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Home Loan Types
Basic Home Loan
As the name suggests, this is a "No Frills" Home Loan product as is does not have the added features you will find in the "Standard Home Loan".
Because this Loan has little or no added features, it is provided to customers at a reduced interest rate.
Most Lenders will allow customers to add individual features to their Basic Home Loans provided the customer pays an additional fee to activate the added feature. This allows customers to "build" a home loan product to suit their individual needs although there is a point at which the cost of these additional features will become excessive.
Advantages
The main advantage is the lower interest rate charged to offset the lack of features. In other words you are not paying for features that you don’t need.
An additional benefit is that because the interest rate is lower, the repayments are generally lower.
Disadvantages
Some Lenders may restrict how the loan can be used or how repayments are to be made. For example a Lender may only accept loan repayments by direct debit from an account held with that Lender.
This type of loan may not be available if you wish to have a Combination Home Loan (covered separately).
Additional features have to be paid for separately and can sometimes be expensive to activate. Generally the Lender will not reduce any of the establishment costs of the loan if you are attempting to negotiate a better deal.
Probable Customer Type
Suits the low-income earner who is also borrowing a small amount of money.
A person that also states that they has no prospect of earning any more than they currently are, and will stay in the home they are purchasing for a long period of time. They don’t expect to be able to borrow more money or need any more funds to perhaps extend or build a pool or renovate.
TopStandard Home Loan
Although known as a standard home loan, a number of home lenders refer to this type of loan as their Premium home loan product. This is due mainly to the extensive features available with this product. This type of loan is probably the most popular type of home loan in Australia.
Because this product usually incorporates all the features that can be made available in a home loan, the interest rate charged is usually higher. The rate, although higher than the Basic Home Loan, is in fact referred to as the Standard Home Loan Rate. The rate is usually the same across the all the major Lenders.
Advantages
The main advantage is the number of features, which allows the customer a wide variety of flexible options that can enable the customer to more easily manage their loan with little or no extra costs when changes are made. The interest is usually set as a variable rate, which allows for additional repayments without penalty. The major lender will in most cases offer additional benefits such as reduced establishment costs, discounts on Home Insurance and no fees on your transaction account with them.
Disadvantages
The interest rate is not always the lowest available and if a customer has no use for the additional features that are available with this product then they would in most cases be better off with a basic home loan product. As the interest rate is generally set on a variable rate, interest rate movements can effect your repayments. Will usually allow mortgage insurance of up to 95% LVR which allows you to borrow more money however it costs.
Probable Customer type
Suit a person who feels they can make extra payments and who's circumstances might change over the next 1 - 5 years.
Number of free transactions = Key difference = Interest rate
Could be viewed as a lifestyle loan because the customer has a lot of flexibility.
TopHoneymoon Home Loan
Honeymoon Loans are also known as Introductory Loans and are often only available to new borrowers. This loan is usually structured on the basis of a lower interest rate for an initial set period ranging from six months to two years. The most common initial period is twelve months. This initial interest rate is usually a fixed rate, which is lower than the Basic Home Loan Rate and as such is often looked at as an attractive deal.
After this initial low interest rate period, the interest rate reverts to the lender's standard variable rate home loan.
Advantages
The lower interest rate period allows customers to reduce their costs over the initial period particularly if the customer makes payments at the standard variable rate from the outset. Alternatively customers can set their loan repayments during the initial low rate period to a lower repayment amount to assist them adjusting to their new home loan payments.
Disadvantages
In most cases the Lender will impose cost penalties if the customer pays out the loan within the first two to four years of establishment of the loan. This is to compensate them for loss of income during the initial low rate period. If interest rates fall during the initial period the customer may also not be able to take advantage of the interest rate reduction.
If a customer chooses low repayments during the low interest rate period and interest rates rise during this period the customer will have to increase their repayments significantly when the low interest period ends.
As Honeymoon or Introductory rates generally only apply to Standard Home Loan rate products, the customer is forced into a higher rate loan due to the added features associated with a standard rate product. If customers don't require all the features associated with a Standard Home Loan they may be better off with a basic home loan product rather than a Standard Home Loan with a Honeymoon or Introductory rate.
TopLine of Credit Home Loan
Also known as Credit Lines or Equity Lines. Usually a variable rate loan which provides customers a set borrowing limit which enables them to have access to the equity in their home for either personal or investment purposes. The borrowing limit is usually set at a fixed amount and customers must ensure their borrowings do not exceed this amount. Repayments are generally interest only, however, customers have the flexibility of placing their surplus funds into their line of credit to reduce interest costs and redrawing these funds whenever they wish. Line of Credit Home Loans can generally be accessed via cheque, direct debit or credit/debit cards.
Advantages
A customer can operate all of their financial affairs from the one account.
Particularly suited to investors who require a flexible account to manage their flow of funds at a reasonable interest rate.
This product is also often used in combination with mortgage minimisation strategies where customers deposit all their income and surplus funds into their line of credit, use their credit card for all their living expenses during the month and repay their credit card by drawing the funds from their Line of Credit Home Loan account.
As the interest is charged only on the outstanding balance of the loan, any additional funds deposited by the customer will result in a reduction to interest.
Disadvantages
As the borrowing limit stays at the same amount, it can lead to customers making little or no reduction to their home loan. Unlike the Standard Home Loan, which requires principal and interest repayments, a Line of Credit only requires interest to be paid.
If used as part of a mortgage minimisation strategy, it is essential that customers work to develop a strict budget and stick to it. If for any reason they are unable to repay their monthly credit card bill when it is due, their whole mortgage minimisation strategy will start to fall apart.
The interest rates on Lines of Credit are often higher again than the Standard Home Loan rates. In some situations the Lenders will restrict the amount or size of transactions allowed on the Line of Credit and any variance to these arrangements can incur high additional fees.
Could be described as a 'wolf in sheep's clothing'
Top100% Offset Home Loan
Comes with 2 accounts - loan account and offset account
This type of loan is a variation of the Line of Credit Home Loan (or Standard Home Loan with redraw facility).
It works on the basis that the customer deposits their surplus funds into a deposit account, which is separate from the home loan account. The amount of money deposited into the deposit account is used to calculate a reduction to the interest charged on the home loan account. The expected result is that your home loan interest would be reduced by the same amount and in the same manner as if you had have deposited the funds directly to the home loan account. Some Lenders offer this arrangement as an alternative to the Line of Credit as it still required the customer to make principal and interest home loan repayments.
Eg:- the principle is reducing therefore you can only redraw up to this amount depending on what you have in your offset account under the principle amount.
Advantages
The advantages of this type of product are similar to those of the Line of Credit but often with a slightly lower interest rate.
It also allows customers to easily identify and keep separate their deposit funds from their home loan but still reduce their interest costs.
Disadvantages
The customer needs to operate more than one account and there may be additional fees for operating this type of arrangement.
Some Offset accounts require a minimum balance before any interest savings can be achieved therefore not giving the same amount of savings as depositing surplus funds directly into the home loan account.
There may be two sets of fees, one for each account
TopLow Doc / Lite Doc Loan
As the name suggests, this is a Loan that requires less than the usual amount of customer supplied documentation. This Home Loan product can be very different from the “Standard Home Loan”.
As this Loan has little or no documentation requirements, it is provided to customers at higher interest rates to cover the higher risks.
Most lenders provide these loans to businesses, (or holders of ABN's), which have been trading for at least two years. The loan is almost always for investment purposes only. The Lender gives the opportunity for the borrower to declare (by way of a signed document) an income, without the requirement to produce evidence of that income. This is particularly good for individuals who have yet to have their accountant complete taxation
returns.Advantages
The main advantage is the lower documentation requirements which allow for "Self-Certification".
Disadvantages
The lender incurs some additional risk by reducing documentation requirements, and as such, a higher than ordinary interest rate is charged.
Most Lenders restrict the loan to investment purposes only.
This type of loan is usually not available to PAYG income earners.
This type of loan usually incurs a higher than average set up cost. A portion of the setup cost may be deferred, and becomes payable if the loan is finalized within a certain period. Total setup costs can be between $2000, to $4000, often with 50% of the setup cost deferred.
This type of loan is usually only available up to 80% LVR. This helps avoid Mortgage Insurance, which in turn assists the lender to reduce their documentation to the customer.
Probable Customer Type
Suits the self-employed earner who has not completed full financials for the last two years, and who is buying an investment property.
TopCapped Home Loan
There are a number of variations to these types of loans, however they basically work on the same principal. That principal is that the customer either chooses, or is offered to choose, an interest rate "Cap" (Ceiling or Peak) that they do not wish their loan to exceed if rates go up, and sometimes this is accompanied by an interest rate "Floor" that applies to their loan if interest rates drop. This arrangement is usually set for a fixed period of time and after this time reverts to the Standard Home Loan rate. There is often a cost or fee associated with this arrangements depending upon the "Cap" and or "Floor" selected.
Eg:- fixed for a period of time between 7.25%(floor) & 8.95%(cap)
Advantages
The main advantage is that if interest rates rise above the customers "Capped" rate the customer does not have to pay that higher rate. In other words, the customer's interest rate will not rise above its "Capped" rate.
If interest rates fall, the customer's rate will also fall unless the interest rate falls below their "Floor" rate. This can provide a customer with piece of mind if they are concerned with adverse interest rate movements.
Disadvantages
If the customer has a "Floor" rate and interest rates fall below this rate, the customer will still have to pay the "Floor" rate.
Getting out of these arrangements before they expire can incur additional costs.
The costs associated with establishing this type of loan can be a waste of money if the "Cap" and / or "Floor" are not selected correctly.
Some Lenders will apply an interest rate higher than their Standard Home Loan rate when the "Capped" term expires.
Could be described as the one account version of the split or combination loan.
You buy a 'cap & floor' and hedge your bet.
Sometimes, the interest rate is determined by the '90 day bank bill rate'
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