Loans Available in Australia

With hundreds of different types of loans, the choices can be sometimes confusing.

Here is a summary of basic loans that are available:

Standard Variable Loans

The interest rate will vary throughout the life of the loan, usually between 25 to 30 years. Interest rates that fall will mean lower repayments and vice versa, if rates rise, so will your repayments.

Many lenders offer many valuable extra features, such as mortgage offset, redraws and line of credit. As with many loans, this may also come with an introductory rate.

Basic Variable Loans

A basic variable loan is in principal the same as a standard variable. However, lenders will generally offer a lower interest rate in exchange for one or many features.

It is basically a compromise between price and flexibility, as some basic variable loans rescind such features as redraws or joint accounts.

It is important to look at the fine print as every lender has different basic variable loans available.

Fixed Rate Loans

A fixed loan allows a borrower to lock in an interest rate for a particular period of time (normally 1-5 years). You then have the assurance of your repayments being fixed for that period no matter what interest rates do. This is often done with, but not limited to, personal loans.

You could also split your loan between a fixed portion and a variable portion. Fixed has more restrictions usually e.g. most fixed rate loans limit or do not allow extra repayments or you cannot pay out the loan during the fixed period without incurring large penalties.

Features such as redraw or mortgage offset are usually not allowed during the fixed period of a loan, however combining the loan allows you to take advantage of features available on variable rate loans.

Splitting your loan into two portions (fixed and variable) can be a good way to hedge your bets on interest rate movements. The fixed portion is safe if fixed at a low interest rate particularly if interest rates then increase. The variable portion moves with interest rates which is good if interest rates drop and you get the benefit of the change.

You can split into thirds, quarters or more - sometimes there is a minimum amount required per portion. You should also consider any fees incurred in splitting and if the loan is one which can be split or pick a package which is designed for such set ups.

Mortgage Offset

A mortgage offset account becomes a personal transaction account. The balance in the account is used to reduce interest on your mortgage. You can deposit and withdraw on this account the same as other accounts so it could be set up as an account for depositing your salary for instance.

Your offset account is linked to your mortgage thereby reducing the balance of your mortgage by the amount of money in your account, dollar for dollar; therefore allowing the balance to reduce the interest payable on your mortgage. Remember the daily limit of your account is offsetting your home loan when the lender calculates the interest.

It could be used as a Loan Reducer or Mortgage Reduction facility. Different lenders offer different types of Offset features, again you need to shop around to make sure the lenders facilities are in line with your own requirements. Be aware that Mortgage offset is not necessarily always offset 100%.

Although ATM, Eftpos, cheque and other access means are available, 100% offset loans encourage borrowers to use a credit card for all purchases and then settle the card in one transaction from the mortgage account per month. This allows the money to remain in the account to reduce the interest for the longest possible period of time.

Introductory/Honeymoon Loans

Honeymoon loans offer customers a special reduced ("teaser") rate for an introductory period, often one year. The loan then reverts to a standard or special variable rate.

Whilst this might help initial cash flow, these loans can be on offer with different packages, so again you need to look at the overall package in relation to your specific requirements, working out the overall rate applicable to the loan over a period of years.

Be sure to know what the AAPR is - the effective rate of the loan, as part of ascertaining whether to take a discounted rate or not.

Principal & Interest Loans

A standard loan on offer from lenders requires that you pay a portion of principal and a portion of interest on every repayment every month ie. amortising loan. This will ensure that your home loan is repaid within the specified period or term. Paying extra repayment to your loan will also allow you to pay off the loan in a quicker period therefore reducing the interest calculated on your home loan, potentially saving you a lot of interest.

Depending on the product that you use, you can split your loan according to the tax effectiveness of the funds that you have borrowed against it i.e if you have investment debt against your home for example, it is better to pay your home loan debt first then when this is paid off, then concentrate on your investment debt. This can also be tax effective for you.

Interest Only Loans

No principle repayments are required - only the interest portion has to be paid on this loan. Theoretically, the loan need never be paid out as long as interest payments are being made.

Some loans can be split with an interest only portion to reduce repayments early on in the loan. Interest only works well with fixed rate loans where the ability to calculate future interest means interest can be paid in advance. This is sometimes a good option for investors.

The interest on a loan is the tax deductible portion of your loan if you are buying an investment and fixed portion sometimes is a good option if you are paying off more then one mortgage. It is recommended that you speak to an accountant regarding the best way to work the repayments tax effectively.

Revolving Line of Credit

This is essentially a facility to allow access to the equity that has been built up in your home over a period of time. It can be looked at like a large overdraft where money paid in can be withdrawn again up to the original amount borrowed. It can function as several different loans (e.g. house, shares, and car) without the borrower having to take out new loans each time they have paid down a portion of the loan.

However most people treat their revolving line of credit loans as an amortizing product in that they make their normal repayments but the flexibility is there should you need to access a portion of your equity quickly.

Revolving lines of credit often have higher interest rates than ordinary variable loans and can be a trap for those not good at budgeting. For more of a safety net, a standard variable loan with redraw or mortgage offset is often preferable, however you can split these loans to suit your requirements.

Capped Loans

Also referred to as a "controlled rate" home loan or tunnel loan. A capped loan sets parameters on the movement of a variable interest rate. This gives some protection against an interest rate rise.

With a tunnel structure, upper and lower limits are set for the rate creating a tunnel in which the loan rate can fluctuate.

Salary Loan or All in One Accounts

A salary loan is one where a borrower's salary is paid directly into the loan. This allows a borrower to use his/her mortgage as both a line of credit and savings account and it also has the effect of a 100% offset account.

Although ATM, Eftpos, cheque and other access means are available, salary loans encourage borrowers to use a credit card for all purchases and then settle the card in one transaction from the mortgage account.

This allows the money to reduce the interest calculation on the home loan for the longest possible period of time.

Some loans offer this flexibility at cost effective rates.

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