Home Loans - Product Types
A home loan is an amount of money you borrow from a bank or financial institution. You then have to repay the money, usually over 25 to 40 years. The home loan is secured by a real property mortgage, usually the property you are purchasing. The interest rate may be variable or fixed while the repayments may be principal and interest or interest only.
This patented product is unique to WealthMaker. Aspire allows borrowers to invest while simultaneously paying off their mortgage.
Key Tip: This product is good for those who wish to create wealth in a structured manner and recognise it cannot be done overnight.
Basic home loan
This is a principal and interest loan with no additional features. The interest rate is usually a lot less than the advertised rate standard variable rate.
Key Tip: This product is good for first home buyers seeking to get into the housing market. Find out how to find the best home loan.
Standard variable rate home loan
This home loan has a variable interest rate and the payments are on a principal and interest basis. The rate moves according to the market trends and the official cash rate changes. It can also include many additional features such as flexible repayment options.
Key Tip: It is important to understand that the standard variable interest rate is a benchmark interest rate. Lenders quote a standard variable rate from which discounts usually apply.
Online home loan
There are home loans where the application process is completed by you over the internet. You receive little or no assistance from the lender or broker. The advertised rate is usually very low, however there are usually important conditions attached to the application. Notably, a low Loan to Value ratio and the applicant generally must have a strong serviceability ratio.
Key Tip: Not for those who do not fully understand the many steps in getting a loan application approved.
Interest in advance
An Interest in Advance Loan is where you pay 12 months interest up-front based on a fixed rate. This product is great for tax payers that have some surplus funds and wish to reduce their tax. It also has a cash-flow benefit if your tax return is lodged shortly after the end of the financial year.
Key Tip: This product is great for investment property owners.
Interest-only home loan
You only pay for the interest on your home loan. There are no principal reductions. After a period of time, usually 5-10 years, the loan converts to a principal and interests loan. A risk is that your repayment amounts will be greater after 5 years of interest only.
Key Tip: Often used to purchase an investment property.
Line of credit
A line of credit is provides a maximum amount under which you can borrow at will. Once you have reached the limit, you must make a payment to keep under the credit limit. The interest rate is usually slightly more than that of a standard variable rate loan because of the in-built flexibility of the product.
Key Tip: Often used to purchase an investment property and to pay for life style activities, e.g. holidays.
A fixed-rate loan, as its name indicates, is a loan which affects the same interest rate for a period of time, e.g. 5 years. It can be either a principal and interest loan or an interest-only loan. Fixed-rate loans provide certainty of repayment amounts. There is no fixed rate 35-40 year home loan products in Australia.
Key Tip: Lenders usually market these when they believe interest rates will fall.
A home package is a set of features, products and services sold along with a home loan. It can include insurance, credit card etc. With a home package you will a solution that may suit your personal needs.
Key tip: There are many packages so making a cost/benefit comparison is difficult.
Low documentation home loan
A “low-doc” home loan does not require the borrower to provide all the financial statements or tax returns generally required. The borrower is required to certify that they have the income to service the home loan. This specialized lending area is designed to assist self-employed borrowers.
Despite a tightening of credit lending criteria by many lenders, low documentation home loans still have a place in today’s (post GFC) market.
Key Tip: Each lender has different document requirements so it’s important to determine what income verification is available. You will also need to have an ABN.
A deposit bond guarantees your payment at settlement instead of at exchange. This option is available when upfront payment is not affordable.
Key tip: A deposit bond is a good option for investment property buyers who are purchasing off the plan, as there is only a minimal upfront investment compared to paying the full deposit amount.
A personal loan is allows you to borrow money for various personal reasons, e.g. car and holidays. This type of loan car may be either secured or unsecured. The term is generally between 2 to 7 years.
Key Tip: Use your equity in your property before taking out a personal loan as the interest rate on personal loans are usually 4-6% higher.
A reverse mortgage is a specific home loan with which the borrower does not need to pay any monthly repayments. The borrower is using the equity in their property to access funds that they may use for a variety of reasons. The loan plus accrued interest must be repaid when the borrower dies, sells the property, moves out or breaches the contract.
Key Tip: Created for retirees who are asset rich and cash flow poor.
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