:: Residential Loans
Residential loans refer to loans which use residential property as security. Each lender has their own name for their product and each will operate a little differently but briefly all loans available in the marketplace are either:
- Full Doc Loans are the most common types of loans. Full doc loans are available to both self employed and salaried borrowers who can provide evidence of income to support the loan application. Full doc lenders require evidence such as bank statements, pay slips and tax returns.
- Lo Doc Loans are loans used by self employed borrowers where full financials such as tax returns are not available to support the loan application. Lo Doc lenders do, however require you to be able to afford the repayments and you will be required to sign a declaration stating your income in order for the loan to be assessed.
- No Doc Loans are similar to lo doc loans except borrowers are not required to declare their income. It is important to remember that lending guidelines for these types of loans are often very strict with higher interest rates and loan to value ratios. You should not consider this type of loan if you do not honestly believe you can afford the repayments.
Once you know if you need a Full Doc, Lo Doc or No Doc loan then you need to look at the 2 types of loans that lenders offer which are available for both owner occupied and investment property
1. Standard Amortising 25-30 year loan
This is your standard loan that we have all become accustomed to over the years. A standard amortising loan is probably the most flexible on the market with many extras such as redraw, offset and the ability to make additional repayments readily available. You will usually have the choice of choosing a variable interest rate or a fixed interest rate of between 1 & 10 years and/or an interest only option of again usually between 1 & 10 years.
2. Line of Credit Loan
As the name suggests this loan is a line of credit, which means lenders will approve a maximum loan amount against the property that secures the loan (generally 80% of the value), and you are free to draw this facility up and down at will. It operates like an overdraft account and most often comes with a chequebook and debit card for ease of access to funds.
Most Line of Credit Loans are interest only for an initial period. They are only available in with a variable interest rate. They offer you a high level of flexibility but you need to be budget conscious to operate these types of loans. If you are unable to budget or have a tendency to spend any money available then this may not be the loan for you.
3. What about the rest?
Other loan types you may have heard of are really only variations of the standard loan and the line of credit loan. Some of the marketing includes
Generally a standard loan split into two or more portions. Most lenders will let you choose to “fix” the rate of one or more of the splits meaning part of your loan will be at a fixed rate and part at a variable rate.
You may wish to split the loan balance into 2 or more sections to separate off those portions which are used for business or for other things such as car purchases.
Similar to the Line of Credit Loan allowing you to repay extra amounts off your loan and “redraw” them when you really need them. The benefit is that if you make additional repayments above the minimum required your loan balance will fall and so will your interest payments. The Loan operates like a normal cheque account with salaries etc being credited to the account and funds withdrawn via cheque book, ATM or Eftpos.
The main difference to a Line of Credit Account usually lies in the amount of “free” transactions available to borrowers (generally less), restrictions on number of transactions (generally less), restrictions on minimum withdrawal amounts (generally more) and interest rates (usually less).
Some lenders do not have all in one accounts but instead operate Offset accounts. An Offset Account is a stand-alone credit account that acts as your day-to-day transaction account The outstanding balance on the account is “offset” against your mortgage and you pay interest only on the net amount. Unless you have a credit balance in your Offset Account you are unlikely to see significant interest rate savings and need to look carefully at this type of account especially if the rate is higher than a standard loan.
Essentially a standard loan for people who wish to buy a new home before they have sold their old home. The lender will take both the old and new homes as security for the loan and reduce the loan once you have sold your old home. In days gone by most lenders charged high interest rates for these types of loans but they are now available at Standard Variable Rates.
Basic Loans are generally Standard loans offered at a slightly lower interest rate. They are, as the name implies a “basic” or no frills product and not as flexible as standard loans with of the additional features such as redraw not available.
- Honeymoon or Introductory Loans
An introductory or honeymoon rate loan is generally promoted by lenders to attract interest rate sensitive customers. They generally have the same features as a standard rate but offer a low interest rate for a set period of time after which the interest rate will revert to the lenders Standard Variable Rate. Borrowers need to consider both the initial rate and the rate to which the loan will revert and compare this against the other Standard Rates in the market before making a decision as introductory or honeymoon loans can often end up more expensive in the long run than other products
- Mortgage Reduction Programmes
Mortgage Reduction Programmes are run using a line of credit account combined with a credit card. The idea being that you deposit all of your income into the loan account to minimise the amount of interest payable each month. You then use the credit card for all of your expenses and then once a month your credit card is automatically paid from your loan account. For people who are disciplined and who can afford to pay large amounts into the loan this can be an excellent way of minimising the amount of interest you pay on your loan and quickly reduce the term of your loan. For many people, however the temptation to spend more than you earn is available and it may end up as an expensive exercise since Mortgage Reduction Programmes are generally sold at a higher rate than standard loans.
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