Expert Mortgage Brokers – Q&A
What is a Basic Home Loan ?
Basic home loan is usually as the word suggests a simple or as some lender like to call them, ‘no frills’ loan. They are usually not as flexible as other home loans but do offer low ongoing interest rate, low ongoing fees and sometimes come with discounted or no application fees.
Usually this type of home loan is suitable for small or smaller amount home loans or one home loan rather than an investor who might have more than a few home loan accounts.
What is a Bridging Loan?
Bridging loan is finance or a loan that you can use to purchase a new property until you have sold your existing owner occupied property. So, in other words if you might be looking to upgrade your home from three to four-bedroom home. Upgrading home is not as easy is it might seem but with bridging loan there is a possibility.
Usually bridging loan is used for the convenience of a quick purchase of a home that you might really like and don’t have the time to sell your existing property. You will need to use the property equity; met required serviceability; meet the bridging term of usually no longer than six to twelve months depending on your property and case by case basis lending criteria; and more.
So, either you sell your existing property and then look at buying while at risk of using your sales proceeds on rental and other living costs until you have bought a new property, or alternatively see if bridging loan might be an option.
What is an Equity Loan?
Equity loan is simply the difference between the value of the property you own and the outstanding mortgage you still must pay off on your property. Hence, equity loan may allow you to get loan by using your property equity as collateral security.
Imagine your home loan is about $400,000 and the property is worth about $1,000,000. In this case, the amount of equity you have is $600,000.
Usually equity loans are used in case of renovations, consolidate small debt (like personal loans, credit cards, store cards and other) or potentially purchasing of an investment property. Usually saving for a property investment deposit may take a long time. This option will allow you to increase your existing home loan to purchase an investment property.
What is a Fixed Rate Loan?
Fixed rate loan is an option where you can fix the interest rate on your home loan or part of the home loan for a fixed period, usually one, two, three, four and five years. Fixed rate home loans are usually beneficial for someone that may require security and consistency in repayments without worrying about the repayments going up with an increase in interest rates.
Most of fixed rate home loans do not allow additional repayments on the home loan and do not offer redraw facility. However, some strategies used are fixing a part of your home loan and leaving the other portion variable. That way risk is diversified and any additional repayments can be used toward extra home loan repayments.
What is Line of Credit?
Line of credit is a form of loan that will allow to draw the loan down as you please for a fixed amount borrowed on the loan. You can draw the funds like any transaction account, cheque account or like a credit card.
Usually line of credit loan is repaid on monthly basis. Some of the benefits to a line of credit are having the freedom of being able to pay with it like a transactional account or credit card up to the limit of the credit borrowed by the lender. Usually line of credit has smaller interest rates than credit cards.
What is a Low Doc Loan?
Low doc loan stands for low documentation loan which is primarily based for self-employed home loan solutions. The low doc loan is a form of a loan that is allowing self-employed applicants to apply for a loan with very low documentation to support their income and tax returns. So, initially it is for self-employed who cannot provide financial statements or tax returns as evidence of income mostly because of their early days as self-employed.
Ideally, they are designed for small business owners, contractors or other ANB holders who intend to get a home loan but cannot provide financial statements or tax returns. Lenders would usually verify their income by income declaration forms without actual financial statements or tax returns.
What is a Variable Rate Home Loan?
Variable rate home loan is a type of loan that, as the name suggests, has a variable interest rate which adjusts accordingly to market changes. Commonly, the market changes that may affect the variable home loan interest rate are changes made by the Reserve Bank of Australia. Imagine a rate change with the Reserve Bank by a decrease of 2%. Most banks may follow soon after by a full rate drop of 2%, or partial rate drop by some of the other banks of for example of 1.5%. Hence the rate on Variable Home Loan will fluctuate up or down depending on the Reserve Banks cash rate.
Some of the attractive flexible options that come with this loan are 100% offset account facility, redraw facility, unlimited additional or extra repayments, split home loan accounts and most banks usually don’t charge any application fees. Hence, variable home loan is the most flexible and most commonly used home loan in the market today. Some of the diverse types of Variable Rate Home Loan options are as following:
- Basic Home Loan (tag this to the Basic Home Loan question, can you do that please?)
- Package Home Loan
- Low Doc Loan (This also)
What is a Package Home Loan?
Package home loan feature or option is an option that provides the borrower certain discounts on interest rates and bank service fees. This will allow products such as multiple home loans, credit cards, transaction accounts that lenders may charge a one off yearly fee or no fees in some but rare instances. It primarily may be suitable to borrowers with multiple home loan accounts that may save more money and keep their banking with one lender.
What is a mortgage broker?
A Mortgage Broker is the specialist between the borrower and the lender, who negotiates the most competitive loan on your behalf.
The process involves researching products on the market from the hundreds of loans available, and then support you through the application and settlement process.
Usually they will not charge anything for their service, as for their hard work brokers are paid a commission by the lender upon last day of the month in which the settlement occurred.
What is an Offset Account?
An offset account is a transaction account linked to an eligible home loan or investment loan. The amount of money you have in this account could offset the owing amount on the loan, and you’ll only be charged interest on the difference between the offset account available funds and the home loan outstanding amount.
Offset account is like any other general account except it can save you money on the amount of interest charged on your home loan. So, an offset account is any savings or transaction account that is linked to your home loan or investment loan as an offset facility. In other words, the account is your savings account or a transactional account but it has super power, called offset facility.
An offset account can be one of the best features you could have on your home loan. It could help you pay off your loan a lot quicker and it will reduce the interest charged on your home loans accordingly.
Imagine your loan was $850,000 and you had saved in your offset account about $200,000 for another property or an upgrade of your existing home property. The amount of interest charged on your home loan would be on the amount of $650,000 and not the full $850,000.
An Expert Mortgage Broker can help you compare over a thousand of different home loans and work out how much additional features on your home loan could save you with a free appointment.
What is Redraw home loan option?
Redraw facility is an option you may be able to have on some most loans and withdraw any extra or overpaid money you paid into your home loan or investment loan account. Now, imagine that your yearly loan repayments are $25,000 and you paid $35,000 by paying more onto your home or investment loan. The $10,000 would show as additional repayments and would still be available for you to transfer back into your everyday account to purchase something else.
What’s even better is that you don’t even get charged for the interest on you home loan for the amount extra repaid into the home loan while the money is in the home loan account. When you redraw the funds out of the home loan the balance of the home loan will go up and you will start getting charges on your home loan for the amount you took out, or redrew from the home loan account.
Like offset facility, redraw facility could your best friend in paying off the home loan sooner. Alternatively, most people may use it to save money for something else and at the same time avoid paying for interest on the home loan for the time those extra or additional repayments are sitting in the home loan.
What is Extra Repayments facility or option?
Extra repayment option allows to pay additional repayments into a home loan. Imagine the home loan repayment is $3,000 and your disposable income allows you to make additional repayments of about $1,000 a month. Ina year the extra repayments will be about $12,000 in case every month is paid with additional $1,000 that you can use in redraw or less interest charged for that amount additionally paid into the account.
Usually all variable rates will allow for you to make additional repayments and hardly any fixed repayments will allow some or any additional repayments. Fixed repayments can be set up on an automatic basis by calling the bank and asking them to debit your account by additional $1,000 per month or you can do it via lenders internet banking that most lenders offer.
What is a Split Rate home loan feature?
Split home loan feature offers the option to have one home loan split into many home loan accounts. Amongst the split loan accounts, they may be fixed rate and variable rate home loan accounts. This is an option that usually may diversify the risk involved with having a fixed home loan account and enjoy the flexibility of having a variable rate account.
One account could be a fixed portion for $500,000 for 2 years and the other account a variable rate of $100,000. This combination might suit a borrower that requires some flexibility and safety regarding interest rate. Hence if the borrower can repay only up to $100,000 every two years, they may only keep that much in the variable portion and fix everything else left owing on the loan because they cannot pay off any more.
What is a home loan Interest Only option?
Interest only option a usually a fixed period of minimum one year and more where the home loan repayments are interest only repayments and no principal portion included. The benefit is having minimum repayments. However, the negative with this option is that the principal is not being paid off at all. Minimum terms a one year up to most commonly 5 years and rarely some lenders may offer 10 to 15 years.