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Variable rate home loans can generally be categorized into Basic Variable and Standard Variable loan products. These two loan types are effectively the same in the way they work. The only differences are in the interest rate charged, and the features available. A standard variable loan will usually have a full range of features, whilst a basic variable loan will have a more restricted range.
A summary of the usual differences is set out below. Please note that this is a general guide, and that differences between lenders may arise with specific products.
|Feature||Standard Variable||Basic Variable|
|Discounts available for higher loan amounts||YES||NO|
|Mortgage Offset Account||YES||NO|
|Line of Credit option||YES||NO|
|Ability to change to fixed rate||YES||NO|
A third category of variable home loans are loans with introductory interest rate discounts. They are normally a variant of a banks Basic variable loan product, and offer new customers a reduced or discounted rate of interest for a set time. These discount periods can range from 6 months to 24 months, after which the interest rate reverts to the Standard Variable Rate. In order for the Lender to ensure that they recoup the cost of the discount and to discourage borrowers from continually changing from introductory products of various lenders, most have introduced penalties should the borrower repay/switch the facility within a specific time.
• A Home Loan Package is an all-inclusive suite of products attached to a home loan. For an annual fee, you can get benefits such a discount on the variable interest rate, fee waivers for transaction or offset accounts, a credit card with an annual fee waiver and discounts on insurance products.
Things to consider
• To be eligible for a Home Loan Package, a minimum loan amount will be required (usually $250,000 or more).
• An annual package fee will apply and can range from $350 to $750 depending on the type of package and the lender.
• A credit card (with no annual fee) is usually part of the package. You may not require this card and the credit card limit may impact your borrowing capacity. It could also result in you incurring more debt at credit card interest rates.
• Talk with us and we’ll help you consider the pros and cons of each product, as well as the overall costs and savings, before choosing the option that suits your needs.Apply today Try our calculator
A Fixed Rate Loan is a loan where the interest rate is guaranteed to remain the same during an initial term, regardless of what may occur in the market with variable rate loans.
Traditionally lenders have offered terms of between 1 – 5 years for fixed rates, however some Lenders may offer terms of up to 10 years.
Fixed Rate term loans normally require the loan to be renegotiated at the conclusion of the fixed term, thus a 5 year fixed term loan would normally be required to be repaid in full at the end of year 5. However most Lenders have the ability to arrange for the facility to revert to the Standard Variable Rate after the Fixed Rate term has expired. Thus a loan facility can be established for a 25 or 30 year loan term with the first 5 years, fixed at a specific interest rate.
Fixed rate loans are popular with borrowers that want to take a conservative approach to borrowing, as they guarantee that the loan repayment will be the same for the Fixed Rate period. Many property investors have also found the Fixed Rate loans attractive products due to the product offering the comfort of guaranteed repayments.
Borrowers who take fixed rate loans need to understand that they are committing to a contract with the lending institution for the fixed rate term, and that should the contract be broken or the term changed, the Lender may charge the borrower substantial fees to cover the costs of breaking the contract.
These ‘break costs’ can be very expensive. The break costs are determined by many factors, such as the term remaining, the current interest rate environment and the amount of the outstanding balance. They cannot be estimated when the contract is taken out.
In addition to the potentially prohibitive break costs, many Lenders also restrict the amount of extra repayments that can be made on the loan during the fixed rate period.
The restrictions vary from lender to lender, and if you are thinking of taking a fixed rate loan, these restrictions may be a very important factor to consider.
Some lenders will provide you with the option of locking in the fixed rate prior to settlement occurring. This is referred to as “Rate Lock” and will involve paying a rate lock fee which will usually be calculated as a percentage of the loan amount.
This fee can be a significant amount, although some lenders will not charge a fee or may waive it. If you choose this option, then you can proceed with certainty and complete peace of mind that the decision to fix your interest rate will not move between when the rate lock is effective and the rate that would be applicable on the day of settlement.
Most people who elect to Rate Lock do so at the time the application is submitted. It can be done later in the process— however, the lender can announce a rate increase at any time before settlement and once announced the opportunity to lock in the previous rate passes. A “wait and see” approach carries with it the risk of missing out on the lowest fixed rate that could have been obtained.
If you decide to Rate Lock, make a note of the expiry date, as it will usually be in place for 90 days. If your settlement still hasn’t occurred when it expires, it will need to be renewed (including paying another fee) for it to remain in place. This can be an important consideration if you have negotiated a long settlement.
If variable rates increase, you may pay more interest than if you fix your rate. It will depend on the size of the increase(s), how far into the term the increase(s) occur, and how long you hold the loan after the increase(s) occur. If variable rates stay flat or decrease, you will pay less interest than if you fix your rate. This is on the basis that your fixed rate is higher than the variable rate over the same period.
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Also known as Come and Go facilities, Equity Loans or Revolving Lines of credit, these loans offer similar benefits and operating features as the common bank overdraft.
A line of credit loan allows the borrower to establish a credit or facility limit, and then draw from and pay down the loan without restriction. The borrower has the ability to use the entire limit at any time and does not have to comply with an amortised repayment schedule.
Most Lenders who offer these loans require that the monthly interest charge be the minimum payment required to maintain the account. That means that the borrower can determine, how much if any, principal repayment they wish to make.
The credit or facility limit is normally determined by two factors:
These facilities have the benefits of allowing the borrower to utilise as much or as little of the credit facility for whatever time frame they require, while still only being charged interest for the outstanding balance. The facilities even allow for the balance to move from a credit balance to a debit balance. Most Lenders will also allow for the borrower to operate their loan account as their transaction accounts, as an ‘all in one’ account.
Important Note: Line of credit loans are not suitable for all people, as the facility allows for the original limit to be reused. Without proper discipline, it is possible to never pay down the loan at all with this kind of loan.Apply today Try our calculator
Recent changes in the demographic of the population in Australia have seen an increase in Asset Rich and Cash Poor elderly Australians. It is expected that this segment of the market will continue to increase as the ‘Baby Boomers’ start reaching retirement age.
A reverse mortgage allows the borrower to borrow funds for any purpose or for day to day living expenses, secured against the equity in their property.
The main difference to this product to standard home loans is that the lender does not require the borrower to make any principal or interest repayments during the loan term. The debt instead capitalises. The debt is traditionally repaid once the property securing the loan is sold.
Due to the nature of the facility, with interest capitalised until the full payment of the debt, lenders restrict the amount that they will advance against the value of the property. Usually lenders will only lend up to 20% of the value of the property, depending upon the age of the borrower.
The borrower has the option of repaying the facility through normal means, however it’s not a requirement of a loan, allowing the consumer to maintain their current standard of living.
An additional requirement of these facilities is that the consumer will be required to obtain independent legal and financial advice, as the nature of the facility diminishes the borrower’s equity in the property.
In 2018, many lenders removed their Reverse Mortgage products from the market, but we still may be able to refer you to a Reverse Mortgage Provider.Apply today Try our calculator