Owner Occupied/Investor

For the owner occupier or investor, you’ll need to understand:

• Types of loans
• Loan features
• Property Purchase costs

To find out more on each of these areas, please scroll down the page.

TYPES OF HOME LOANS

Variable (Principal and Interest) home loans 

The rate charged on a variable loan moves up or down in accordance with movements in interest rates, as set by the Reserve Bank of Australia. Basic variable loans generally have fewer loan features than a standard variable loan. Basic variable loans are suitable if you are looking to pay off a consistent amount over the full term of the loan, but are not suitable if you are looking to pay off your mortgage quickly.

Pros:

• Repayments fall when official interest rates fall
• Standard variable loans offer flexibility and additional features, such as the ability to make additional payments, such as a redraw facility (take out any extra money that you have put in), low introductory or honeymoon rates
• Allows careful borrowers to pay off the mortgage quickly by having minimal penalty for advance payouts

Cons:

• Higher interest rate is higher for standard variable loans than basic loans because they usually offer additional features
• Repayments rise when official interest rates rise

Fixed Rate (Principal and Interest) home loans

A fixed rate loan is a loan that has a fixed interest rate and therefore fixed loan repayments. The time period of these loans can vary, but you can usually “lock in” your repayments for between 1-5 years. Although the fixed rate period may be 3 years, the total length of the loan itself may be 25 or 30 years. At the end of the fixed loan period you can decide whether to fix the loan again for another period of time at the current market rates or convert the loan to a variable interest rate for the remaining time left of the loan.

Pros:

• Repayments do not rise if the official interest rate rises
• Provides peace of mind for borrowers concerned about rate rises
• Allows more precise budgeting

Cons:

• Repayments do not fall if rates fall
• Allows only limited additional payments
• Penalises early payout of the loan

Split Rate (Principal and Interest) home loans

A split rate loan is a loan that has one portion of the loan fixed and one portion variable. You can select how much to allocate to each.

Pros:

• Provides some peace of mind for borrowers concerned about rate rises
• Provides more certainty in budgeting than full variable loans
• Can make additional payments on variable portion

Cons:

• Allows limited additional payments only
• Repayments will rise with rate rises

Interest-Only home loans

You repay only the interest on the principal during the term of the loan; therefore, repayments are lower than with a standard principal and interest loan. At the end of the interest only period – usually one to five years – you must start making Principal and Interest Repayments over the remaining term of the loan.

Pros:

• Lower repayments initially so you have more money to renovate/improve the property.
• Cuts the cost of buying a residential investment property in the short-term, which could allow you to make greater contributions to your principal place of residence.

Cons:

• There will be sudden increase in repayments at the end of the Interest Only period and the loan converts to Principal and Interest repayments.
• Lenders will assess your ability to repay the loan only on the principal and interest repayments. This can reduce your borrowing power, as these repayments will be higher than a loan on Principal and Interest for the full term.

Line of Credit home loans

This type of property loan revolves around equity built up in your property and allows access to funds when needed. These products are creative ways to raise funds for investment by providing cash up to a pre-arranged limit. Each month the loan account balance is reduced by the amount of cash coming in and increased by the amount paid on the credit card or withdrawn in cash. As long as there is consistently more cash coming in than going out these accounts can work well. However, they can be very costly if the balance of the line of credit is not regularly reduced. It requires an interest-only payment as a minimum each month, which can add up to a lot of interest over the long term.

Pros:

• Use the money you need and pay it back when you can
• Home loan interest rates tend to be lower than credit cards or personal loans
• Offers flexibility

Cons:

• Possibly reduces equity in your residential property
• Usually higher interest rates
• Need to be disciplined to make principal payments regularly
• Can be very expensive if not used carefully

Low-doc home loans

A low-doc or no-doc mortgage is ideally suited for investors or self-employed borrowers looking to refinance, purchase or renovate. No tax returns or financial reports are required.

Pros:

• Simple income declaration form
• No tax return or financial records required
• Fully serviceable loan options, redraws, line of credit, variable or fixed rates
• Principal & Interest or Interest-only loans

Cons:

• Generally a higher interest rate

Introductory home loan

The interest rate is usually low to attract borrowers. Also known as a honeymoon rate, this rate generally lasts only for around 12 months before it rises. Rates can be fixed or capped. Most revert to the standard rates at the end of the honeymoon period.

Pros:

• Usually the lowest available rates
• When payments are made at the introductory rate, the principal can be reduced quickly
• Some lenders provide an offset account against these loans

Cons:

• Payments usually increase after the introductory period

Non-conforming home loan

People with poor credit ratings often have trouble sourcing a home loan. Many lenders now offer what are known as ‘non-conforming loans’ for people in this type of situation. While lenders are willing to overlook prior credit problems, they will want to see some evidence of your ability to repay the loan. A larger deposit than is required for traditional loans will generally be required also.

Pros:

• Overlooks poor credit rating

Cons:

• Higher interest rate than traditional loans

 

LOAN FEATURES

There are lots of different features and benefits to consider when you’re choosing a suitable home loan for you. Do you want to be able to reduce your loan interest? Have the convenience of combining all of your accounts into one; get a discount on your interest rate? Or make additional repayments to pay your home loan off more quickly? Velocity Finance Australia will be able to help you decide what’s most important for you.

100% offset account

A 100% offset account is a savings account linked to a loan account. No interest is paid to the offset account but instead the balance of your offset account is deducted from your loan account before the interest on your home loan is calculated. Therefore less interest is charged to your loan.

Pros:

• Savings interest is taxable, but because your offset account balance is used instead to reduce your loan interest, no tax is payable, so you are effectively reducing your tax bill.
• The interest rate on your offset account is the same as that applied to your loan account. This is a great rate and is much higher than you could earn on most savings accounts. The interest rate moves with your loan account rate ensuring you get maximum benefit from every dollar in your offset account.

Cons:

• You may have higher monthly fees attached to the account.
• You may need a minimum balance in the account to benefit.

All in one loan account

This is a loan account that acts as a combined mortgage, savings and cheque account. You have a central mortgage account into which your salary and any other cash payments are deposited. The extra cash in your account reduces the principal amount owing and thereby the amount of interest charged. You then access the funds you have left over and above the minimum monthly repayment amount to pay monthly expenses.

These accounts often have a credit card linked to them, with the balance owing on the card at the end of each month being drawn down from the all-in-one account. Standard transactions such as ATM withdrawals and direct debits are also managed through the account so that many borrowers will not need another bank account. This can be an effective way of using the interest-free period on your credit card each month.

Pros:

• Offers flexibility
• May be tax effective
• Can result in interest savings if used with discipline

Cons:

• Higher interest rate than some other products

Professional Package

Professional packages are generally only available on home loan amounts over a certain value. Usually, the greater the loan amount the more likely the lender will be to offer additional discounting on the interest rate.

Pros:

• Interest rate discount
• May include discounts on other banking products

Cons:

• Borrower may not need the additional services offered
• Borrower may be financially better off with a basic variable loan

The questions below will help you decide the features you need, which should in turn guide you to the home loan that suits your needs. When answering the questions, think ahead, not just until next year but also to 5 or even 10 years down the track. It’s important to be realistic in your answers. Ask yourself the following questions:

• Do I want to pay the loan off as quickly as possible or am I happy to see out the term of the loan?
• Am I good at sticking to a budget or am I a spendthrift?
• Do I require certainty in the amount of my loan repayments or am I happy for them to fluctuate with official interest rate movements?
• Am I likely to want to draw back some of my repayments in the future for spending on holidays, cars, furniture, etc?
• If I am planning on having children, how will this affect mine or my partner’s work situation?
• For existing children, have I adequately budgeted for school fees and other expenses that are likely to come up in the future?
• Am I likely to receive some form of cash windfall or bonus at any stage?
• How secure is my employment or work situation?

These answers will assist you in clarifying your goals, which will in turn help us work through the different loan options and arrive at the one that suits you.

Depending upon your answers to the above questions, you will need to seek a number of loan features that are specific to your situation. Some of the more common loan features available are outlined below.

1. Additional repayments

These are payments that you make which are above the standard repayment for your loan. So for example, a $300,000 loan with a 7% interest rate requires a monthly repayment of $2,120. If you want to pay the loan off quickly and reduce the interest bill, you might make monthly payments of $2,500, which would include an extra repayment of $380.

2. Direct salary credit

This allows your salary to be paid directly into your home loan account. This is an advantage if you are not a disciplined saver.

3. Loan portability

This allows you to take an existing loan to a different property when you move (saving you on Mortgage Stamp Duty).

4. Offset account

This is a separate account that is attached to a loan account. The balance of the offset account is deducted from the balance owing on the loan account when calculating the daily interest charge. For example, a borrower with a $300,000 mortgage and $10,000 in an offset account will only be charged interest on $290,000 and not $300,000. Some products do not offer 100% offset, while others may require a minimum balance in the account before the offset applies.

5. Redraw facility

This allows borrowers to access extra payments that have been made. This money can then be used for a variety of purposes including a holiday, furniture or car. Some lenders have a minimum redraw amount and may also charge a fee per redraw.

6. Repayment holiday

This feature offers a complete holiday from repayments or a period of reduced repayments. This can be especially useful during career changes or breaks such as maternity leave.

7. Switch to fixed rate

This allows the borrower to switch from a variable to a fixed rate loan.

8. Top-up

This allows a borrower to increase the limit on a home loan, using the equity in your property for other needs (e.g. renovations).

 

PROPERTY PURCHASE COSTS