Home Loan Types

Variable Loans

These loans provide you with an interest rate that “varies” according to the movement in interest rates set by the Reserve Bank of Australia (RBA). Lenders will generally raise or lower their rates on variable loans after the Reserve Bank hands down their decision each month. However, lenders often raise or lower their rates independently of the Reserve Bank also.

Fixed Rate Loans

The interest rate on a fixed loan remains the same regardless of what the RBA or lender’s do. This gives you certainty in what you will pay every month.

These loans usually have a fixed rate term. Once the term expires, your loan generally reverts to the standard variable rate of the lender you have the loan with. If you wish to move to another lender or product, there are break fees usually associated with this. Many lenders also place restrictions on the amount of additional repayments you can make on these products.

Interest Only Loans

Interest only loans offer repayments based on the interest payable on the loan each month rather than paying the principal and interest. The amount you owe on the loan will not reduce as you are only paying the interest, or the cost the bank charges you to borrow the money.
These loans are popular with property investors who rely on their investment increasing in value to offset not paying off any principal. It also helps increase cash flow thanks to not re paying any principal off the loan each month.

Offset Loans

Offset loans allow you to have an additional account linked to your mortgage. The money you deposit in this additional account is “offset” by the money owing on the mortgage. This money is constantly working at reducing your interest expense and can help you pay your loan off sooner.

For example: Tom and Mary owe $450,000.00 on their home loan. They also have $50,000.00 in their offset account. Every month the bank calculates the interest rate on the money that is currently owing ($400,000.00).
By keeping this money in their offset account they are reducing the amount of interest payable on their loan each month. This helps them pay their home off sooner and reduce the total amount of interest paid over the life of the loan.

Construction Loans

Construction loans are used for home buyers looking to build their own home. Once a construction loan has been approved and the construction of the property is underway, lenders will make progress payments throughout the stages of construction. Generally the payments will be made upon completion of five stages below:

• Slab down/base
• Frame stage
• lockup
• Fitout/Fixing
• Completion

As the loan is progressively drawn down, interest and principal will only be charged/calculated on the funds used. For example if by the third progressive payment only $200,000 has been drawn down on a $400,000 loan, interest would only be charged on $200,000.

Low Doc Loans

Low Document (Lo Doc) loans are usually offered to people who are self employed and are not able to show a high income due to reinvesting their profits back into the business or writing off losses within their business in any given year.

There are some major differences between mainstream and low-doc lenders. The main one is that low-doc lenders do not require traditional proof of income such as company financials or tax returns.

Clients should be aware that interest rates and fees are higher with low-doc home loans. Lenders mortgage insurance (LMI) fees often apply. One of the key components of a low-doc loan is the payment of lenders mortgage insurance. While traditional loans typically require LMI if you are borrowing more than 80% of the property’s value, low-doc loans often require LMI if you are borrowing more than 70% – and in some cases 60%.