Loans - by type
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Loans
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Loan Types

 

Once you decide to proceed you will also want to consider what type of loan to get. There are a number of different loan types in the market which we commonly recommend which may be able to achieve what you are after ….

"No Frills" Home Loans

The first are plain and simple “no frills” home loans. These tend to be the ones we recommend when the loan amount is around $250,000 or less and/or if the customer is near their serviceability limit. The benefit of such loans are that they come with base level interest rates and they often maximise the borrowing capacity of the customer. Their disadvantages however are that they often have upfront costs of around $500 to $600 and some have an ongoing cost of around $5 - $10 per month. Also they usually don’t have offset accounts which means that any extra repayments that you might be able to make actually have to be placed into the actual loan before it reduces any principle off your loan. If you choose a variable rate and with no honeymoon period, access to these funds is usually still available through redraw but typically at a cost of $25 - $50.

Professional Package Loans

The second are professional package type loans. As your borrowing capacity and loan amount increases, in situations where loan amount is $250K or greater, we tend more and more to recommend professional package type loans that the majority of lenders have available. The disadvantages of such packages are that they usually have an ongoing cost (normally around $300 per year) and their tighter serviceability conditions may slightly reduce your maximum borrowing capacity however their benefits are many and usually far outweigh any disadvantages.

With professional package loans you are usually able to get similar interest rates as the "No Frills" home loans once your loan amount gets to the $250K - $350K mark. The cut off differs between lenders so speak to us to get more specific information. Also, most professional packages give you a loan set up similar to the following diagram …

 

Home Loan - Offset Account - Credit Card

Home Loan

 

Offset account

 

Credit Card

 


This loan structure can allow extra principle to be paid off your loan by simply placing funds into the offset account. In general, with variable rate loans, any extra funds you place into the offset account  reduces the balance of your home loan by the amount of the extra funds for as long as those extra funds remain within the offset account. If your entire salary is paid directly into your offset account on your payday for example, then your home loan will be reduced by this amount for as long each dollar of your pay packet stays within the account.

This can be a useful way to reduce the balance of your loan (and hence the interest payable to the lender) than continually having to manage your finances by transferring any extra funds available from your bank account to your "No Frills" home loan and then back out again (redraw at cost) when you require them. These packages also often come with credit cards with fee free days (some lenders allowing up to 55 fee free days!) so any purchases made on the credit card will accrue on the credit card account for the days until payment is due, thus allowing the funds to pay for your purchases to stay within the offset account for an interim period offsetting your loan balance. Obviously the payments for your purchases still need to be made however at least in the period between your purchase and the payment, your funds are reducing your home loan interest.

The popularity of such professional package loans is continuing to increase possibly due to their overall convenience.

 

Honeymoon Rate Loans

Home Loan Advice Centre generally do not recommend many honeymoon rate loans because, with the majority of lenders, despite saving on interest during the honeymoon rate period, afterwards the interest rate defaults to a level that is significantly higher than discount interest rates that are available to most borrowers. There are a couple of lenders in the market however that give a honeymoon rate period followed by a variable rate that is discounted. In such cases, a honeymoon rate loan may be suitable however please contact Home Loan Advice Centre to find out whether we would recommend such a loan given your circumstances

 

Line of Credit Loans

Line of credit type loans are a useful and convenient style of loan that work in a similar way to a standard loan on interest only repayments with an offset account. The lender gives you a credit limit and you must maintain you loan balance below this limit at all times. The benefit of a line of credit however is that usually, if the loan balance is below the limit, if you do not make your normal loan repayment, the interest amount is simply capitalised onto the loan balance. Lines of credit usually also don't have a term ie they can be set up to run perpetually. They are most popular with investors who want a handy all-in-one loan to simplify managing their finances.

 

For more information on this topic or any other topics please call Home Loan Advice Centre on 02-9210-1000 or see the following links:

Application process

How much can I borrow

Loan enquiry page