Banks, credit unions, mortgage originators and brokers 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. How do you determine whether a home loan is suitable for you?
1. Set your financial goals, determine your budget and work out the term of the loan (i.e. how long you will be paying it off). You may do this yourself or want to consult with your financial adviser or accountant.
2. Ensure the organisation or person you choose to obtain your loan from is a member of the Mortgage and Finance Association of Australia (MFAA). The MFAA Member logo means you are working with a professional who is bound by and subject to a strict industry code of practice.
3. Contact BMG Financial Services who will research and explain the types of loans available so you can explore all options available to you.
Basic home loan
This loan is considered a no-frills loan and usually offers a very low variable interest rate with low or no regular fees. Be aware, they usually don’t offer additional extras (like an offset or split loan capability), but still have the flexibility in repaying the loan faster and may have free electronic redraw.
These loans are directed towards people who don’t foresee a dramatic change in personal circumstances and who may not need to adapt the loan in accordance with any lifestyle changes, or people who are happy to pay a set amount each month for the duration of the loan.
100% mortgage offset facility
Under this facility, money is paid into a bank account which is linked to a nominated loan – this bank account is called an Offset Account. Income you receive from time to time and other money you have can be deposited into the Offset Account. You will be able to access the money in the Offset Account and use it for all your EFTPOS, cheque, internet banking, withdrawal transactions, bill payments and funds transfers.
The balance of the Offset Account effectively reduces the amount of interest payable on the nominated linked loan. That is, whatever is in the Offset Account comes directly off the loan balance, or ‘offsets’ the loan amount for calculating interest payable. Effectively you are not earning interest on your savings, but are benefiting as your savings reduce the interest payable on your loan.
Bridging loans
A short term solution where you buy a new property before you have sold your existing property. The bridging loan covers the gap when there is a period of time between payment of the purchase price for the new property and the subsequent receipt of funds from the sale of the existing property.
Redraw facility
This facility allows you to put additional funds into the loan in order to bring down the principal amount and reduce interest charges, plus it provides the option to redraw the additional funds you put in at any time. Simply put, rather than 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 are still saving for the future. The benefit of this type of loan is the interest charged is normally cheaper than the standard variable rate and it doesn’t incur regular fees. Be aware there may be an activation fee to obtain a redraw facility, there may be a fee for each time you redraw, and it may have a minimum redraw amount.
These loans are suited to low to medium income earners who can put away that little extra each month.
Line of credit/equity line
This is a pre-approved limit of money you can borrow either in its entirety or in part as and when required. The popularity of these loans is due to their flexibility and ability to reduce mortgages quickly. However, they usually require the borrower to offer their house as security for the loan. A line of credit can be set to a negotiated time (normally 1-5 years) or be classed as revolving (longer terms) and you only have to pay interest on the money you use (or ‘draw down’). Interest rates are variable or fixed, but due to the level of flexibility and features, are often higher than the standard variable rate. Some lines of credit will allow you to capitalise the interest until you reach your credit limit (ie. use your line of credit to fund the interest on your line of credit – interest is added to the outstanding loan balance). Most of these loans have a monthly, half yearly or annual fee attached.
These loans are suited to people who are financially responsible and already have property and wish to use their property or equity in their property for renovations, investments or personal use.
Split loans
This is a loan where the overall money borrowed is split into different loans where each loan has a different product (eg. part fixed, part variable and / or part line of credit). In addition, different loans may have different purposes. These loans are directed at people who seek to minimize risk and hedge their bets against interest rate changes while maintaining a degree of flexibility.
Introductory rate or ‘honeymoon’ loan
This loan is attractive as it offers lower interest rates than the standard fixed or variable rates for the initial (honeymoon) period of the loan (ie. 6 to 12 months) before rolling over to the standard rates. The length of the honeymoon depends on the lender, as too does the rate you pay once the honeymoon is over. This loan usually allows flexibility by allowing you to pay extra off the loan. Be aware of any caps on additional repayments in the initial period, of any exit fees at any time of the loan (usually high if you change immediately after the honeymoon), and what your repayments will be after the loan rolls over to the standard interest rate.
These loans may be appropriate for people who want to minimise their initial repayments (whilst perhaps doing renovations) or to those who wish to make a large dent in their loan through extra repayments while benefiting from the lower rate of interest.
Tip: If you start paying off this loan at the post-honeymoon rate, you are paying off extra and will not have to make a lifestyle change when the introductory offer has finished.
Mortgage
A legal document executed by a borrower and lender, giving the lender a conditional right to property as security for the money lent until such time as the debt is repaid in full.
Principal and interest (P&I) loans
Under a principal and interest loan, the repayments you make under your home loan pay off the interest incurred for the relevant period (week/fortnight/month) together with part of the principal (the amount that you borrowed).
Interest only loans
An interest only loan means that your repayments only go towards paying the interest for a specified period. During the specified period, you are not repaying the principal amount of the loan (if you are only paying the minimum repayments) and the principal balance stays the same. It is also common for investment loans.
Fixed rate loans
A loan with an annual percentage rate or an interest rate, that does not change for a specified fixed period. Fixed rate loans offer you the security of knowing that your repayments are fixed for the specified period, and protects you against any increase in interest rates.
Variable rate loans
A type of loan where the interest rate may go up and/or down during the term of the loan. Variable rate loans give you repayment flexibility and in some cases, the ability to link the loan to a 100% mortgage offset account.
Lender’s Mortgage Insurance (LMI)
Lender’s Mortgage Insurance (LMI) is a form of insurance that is used to protect lenders against financial loss when a borrower defaults, and a shortfall arises, following the sale of the security property. The insurance premium for LMI is payable at the start of the loan by the borrower and protects the lender for the life of the loan. The premiums are calculated taking into account the amount of the loan and the loan to valuation ratio (LVR). Generally speaking, the higher the LVR the higher the premium.
Most lenders will require LMI whenever the LVR is above 80%. However, LMI may be required for some loans when the LVR is below 80%.
> BMG Residential
> Steps in the loan process
> How do I pay my loan off sooner?
> Why refinance?
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