing property is sold and settled.