General Product Definitions:
Basic Variable Rate Loans: A simple mortgage with limited features, minimum monthly repayments, a low interest rate (approximately .5% lower than a standard variable rate), as well as no or low on-going account keeping fees. It benefits clients who are looking for a low monthly repayment and low costs. A client that is willing to pay for limited features, such as redraw but only when they need them.
Standard Variable Rate Loans: Fully featured loan facility with, minimum monthly repayments and generally no extra fees for the features such as redraw or set-off accounts. Designed for clients who will be using all the features on a regular basis. Most commonly used features include a 12 month introductory discount rate, redraw and links to set-off accounts.
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 (i.e. six 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.
This loan 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 bits at a time. The popularity of these loans is due to its flexibility and ability to reduce mortgages quickly. These products are fully flexible and generally have no minimum repayment requirements while loan limit is respected. 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 pay interest on the money you use (or ‘draw down’). Interest rates are variable and due to the level of flexibility 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 i.e. use your line of credit to pay off the interest on your line of credit. 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.
This is a loan which works as an account where all income is deposited in the account and all expenses come out of the account. The benefit of the All-In-One Account is its ability to reduce the amount 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 will be at the standard variable rate or slightly higher and may incur monthly fees. Be aware that if the account is split into the loan account, with credit, cheque and ATM facilities placed into satellite accounts, you will need to check your access to funds, how many 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 similar to an All in One Account however the money is paid into an account which is linked to the loan – this account is called an Offset Account. Income is deposited into the Offset Account and you use the Offset Account for all your EFTPOS, cheque, internet banking, and credit transactions. Whatever is in the Offset Account then comes directly off the loan, or ‘offsets’ the loan amount for interest. Effectively you are not earning interest on your savings, but are benefiting as what would be interest on savings is calculated on a reduction on your loan. The advantages are similar to the All in One Account. These loans normally have a higher interest rate and higher fees due to their flexibility. These loans are directed at medium to high income earners, and to disciplined spenders as the more money kept in the offset account the faster you pay-off your loan.
Partial offset account and an interest offset account are also available.
This is a loan where the overall money borrowed is split into different segments where each segment has a different loan structure i.e. part fixed, part varied and part line of credit. These loans are directed at people who seek to minimize risk and hedge their bets against interest rate changes while maintaining a good degree of flexibility however subject to the proposed structure of the split loans taxation issues may arise in some circumstances.
Low doc Loans
“Low Documentation” loans means limited or no income verification is required by the Financial Institution in order to assess your ability to repay the loans. The applicants are required to self certify income level via a signed declaration confirming income level and they can pay back the loan. Whilst there are numerous “Low Doc” loans on the market, I break them into two general categories:
1. Low Rates with Mortgages Insurance - These products have normal market interest rates but should the loan amount exceed 60% of the property value up to a maximum of 80%, then the loan is mortgage insured and the clients pay the premium on behalf of the Bank.
2. Higher rates with Financier Paying Mortgage Insurance - Higher rates are initially charged on these loans for up to 3 years. If good conduct is displayed over this time, rate is reduced to market rates upon an annual anniversary. Financiers generally do not pass on mortgage insurance premium to remain competitive.
Special mortgage packages aimed at attracting professional or low risk (in the lender’s opinion) people to that lender. Usually determined by profession criteria or income/size of loan. The packages usually reduce the interest rate and waive or reduce the fee’s, they may also offer other services such as free financial advice or reduced insurance premiums.
AAPR: Stands for the Annual Average Percentage Rate.
It is based on a formula defined by the Australian Government to determine the effective rate of a mortgage. It includes interest costs, set up fees and charges, as well as on-going fees and charges for a home loan over a seven year period. The calculation also takes into account initial interest rates and reverting rates if applicable to the loan.
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