Confused about different loan products and what they really mean?
Click on the links below to get the full picture.
We also offer a wide range of loans designed for people in specific circumstances, such as self-employed, credit-challenged or overseas borrowers, facilities for seniors, etc. These include no-deposit loans, no-documentation-required loans and many more...
Bridging finance allows a borrower to "bridge" the gap between the sale of one property and the purchase of another. This can be useful if the settlement date of the new property purchase takes place before the sale of the original property settles. If these two transactions are, say, 30 days apart, bridging finance can help fill that one month gap. Bridging finance can be expensive.
Similar to a standard variable rate, but without the 'extras' such as the ability to redraw extra funds, portability, etc. Extra repayments are permitted with some lenders. The interest rate is typically lower than a standard variable loan, making them attractive to people who are sure they won't be needing the additional features. Ideally suited to clients who don't have any surplus cash each payday.
Fixed Rate Loans
Fixed loans generally allow a borrower to lock in an interest rate for a particular period of time, normally 1-5 years. Customers who choose a fixed rate get assurance that their repayments will not change for the fixed period and that if interest rates rise, their rate will remain the same. However if interest rates drop, a fixed loan will keep a borrower at the higher rate. Customers who want the assurance of a fixed rate but want to take advantage of rate drops, should consider splitting their loan. Fixing a portion of a loan does mean a trade off of the flexibility of the loan. The fixed rate portion of a loan generally has more restrictions than the standard variable. Most fixed rate loans do not let you make extra repayments or pay out or refinance the loan during the fixed period. Features such as redraw are usually not allowed during the fixed period of a loan.
Interest only loans require no principle repayments to be made. You only have to pay the interest portion. Borrowers can't have more of their loan outstanding than they originally borrowed so interest repayments are required to keep the loan balance below that amount. Theoretically, the loan need never be paid out as long as interest payments are made. Many lenders only allow a period of 5 years maximum for this type of loan. Interest only is common in fixed rate loans where the ability to calculate future interest means interest can be paid in advance. It is also commonly used for investment purposes where the interest can be used as a tax deduction.
Introductory or Honeymoon Rate Loan
Introductory or honeymoon rates give the customer a special reduced rate for the first part of their loan contract that can be either fixed or variable. They generally revert to a standard or special variable rate. The benefit of the introductory rate is that repayments in the beginning are lower and can give first home buyers or renovators some breathing space. But honeymoon rates can have hidden traps like break costs if paid out or refinanced during a certain period. Often the rate they revert to after the first year is higher than the standard variable rate and the loan often has increased fees. Ask your mortgage broker to calculate the AAPR on your chosen lender which will show you the effective rate of their loan. This will show if taking out a loan with a honeymoon rate makes you better off overall.
Revolving Line of Credit
A revolving line of credit is essentially a giant overdraft where money paid in can be withdrawn again up to the original amount borrowed. If used properly, the borrower will never have to take out new loans for any purpose in the future. A revolving line of credit is best for those people who want to use the facility several times, buying a house, then shares or a new car with the same loan. Technically, a revolving line is interest only. But most people make higher repayments each month so they can redraw the money up to the original loan limit when they need the funds. Revolving lines of credit often have higher interest rates than ordinary variable loans and can be a trap for those who aren't good at budgeting. So if you want the flexibility but would prefer the safety of set monthly repayments and a mortgage that is slowly being paid off a revolving line of credit is not necessarily the best loan for you.
Splitting a loan is a great way to reduce the effects of interest rate movements. Splitting your loan can be an effective way to cover yourself against interest rate movements. By dividing your loan into two portions, part fixed and part variable, you can watch the variable half of your loan drop when the market does but know that a portion of your mortgage is safe at a lower interest rate if the market goes up. Most institutions require a minimum dollar amount in each split portion and some charge per split so you should check with your mortgage broker about all costs beforehand. Split loans are sometimes called "combination loans".
Variable Rate Loan
Most lenders offer a variable rate loan. The interest rate on these loans does exactly what the name suggests. It can vary with time depending on the market. Although this can sound scary, variable rates are based on official Reserve Bank interest rates and generally won't change unless there is an official change. Variable loans include basic, standard or revolving line of credit products and are traditionally the most flexible. Variable loans generally allow you to make extra repayments and redraw. They also allow you to pay your loan out early. Many institutions offer basic or "no-frills" variable loans with a lower interest rate. In the past, these loans were rate based with little or no extras.