Summary Of Loan Types

Are You Confused By All The Different Loan Types Available Or Unsure Which Loan Features Will Best Meet Your Property Investment Needs?

Then read on to explore the features of the various loan types available and discover the advantages and disadvantages of each.

Summary Of Loan Types

Standard Variable Loan

Standard variable loans are Australia’s most popular type of home loan. The interest rate varies throughout the loan term. These loans generally offer excellent flexibility, low fees and often offer great features such as an offset facility, redraw facility, no limits on additional repayments and in most cases, no early pay-out penalties.

Advantages:

  • Flexibility
  • Lump-sum payments can be made without incurring a penalty.
  • If interest rates fall, your repayments will fall.
  • Often offer extra features.

Disadvantages:

  • If interest rates rise your repayments will rise.

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Basic Variable Loan

Basic variable loans typically offer lower interest rates and fewer features than the standard variable loans. You often have the option to pay for any additional feature required. Interest rates and repayments will vary throughout the loan term.

Advantages:

  • Relatively low interest rate.
  • Lower repayments.

Disadvantages:

  • Many of these loans do not have the same features or flexibility as other variable loans.

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Intro Rate ‘Honeymoon’ Loan

An introductory rate loan generally offers a guaranteed low rate for an initial period of time (usually 12 months) after which most will revert to the standard variable rate. The rate can be fixed or variable.

Advantages:

  • Usually the lowest rates on the market.
  • Some lenders provide offset accounts on these loans.
  • Opportunity to reduce the principal quickly during the ‘honeymoon’ period.

Disadvantages:

  • Payments will increase after initial introductory/’honeymoon’ period

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Fixed Rate Loan

Under a fixed rate loan, the interest rate is fixed for a specified period, usually between one and five years. This loan gives you the certainty of knowing exactly what your monthly repayments will be and peace of mind knowing the repayments won’t rise. However you won’t benefit if rates go down during the fixed term.

Advantages:

  • Guaranteed rate, if interest rates rise your repayments won’t.

Disadvantages:

  • Reduced flexibility.
  • Extra repayments may incur a fee or be limited.

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100% Offset Loan Account

A 100% offset loan is very similar to an all-in-one loan. Rather than putting all your salary and other income into your loan, it goes into an offset account that is directly linked to your home loan. Any balance in the offset account is 100% ‘offset’ against your home loan. This reduces the amount of interest you have to repay, making your money work harder for you.

Advantages:

  • Can save you substantial amount of interest if used correctly.
  • Operates like a normal transaction account and has a chequebook, ATM card, etc. attached.

Disadvantages:

  • May have higher monthly fees attached to the account.
  • May require a minimum balance in the account

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Line of Credit Loan

A line of credit loan provides you with access to the equity in your home or investment properties up to a pre-approved limit. You access the funds as you need to. The interest rate on a line of credit loan is usually a variable rate and repayments are interest only.

Advantages:

  • You can use the money when you need it and pay it back when you can.
  • Rates are generally lower than a personal loan or credit card.

Disadvantages:

  • Unless care is shown it is possible to reduce the equity you have built in your home.

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Low-Doc & Credit Impaired Loans

A low documentation (or no documentation) loan is suited to investors or self-employed borrowers who do not meet the ‘standard’ lending criteria. This may include; those with an impaired credit history, those who are unable to provide the required documentation in support of their loan application, or those who wish to borrow more than 100% of the property value.

Advantages:

  • Simple income declaration form.
  • No tax returns.
  • No financial statements.
  • Can have features such as redraw, line of credit, variable or fixed rates, principal and interest or interest only.

Disadvantages:

  • Generally a higher interest rate.

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Construction Loans

If you are building your own home or investment property, a construction loan may be suitable for you. This loan requires a fixed price building contract from a registered builder. These loans are usually interest only for the period of building and then become principal and interest once building is completed. A construction loan allows you to draw money as is required whilst building. Also, with the usual necessary documents required when applying for a loan, construction loans also require a ‘fixed price building contract’ and ‘council approved plans’.

Advantages:

  • Competitive variable interest rates.
  • Facility to draw money when necessary whilst building.
  • Interest only payments during the building period.
  • Additional payments can be made.

Disadvantages:

  • Requires a fixed price building contract leaving little room for change whilst building.
  • Some lenders charge a fee for every time you draw money whilst building.
  • Given it is a variable loan; loan repayments will increase if interest rates go up.

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Self-Employed and Non-Conforming

Not all people seeking a home loan will fall into the typical category or mould that applies to the standard home loan. You may be self-employed and have a more complex financial situation, with business and personal finances linked together. You may have a poor credit history or be unable to provide the necessary documentation to support your application. Perhaps you need to borrow more than 100% of the property value.

Advantages:

  • Simple income declaration form.
  • No tax returns.
  • No financial statements.
  • Can have features such as redraw, line of credit, variable or fixed rates, principal and interest or interest only.

Disadvantages:

  • Generally a higher interest rate.

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Deposit Bonds

A deposit bond is an alternative to a cash deposit.  If your funds are tied up in equity in another property or you are a first home buyer and are borrowing 100% of the purchase price, a deposit bond is a useful tool for you to use. They act as a form of ‘insurance policy’ advising the vendor that the deposit bond issuer or underwriter will pay the vendor the 10% deposit should any circumstances arise whereby the purchaser forfeits the deposit.  The deposit bond will lapse on settlement with no funds changing hands in relation to the bond

Advantages:

  • Acts as a substitute for the cash deposit between signing the contract and settling on your property.

Disadvantages:

  • You ae required to come up with the funds required for the purchase at settlement.

 

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Commercial Loans

Commercial loans are a flexible solution available with competitive interest rates and repayment terms. The repayment term can be anything between one and fifteen years on average and you can choose between fixed and variable interest rates. Most lenders offer a Low Doc Commercial Loan which can be useful if you don't have financials available.

Advantages:

  • Increased cash flow predictability.
  • Interest payments on commercial loans are tax deductible.
  • If you back your loan using capital equipment then you remain the legal owner of the equipment.

Disadvantages:

  • If you default on repayments, the lender is able to foreclose on any assets backing the loan and sell them to pay back the money owing.
  • Some lenders charge up to two months interest if you settle the loan within 3 to 5 years and before the due date.

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Business Loans

Most business loans offer the flexibility of variable or fixed interest rates with structured repayments that feature either interest only or principal plus interest. The interest costs associated with business loans are tax deductible against the profits of the business.

Bank overdraft

A bank overdraft account allows you to have access to a pre-determined limit and you only have to pay interest on the amount that you have used.

Debtor finance

Debtor Finance is a financing product that allows you to maximise your cash flow .  Unlike traditional lending products, this form of lending enables you to access funds using the strength of your sales as leverage through borrowing against the outstanding value of your trade debtors.

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Contact us for more information

Click here to contact us now or call us on 1300 734 421 to find out more about how Financing Property can help accelerate your wealth-building journey.