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Types of loans
Principal Only Loans - This is a groovy little technique that can be employed when you have a motivated seller. A seller maintains an interest in the property, (sometimes secured on the property, but not always). The balanced is paid over a period of time, with no interest.
Honeymoon Loans - Some institutions offer a six month or one year discounted rate to attract new business, usually about .5% to 1% below current variable interest rates. When the honeymoon is over; the loan will revert to the standard variable rate, or you can elect to fix the interest rate for a period.
Basic Loans - A basic loan is based on the variable interest rate, but the bank will offer you a discount for the life of the loan. The downside for this discount is you will have restrictions on the usage and flexibility of the loan. If you want to repay a lump sum, it has to be in large amounts.
Line of Credit, Re-draw Facilities and Offset Accounts - These loans are very similar products and all give you the ability to access funds against your mortgage when needed. The line of credit and re-draw facilities are virtually inter-changeable. You can access funds up to the set limit (depicted by your income). Both loans are usually operated on an interest only basis for the amount borrowed, calculated on a daily basis. An offset account is a little different, in that excess monies do not actually pay down the loan balance, but sit in a parallel account and interest is only calculated on the difference between the two.
The advantage of having these types of accounts is that you can have great flexibility to control your finances, no matter what type of property or investment strategy you decide to employ. Typically, with this style of loan, you can borrow 80% of the value of the property and in some cases even 90%. So, if you are looking to access the equity in your home, this style of loan is the perfect option, as you can gain access to the built up equity without paying interest on the loan until you actually use the money.
Click here to find out >>> How to use a Line of Credit Efficiently
Fixed Loans
Fixed Loans - Most financiers offer borrowers the option of fixed loans. These maintain a guaranteed interest rate for a specified period. Loans maybe fixed from 1 to 5 years, but can be fixed for 10 to 15. Basically, fixed loans are when you contract to the bank for a specified period for an agreed interest rate.
Most financiers give borrowers the option of fixed loans; that is maintains a guaranteed interest rate for a specified period of time. Usually loans are fixed from 1 to 5 years but can sometimes be fixed for 10 to 15 years. Basically, fixed loans are when you contract to the bank for a specified period of time for an agreed interest rate.
Financiers vary a little in what repayments you can make during this period of time. However, most financiers only allow you to repay the minimum repayment during this period of time, while some allow you to only repay up to 20% above the payment required. When signing for a fixed option, there are a few traps to watch out for. Usually, you are not guaranteed the rate you sign for; banks will usually have written into the loan contract that it is the rate on the day of settlement not the rate on the contract. So if the rates go up or down, you get the rate on the day of settlement. We have seen instances where the fixed rate has increased over 1% between the times of applying to have a loan fixed to the time of settling the loan.
Some banks give you an option to guarantee the rate if you agree to pay a premium on the rate at the time of applying, usually this is .5%. You are able to fix either principal and interest loans or interest only loans. After the agreed term, you can pay to re-fix or roll-over onto the variable rate of the day.
Another trap with fixed loans is that if you decide to sell the property or refinance it either with the same bank or another banker, there will quite often be a discharge penalty during the fixed term of the loan. If interest rates have dropped since fixing your loan, this penalty can often be very substantial. It is important to find out all the facts before entering into a fixed loan and if you already have a fixed loan and are considering refinancing to access untapped equity in your property, it is important to determine the cost of doing so. Sometimes even when there is a substantial cost, the benefits can still out way any fees you may have to pay in doing so. In this circumstance, ask for help from one of our financial strategists.
Variable Loans
These are the standard type of loan that can fluctuate anytime. Usually bank rates are the same or very similar as their rates are linked to the reserve bank wholesale rate plus a margin. That is an extra percentage that is profit to the bank. Variable loans can also be taken out as either principal and interest loans, or interest only loans. All line of credit facilities and redraw facilities are based on a variable rate loan. These loans can have early repayment fees, but usually only in the first one or two years. Honeymoon Loans Some institutions offer a six months or one year discounted or honeymoon rate to attract new business, usually about .5% to 1% below current variable interest rates. When the Honeymoon is over; the loan will revert to the standard variable rate or you can elect to fix the interest rate for period of time.
Basic Loans
A basic loan is again based on the variable interest rate but the banks give you a discount for the life of the loan. However as the price for this discount, you have restrictions on the usage and flexibility of the loan. Quite often, you can only repay a minimum amount per month and if you want to repay a lump sum, it has to be in large amounts.
There are hundreds of different home loan products on the market that fit into each of the types of loans explained below. We can help you choose the home loan product that suits you best. If you're ready to discuss your options in more detail then arrange to speak to your local Investor Loans Network finance strategist.