Loan Types
What is a great home loan?
For most people they believe a low interest rate is one of the most important features. For others it is minimising ongoing fees or having the flexibility of a redraw facility or the ability to pay extra off the loan at anytime.
At Loans Australia we realise there are many hundreds of loans on the market, all with different rates, fees and features. Loans Australia offers a personalised approach to help you find the right loan. We will explain in detail the different products and features on offer to ensure you make an INFORMED DECISION.
The following guide might help you choose the type of loan that is best suited to your situation. Most loans are generally categorised under:
Standard Variable ||
Introductory/Discount "Honeymoon" Variable || Basic Variable || 100% Offset ||
All-in-One || Line of Credit / Equity || Fixed Rate ||
Combination / Split Rate || Bridging || 106% Home & Investment Loan || 100% Home Loan ||
97% Investment Loan || Professional Packages || Low/Light Documentation || No Documentation || Non-Conforming
Traditionally this is Australia's most popular type of loan. The interest rate can vary throughout the life of the loan - both up and down. When the Reserve Bank of Australia alters the "cash rate", it normally has a direct impact on the standard variable interest rate offered by lending institutions. The term of these loans can be from 1 year to 30 years.
Key Benefits
- If interest rates fall, your repayments will decrease.
- You can make additional repayments without incurring a penalty fee at any time.
- Most lenders will allow you to redraw additional repayments you have made over and above the minimum repayment.
- Wide choice of repayment options (weekly, fortnightly, monthly and yearly in advance).
- Many offer a 100% offset facility where interest earned on savings is deducted from interest charged on the mortgage (at the same interest rate).
- Many allow you to pay off the loan early without penalty.
- Allow you to switch to a fixed interest rate at anytime.
- Allow you to split your loan between two products or more (combination feature).
- Many allow you to have multiple sub-accounts (splitting debts).
- Portability (allows you to transfer the loan to another property if you sell your home).
- Very good for discipline as the regular repayments help with budgeting.
- Very flexible loan offering more features than most other loans.
Disadvantages
- If interest rates increase you will have to make higher repayments.
- The interest rate is often not the most competitive.
- If you are not utilising all the features of the loan you are paying a higher interest rate than required.
- Some lenders still charge ongoing fees for their highest variable interest rate product.
- Most of the repayments in the first 10 years are allocated to interest (bank's profit) and only a bare minimum is allocated to actually paying off the principal on your loan.
Most Suitable for
- This loan is suitable for most situations for both investors and homeowners who want maximum flexibility in their loan features. We would recommend the standard variable as part of a lenders professional package whereby the interest rate would be discounted by between 0.40 and 1.10% off the normal rate.
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The interest rate is usually low to attract borrowers and normally lasts for 12 months but can be up to 3 years. The interest rate can be variable, fixed or capped. The variable interest rates are normally a set margin below the standard variable rate. If the standard variable rate moves up or down then the discount also moves up or down. The purpose of these loans is to bring people in the door. The major institutions spend huge budgets on advertising these products because they make the lenders a lot of money.
Key Benefits
- Usually the lowest interest rates available on the market, allows new homebuyers to get accustomed to making regular repayments.
- If repayments are made at the interest rate the loan will revert to after the honeymoon period, the loan can be reduced faster and equity can be built up in the redraw.
- Some banks provide an offset account on these loans.
- Usually have the same features as standard variable loans.
- Some lenders allow this product under its professional package, giving the client a very low rate in the first year and a discount below the standard variable rate in the second and subsequent years.
Disadvantages
- After the initial discount period most lenders do not allow you to choose which product to revert to, requiring you to revert to the higher standard variable rate. The repayments can substantially increase after the honeymoon period making it very important to budget properly. Therefore you could have been better off with a cheaper basic variable loan from the start.
- If you want to switch to a lower interest rate loan after the introductory period a substantial penalty fee is usually payable which could negate any interest savings made.
- If you payout the loan in full within the first few years an early repayment fee is normally payable.
- If the introductory rate is fixed and interest rates fall you will be locked into higher rates.
- Most introductory loans have ongoing monthly fees.
- Some of the worst introductory loans do not allow for extra repayments within the introductory period or limit the maximum lump sum repayment.
- Generally cannot redraw advanced repayments during the introductory period.
- The comparison rate is generally higher for introductory loans than it is for the basic variable home loans.
Most Suitable for
- These loans are targeted at first homebuyers who like the thought of having really cheap repayments in the first year of owning a home. It is very important to do your sums before taking a honeymoon loan to make sure that a basic loan wouldn't have been cheaper from the start.
- These products can also be appropriate with people who have short-term requirements e.g. property traders or investors, however early repayment fees should be investigated. These loans are not good for long-term loans as the interest rate after the initial discounted period becomes uncompetitive.
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Many lenders are now offering basic or "no frills" variable loans with lower interest rates and slightly fewer features than standard variable loans. The interest rate is generally set about 0.50 - 0.60% below the standard variable rate. The interest rate and loan repayments will vary over the course of the loan, generally in line with the Reserve Bank's cash rate.
Key Benefits
- Permanently lower interest rate than the standard variable rate for the life of the loan.
- Customers do not pay for features they do not use.
- Most lenders allow extra repayments without penalty.
- The repayments on the loan stay low for the life of the loan.
- The better loans have a redraw facility available.
- Many loans now offer direct salary crediting to the loan account.
- Some basic variable home loans offer a similar interest rate to professional packages and sometimes provide better long-term benefits as the ongoing fees are generally a lot less.
Disadvantages
- Generally you can't combine the basic loan with other loan combinations. This is beginning to change so you should look at your options.
- They do not offer 100% offset accounts (so your savings do not lower the interest you pay the bank).
- Most charge a fee to use the redraw facility (this could be a good basis of comparison).
- A lot of these loans are not portable (i.e. cannot be moved when you sell your home and buy another) and would therefore cost more to setup a new loan on the new property.
- Most major banks charge ongoing administrative fees however many other lenders do not charge a fee.
- Since the interest rate is variable you are at the mercy of interest rate fluctuations.
- Most of these loans have early termination penalties within the first 3 - 5 years. These penalties can range from $300 to 1.50% of the loan amount.
Most Suitable for
- The budget conscious borrower who is looking to minimise repayments as much as possible, and is not concerned about extra "bells and whistles". Would suit investors who are looking at generally having interest only repayments or borrowers who are on tight budgets with not a lot of money left over at the end of the week (so an offset account would not benefit them).
- Basic loans are also great for small loan amounts (though some lenders have a minimum loan amount of about $50,000).
- These loans are great for "set and forget" lending structures, whereby the minimum repayment is the only transaction made on the loan account.
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This is a standard variable loan with an attached savings/transaction account. The interest rate on the offset account is normally the same as on the loan. Any money you put into the offset (savings) account is deducted from your loan balance before interest is calculated.
Key Benefits
- The loan balance is reducing every month, as repayments are required at least monthly to pay off the loan over a set period of time. This promotes discipline (compared to a line of credit which may not require monthly repayments).
- The transaction account typically has an ATM card and possibly a cheque book. Most have access to internet and phone banking.
- The interest earned on 100% offset accounts is higher than on other savings and transaction accounts (and the interest is not taxed).
- Instead of earning interest in the transaction account and being taxed, the interest saving benefits of an offset account are not taxed (verify with your Accountant).
- Has the benefit of potentially saving you interest whilst being able to access your funds at anytime with generally no redraw fees in the offset account.
- The home loan can effectively be paid off quicker than the set loan term by the savings generated by the offset account (effect differs for everyone).
- You can normally include a 100% offset account as part of a professional package and thus access the loan at a discount of between 0.40 - 1.10%.
- The interest rate is generally lower than a line of credit facility.
- Can be used for some investment loans as well as home loans.
Disadvantages
- Some lenders have less than a 100% offset (do not use these lenders).
- You may have to have a minimum balance in the offset account, such as $2,000 for the offset benefit to be calculated.
- Redraw fees still generally apply from the home loan.
- Most offset accounts have the same interest rate as the standard variable loan, which is higher than the basic variable loans.
- Most offset accounts have an ongoing administration fee of about $10 pm.
- The offset is not of great benefit if the balance in the savings account is generally fairly small.
- Not many lenders offer this type of loan structure.
Most Suitable for
- This is a great way for a borrower to use their savings to reduce the interest charged on their home loan in a tax effective manner. If your savings balance fluctuates greatly each month and you don't have a lot of money left over each month, then these loans are not for you (try basic variable loans).
- You must weigh up the benefit of paying the higher interest rate and the greater flexibility of a 100% offset account versus a lower interest rate of the basic variable loans.
- Can be great for investment loans (if the customer does not have a home loan). The customer could save interest and lower their loan repayments but still have full access to their savings for other purposes. This could help to build equity in the property faster and thus get the customer into another investment.
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The All-in-One loan works by having all your income e.g. wages, rental income, dividend income etc. deposited directly into the home loan. All additional monies above the interest owed that day (interest is generally calculated daily) directly comes off the principal on the loan. This has the effect of reducing the interest charged on the home loan each day. You will leave all your income in your loan until it is needed for bills and general living expenses. Access to your money is via an ATM/EFTPOS card, a linked credit card, phone banking, internet banking or sometimes the post office.
Key Benefits
- The loan is a variable home loan and as such minimum principal and interest repayments are required at least monthly. Therefore the loan will be paid off at least over the original loan term (even if there are no interest savings).
- By leaving your income in your loan account as long as possible (by putting as many of your expenses on credit card as possible) you will be maximising your interest savings. The credit card should be paid out to nil every month to avoid interest payments.
- All your savings will now be working for you by saving you interest against your mortgage.
- Instead of earning interest on your money of about e.g. 1% (savings account) or 4% (Cash Management Trust) and then paying tax on it, you save interest on your mortgage at the mortgage rate (and you don't pay tax on it). Consult your Accountant.
- Periodical payments and direct debits can be made directly from the loan account.
- By having all your transactions in the one account it makes managing your accounts easier and more convenient.
- Instead of receiving home loan statements every 6 months you will generally receive statements monthly to track all of your transactions. This is great for budgeting.
Disadvantages
- Interest rates are normally similar to the standard variable rate (sometimes a little higher).
- Most charge a monthly or yearly administrative fee.
- Some people feel uncomfortable about having their savings sitting within their mortgage. They can feel they are going backwards if they draw the funds out of the mortgage.
- Discipline is required to ensure the extra repayments/savings stay in the loan.
- You can only redraw the excess payments made over the normal repayments.
- Since it is easy to withdraw funds, undisciplined people may not pay any extra off the loan and therefore the higher interest rate, fees and charges may not be of a real benefit to them.
Most Suitable for
- People who earn a lot more than they spend, as their savings work for them by saving interest on the mortgage.
- People who like an easy way to manage all their banking requirements (one account for all their needs).
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A majority of line of credit loans are interest only variable rate loans secured against a residential property. This loan has a revolving credit facility allowing the customer to draw funds whenever they want, up to a prearranged credit limit. These loans can be repaid or drawn down at anytime. Line of credit products are essentially a transaction account and a home loan rolled into one account.
Key Benefits
- People deposit their salary and other income directly into the loan account and then draw funds on the account when required via ATM, cheque etc. The longer your funds stay in the account the greater the interest savings you may achieve, as interest is calculated daily on the outstanding loan balance. You pay all your expenses by credit card, keeping your cash in the loan longer.
- Can consolidate other higher interest debts into this loan.
- Investors love these loans as they can raise funds, such as a deposit at very short notice at home loan rates without the need for another loan application.
- These loans are very flexible. You can have multiple sub-accounts, which can be used for different loan purposes e.g. home loan, investment loan, and renovations.
- Some loans have no loan term, so as long as you maintain the interest payments you could conceivably have the loan into retirement.
- Instead of earning interest on your savings at 1-5% and paying tax on it, you save interest on your mortgage at the mortgage rate, and pay no tax on the interest savings (consult your Accountant).
- Some line of credit products do not require any repayments, the interest is added to the loan balance until it reaches the credit limit.
Disadvantages
- You need to be disciplined with the use of your available funds as you can redraw your equity up to the set limit at any time.
- As the minimum repayment is usually interest only, there is the possibility of never paying the loan off.
- Discipline with your spending is the key as there are no set principal repayments and no set time frame in which to repay the loan.
- Unless the customer is careful it is possible to reduce the equity you have built up in your home.
- The interest rate is usually higher than traditional or basic home loans.
- The ongoing fees tend to be higher than traditional or basic variable home loans.
- Some people can feel uncomfortable having their savings sitting within the mortgage.
Most Suitable for
- Borrowers who want to make small irregular transactions and want the benefit of having their entire income sitting against their mortgage trying to reduce the interest paid on their home loan.
- Great for investors who want quick access to funds e.g. funds for a deposit. Line of credit facilities allow the separation of personal and investment debt for taxation purposes.
- People wanting to fund home renovations where money can be drawn down when required.
- For people who spend substantially less than they earn and can consistently save money.
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Fixed rate loans involve a set term and a set interest rate. The loan can be both principal and interest, or interest only. Fixed rate loans provide the borrower with the certainty of knowing exactly what their monthly repayments will be. Each lender sets their own individual fixed interest rates and hence interest rates can vary widely between lenders. They are usually offered for terms of 6 months, 1, 2, 3, 4, 5, 7, 10 and 15 years.
Key Benefits
- Your repayment will not change during the fixed period, allowing you to budget better.
- Provides certainty in a volatile interest rate market.
- Can be included as part of a split loan structure whereby part of the loan can be fixed and part of the loan can be variable.
- When the set fixed term expires, you can either elect to fix another term or rollover to the standard variable rate.
- A couple of lenders allow for unlimited extra repayments in combination with a redraw facility (this is very rare).
Disadvantages
- You can be charged a higher interest rate in return for the lending institution taking the risk of the future interest rate movements.
- If you want to break your fixed rate contract the penalty cost can be quite large especially if the fixed interest rates are now lower. You could be charged an interest rate adjustment and an administrative charge.
- On most fixed rate loans additional repayments are very limited.
- Almost no lenders have a redraw facility on fixed rate loans.
- Almost no lenders have a 100% offset account attached to their fixed rate loans.
- If interest rates go down after you fixed, you can find yourself paying a much higher rate than the standard variable rate.
- A lot of the major lenders charge a monthly administrative fee.
- It is very difficult to know when to fix the rates as generally the lenders put up the rates before you are ready to fix (they employ a team of economists to tell them when to increase the rates).
Most Suitable for
- A fixed rate loan is ideal for people who are concerned about a rising interest rate market as a fixed loan guarantees the repayments over a set period of time (it is like buying insurance). Splitting your loan into part variable and part fixed allows the homeowner to have the best of both worlds.
- Investors, who just want to have set repayments allowing them to budget, are suited to fixed rate loans.
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A combination or split rate loan is ideal for a borrower who wishes to have the benefit of two or more products instead of one. An example would be a borrower who takes a fixed rate loan in combination with a standard variable rate loan. For customers who are confused about what to do in regards to taking a fixed or variable loan, combination loans are a great each way bet.
Key Benefits
- The borrower can fix in a portion of their loan to provide stability of interest rate and repayment but still allowing themselves the flexibility to make additional and/or lump sum repayments off the variable portion of the loan.
- The consumer will have peace of mind. If rates go up, the fixed rate is cheaper or if rates go down they benefit from the cheaper variable rate.
- Great for investors, as an equity or line of credit split allows for a very flexible way of accessing equity with a pre-approved credit limit. Separate loan account statements make accounting for the investment split very easy.
- A split loan could be used to purchase a car or other consumer goods at home loan rates (should structure the repayments over a shorter time frame to maximise the benefits).
Disadvantages
- Many lenders will charge extra application fees to setup the extra loan accounts.
- By having multiple loans, you could be paying ongoing administration fees on every loan account.
- Some lenders don't allow their honeymoon loans to be part of a combination facility.
- Some lenders don't allow their basic variable home loans to be part of a combination facility.
- If the loans are not structured properly, then the setup can be very expensive.
Most Suitable for
- People who wish to hedge their bets against interest rate fluctuations and wish to fix part of their loan.
- People who would like to use some of their equity to invest and would setup a line of credit split for this purpose in conjunction with their normal home loan.
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Bridging loans are for people who wish to purchase a new home now and sell their current home later. Most lenders give the customers at least 6 months to sell their house, (sometimes up to 12 months). A bridging loan provides flexibility when moving from one house to another (without having to wait for the sale of the current property). The interest rate on a bridging home loan is usually the same as a standard variable loan.
Key Benefits
- A bridging loan ensures that a customer will not miss out on a desired property because they haven't sold their home as yet.
- The customer will usually pay interest only during the bridging period.
- The interest charged to the new loan could either be paid by the customer or capitalised (added to the loan and paid out when the property is sold).
- When your original property is sold, the proceeds are used to payoff the bridging loan and you commence to make normal repayments from then on.
- Allows the customer to move into their new house straight away instead of having to move into a rental property after their property is sold while they are looking for a property to purchase.
- A bridging loan allows you to negotiate from a position of strength. Rather than having to sell your home quickly you will be able to take your time and obtain the best possible sale price for your current home.
Disadvantages
- A stronger financial position than normal is required to be approved for this type of loan because there will be two loans running concurrently for a period of time.
- If you don't have a lot of equity in your existing home, then you will not qualify for a bridging loan.
- The interest cost on both loans could be a lot higher than what you are use to.
- If you don't sell your existing home in a reasonable time frame and for the expected price, the interest bill could become quite large and put you in an unfavourable position.
Most Suitable for
- People who have found their dream home and need to sell their current home to finance the new one.
- People who require assistance to bridge the gap between the sale of one property and the purchase of another.
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106% loans allow the borrower to lend the entire purchase price of the property plus the associated purchase costs. The loan is available for both owner-occupier and investment purposes. A customer must have a stable employment history to qualify for these loans however they do not need to produce any savings to qualify for this loan. This loan is only available in NSW, Victoria and Queensland. There is no mortgage insurance approval required for this loan. All applicants must have a good credit history.
Key Benefits
- Provides customers with an option to buy a new or established property with no deposit. Can be used for owner-occupied or investment purposes.
- No genuine savings are required.
- No reliance on other properties (it is a standalone facility).
- No ongoing account keeping fees.
- Unlimited additional repayments are allowed for free.
- Loan term is over 30 years to keep the initial repayments as low as possible.
- There are no additional lender requirements to qualify for the 106% investment loan.
- Allows borrowers to maximise tax deductions for investment properties.
- There is no maximum total borrowing exposure per client.
- Will lend up to 106% in the CBD of Sydney, Melbourne and Brisbane and surrounding suburbs such as Docklands in Victoria and Alexandria in Sydney.
- Now available in most parts of Melton, Geelong and on the Mornington Peninsula in Victoria.
Disadvantages
- An early termination fee is payable if the loan is discharged within the first 3 years.
- Variable interest rates are available only, no fixed rates available at this stage.
- There is no 'interest only' option.
- Construction and land loans are not available.
- There is no redraw facility.
- There is a mortgage risk fee to cover the additional risk the lender has undertaken when lending a borrower more funds than the property is worth.
- This is a full document loan only, low document loans are not available.
Most Suitable for
- PAYG income earners who earn at least $55,000 pa on a single income or $80,000 on a joint income or self-employed professionals earning at least $150,000 pa.
- It is a fully featured home and investment loan that meets the market need for customers who have good cashflow but minimal savings.
- Suited to first homebuyers, subsequent homebuyers, people who have separated and wish to re-establish themselves, graduates in professional employment for at least 6 months, investors wishing to maximise tax deductions and anyone without the funds to cover fees and normal deposit requirements, including those that prefer to retain savings for improvements or other purposes.
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100% home loans allow the borrower to lend the entire purchase price of their property. They are available for both owner occupied and investment purposes. A customer must have a stable employment history to qualify for these loans. Some loans have no requirement for the customer to have saved any money whilst some lenders like you to have saved between 1.5% and 3% of the purchase price to cover some of the costs. Maximum loan is generally about $500,000 over a loan term of 30 years. The loans are available for both PAYG employees and self employed borrowers with full income documentation only.
Key Benefits
- Provides customers with an option to buy a new or established property with no deposit.
- Choice of variable or fixed interest rates, or a combination of both.
- Unlimited additional repayments are allowed for free.
- Redraw facility available.
- Principal and interest or interest only repayments are available.
- Some lenders have a 100% offset account available.
- Interest rates are similar to the standard variable rate.
- Generally available within 50kms of a capital city and 25kms of a satellite city e.g. Newcastle, Wollongong etc.
- A 100% refinance facility for owner occupied home loans is now available.
- Construction and land loans are available.
Disadvantages
- Although no deposit is required, there are still substantial funds required to settle the property e.g. stamp duty, transfer and registration fees, mortgage insurance, application, settlement and legal fees. You need to budget for these fees upfront.
- There is a risk premium charged by the lender to cover the additional risk the lender undertakes when lending a borrower 100% of the purchase costs.
- A large early termination fee is usually payable if the loan is discharged within the first few years.
- Some lenders have strict lending guidelines which must be met.
Most Suitable for
- It is a fully featured home loan that meets the market need for customers who have good cashflow but minimal savings.
- Suited to first homebuyers, people who have been divorced and wish to re-establish themselves, investors wishing to maximise tax deductions and new Australian residents with strong incomes.
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97% investment loans require only 3% genuine savings to purchase an investment property. First time investors or seasoned investors can use the loan. There are now lenders available who will lend 100% on an investment property up to $750,000 (conditions apply) with as little as 1.5% genuine savings over a three month period.
Key Benefits
- Construction loans are available.
- Maximum loan of $400,000 in Melbourne and Sydney and $300,000 in all other metro and major regional areas.
- Limited cash savings are required.
- Some lenders now allow a 95% investment loan with mortgage insurance premium capitalised (added onto the loan amount), and thereby increasing the loan amount to about 97%.
- Honeymoon interest rates and a 100% offset account now available.
- The mortgage insurance premium is cheaper when compared to a 100% home loan.
Disadvantages
- Refinances are not allowed.
- Credit history must be clear, no defaults are allowed.
- Applicants must be employed for a minimum of 12 months.
- Guarantor and third party mortgages are not allowed.
- Vacant land loans are not acceptable.
- The customer will have to find 3% deposit, mortgage insurance premium, application fee, settlement fees, stamp duty, transfer and registration fees.
Most Suitable for
- Investors who have limited access to deposit funds or who wish to preserve their funds.
- Investors who wish to maximise their tax deductions by maximising their loan size.
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These are special loan packages designed to attract professional or lower risk clients to the lender. To qualify, some lenders insist on a certain income level, a minimum loan size, or you must be in a certain profession. Most lenders use these packages to cross sell at least three products to every client hoping to keep the client longer and earn more fees from them over a longer period of time. Professional packages key features include discounts on interest rates on certain loans, discount application and/or ongoing fees, fee free transaction accounts, gold credit cards and extra services such as discounts on margin loans, personal loans and financial planning products.
Key Benefits
- Reduced interest rates on products such as standard variable loans, 100% offset loans, line of credit facility's and some fixed rate loans.
- These loans are generally discounted from 0.30 - 1.10% off the standard rates.
- Some lenders allow access to a one year discounted rate and then roll into a professionally discounted loan after that first year.
- Application fees can be waived (sometimes for up to ten separate loans).
- Some lenders will lend more money to borrowers on professional packages allowing them to purchase more expensive properties.
- Some lenders do not discount the application fee but have much lower ongoing fees, which could be beneficial.
Disadvantages
- Sometimes a large annual fee is charged and unless a lot of the features of the package are properly utilised then the package may not be of true benefit.
- Very few lenders provide discounts on fixed loans.
- Some professional packages insist on the client having at least three products from that lender i.e. home loan, gold credit card and a transaction account or line of credit.
Most Suitable for
- Clients with large loan sizes where interest rate discounts could save them thousands of dollars in interest, far outweighs the ongoing administration fee.
- Clients who require a range of financial products e.g. home and investment loans, transaction account and a credit card and wish to minimise the overall fees.
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Many lenders now offer "Low Doc" or "Light Doc" loans which are designed for self employed people who cannot or do not want to provide tax returns and financial information. These customers sign a self-certified income declaration form outlining how much they earn without providing the supporting documentation. Customers usually require a sizeable deposit, normally 20%, to qualify for these loans.
Key Benefits
- Have a loan approved quickly without the need for up to date tax returns and financial statements.
- Fully featured loan options, including redraw facility, split loans, fixed rates, 100% offset, line of credit and interest only options are available.
- Some lenders will offer a lower interest rate if the client pays the entire mortgage insurance premium (normally the upfront cost of the insurance premium is outweighed by the interest savings on the loan).
- Some lenders offer a step down interest rate, whereby the interest rate decreases based on the customer maintaining a perfect repayment history.
- Some lenders have the same interest rate for their full documentation and low documentation loans.
- Most lenders will lend up to 80% of the property's value.
- Some lenders will lend up to 95% of the property's value but at higher interest rates (than 80% loans).
- Some lenders will even consider lenders who have a bad credit history albeit at higher interest rates and fees and charges up to 95% of the property's value.
- Some lenders do not require the applicants to declare any particular income, they just rely on a statement that the borrower can afford the loan.
Disadvantages
- These types of loans generally have a higher interest rate than standard fully verified loans.
- The application fees are generally higher than standard loans.
- Some lenders are reliant on mortgage insurers to approve the loan (even if the client is paying the insurance premium).
- The tax office is starting to look at low doc loans as they believe that some consumers are either not declaring some of the income they are earning or are declaring higher incomes to lenders in order to obtain the loan.
- Most lenders pass on the cost of mortgage insurance to the borrower once they borrow more than 60% of the value of the property.
Most Suitable for
- Self-employed borrowers looking to purchase, refinance or construct an owner occupied or investment property.
- Self employed people looking to refinance business loans to a cheaper interest rate.
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Lenders do not require any declaration of income or employment in order to approve a 'no document loan'. The lenders only concern is the property offered as security, ensuring they cover their debt exposure should the borrower be unable to meet the loan repayments. These loans are generally only available for business or investment purposes.
Key Benefits
- A low cost alternative to the traditional suppliers of these funds (generally solicitors). Solicitors provided these funds on a short term basis (1-3 years) at higher interest rates and higher fees and charges.
- Sometimes credit checks are not undertaken, thus people with poor credit history may still be able to access to cheap funding.
- Some of these loans offer features such as redraw facility.
- Large loan sizes are available up to $1,500,000.
- 30-year loan terms are available to keep the repayments low.
- No employment details need to be mentioned.
Disadvantages
- The maximum someone can borrow is limited to 85% of the value of a property.
- Higher application fees than standard loans.
- Interest rates can be higher than standard loans.
Most Suitable for
- Customers who have large amounts of equity in their home and don't want the hassle of providing financial documentation to the lender.
- Great for people who want quick access to their equity at cheaper rates than traditional solicitor funds.
- Suitable for self-employed people who have just started a new business and a traditional bank will not give them a loan.
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Non-conforming lending provides a lending alternative for applicants who do not meet the criteria of traditional lenders. There are many circumstances when a non-conforming lender could be utilised: mortgage arrears, paid or unpaid defaults, paid or unpaid judgements, bankruptcies, divorce, problems with a credit provider, casual wages as main income, mortgage insurance guidelines not being met, recently arrived in Australia, large reliance on pension income, newly self-employed applicants, unacceptable or unusual deposit sources, instability of employment and residence, large number of debts to be consolidated, short term employment, age of applicants and lending on valuation instead of contract price for 'off the plan' purchasers.
Non-conforming loans have traditionally had higher interest rates, fees and charges than mainstream lenders due to their higher risk structure. These lenders expect clients to refinance out after about three to four years and do not usually charge an exit penalty fee after this time.
Key Benefits
- People can lend up to 95% of the value of the property without any mortgage insurance with some lenders.
- Loan terms up to 40 years to minimise repayments
- You can secure a loan after a traditional lender declined the loan.
- You can refinance to a cheaper interest rate in as little as 3-4 years.
- Borrowers with a history of late payments, loan defaults or past bankruptcy are still acceptable.
- No mortgage insurance premiums are payable in most cases.
- Equity release mortgage - easy to tap into unused equity in your home with limited paperwork.
- Borrowings are accepted for the deposit of a house.
- Accepts people with multiple casual jobs.
- Allows borrowers with a bad past credit history another chance by lending to them albeit at a higher interest rate. Borrowers then have the opportunity to develop a good repayment history and after a period of time, refinance back to cheaper mainstream lenders.
Disadvantages
- As these loans are higher risk to the lender they attract higher interest rates, fees and charges.
- Large exit penalties to pay these loans out within the first couple of years.
Most Suitable for
- Great for people with lending situations outside normal parameters where traditional lenders will not approve a loan. With only a few good years of repayments you are able to refinance to a cheaper deal.
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