Basic Variable Home Loans

What is a Basic Variable Home Loan?

A Basic Variable loan is quite simply that, basic. Often referred to as a “no-frills” product a basic home loan usually just a home loan with no additional products attached. The benefit of a basic loan, however, is that it usually comes with a low interest rate so it can be extremely cost effective.

While there are often no ongoing fees with a basic loan product you may be charged for additional account keeping transactions such as accessing redraw. Another factor to consider is that basic loans usually do not come with an offset account facility.

The mortgage holder most suited to a Basic Home Loan is the First Home Buyer given their position is usually simplistic and not in need of multiple products. For a mortgage holder with multiple properties, several loan facilities and a suite of different banking products, a basic loan is unlikely to be suitable.

Variable Rate Home Loans

What is a Variable Rate Home Loan?

Standard variable loans are the most popular home loan in Australia. Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and funding costs. Your regular repayments pay off both the interest and some of the principal.

You can also choose a basic variable loan, which offers a discounted interest rate but has fewer loan features, such as a redraw facility and repayment flexibility.

Pros

• If interest rates fall, the size of your minimum repayments will too.
• Standard variable home loans allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
• Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.

Cons

• If interest rates rise, the size of your repayments will too.
• Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
• You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
• If you have a basic variable loan, you won’t be able to pay it off quicker or get access to money you have already repaid if you ever need it.

The team at Blackburne Mortgage Broking can explain in detail exactly how a Standard Variable Rate Home Loan works and how features like redraw and offset accounts can add value to help you realise your home ownership dreams.

When selecting a Variable Rate product, the added bonus is the ability to negotiate better discounts throughout the life of the loan. On an annual basis or at the mortgage holder’s request, our brokers will approach your lender to request additional interest rate discounts off your variable rate home loan on the basis of your loyalty as a client and to retain your business.

Fixed Rate Home Loans

What is a Fixed Rate Home Loan?

The interest rate is fixed for a certain period, usually the first one to five years off the loan. This means your regular repayments stay the same regardless of changes in interest rates. At the end of the fixed period you can decide whether to fix the rate again, at whatever rate lenders are offering, or move to a variable loan.

Pros

• Your regular repayments are unaffected by increases in interest rates.
• You can manage your household budget better during the fixed period, knowing exactly how much is needed to repay your home loan.

Cons

• If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
• You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.
• There is very limited opportunity for additional repayments during the fixed rate period.
• You may be penalised financially if you exit the loan before the end of the fixed rate period.

Traditionally Fixed Rate loans were very rigid in their offering with very little of flexibility– they literally were fixed. Now lenders are starting to ease their fixed rate loan policies and we are starting to see more features available. It’s not uncommon to now have the capacity to pay extra into a fixed product and to even have it attached to an offset account.

The mortgage brokers at Blackburne can talk you though what Fixed Rate products are available and if its suitable for your requirements and financial goals.

Line of Credit Loans

What is a Line of Credit?

With a Line of Credit facility, you can pay into and withdraw from your home loan every month, so long as you keep up the regular required repayments. Many people choose to have their salary paid into their line of credit account. This type of loan is good for people who want to maximise their income to pay off their mortgage quickly and/or who want maximum flexibility in their access to funds.

Pros

• You can use your income to help reduce interest charges and pay off your mortgage quicker.
• Provides great flexibility for you to access available funds.
• You can consolidate spending and debt management in a single account.

Cons

• Without proper monitoring and discipline, you won’t pay off the principal and will continue to carry or increase your level of debt.
• Line of credit loans usually carry slightly higher interest rates.

How does a Line of Credit work?

A Line of Credit or Equity Access facility as it is sometimes known as is primarily an account which allows you to draw upon at your leisure, up to the set limit, kind of like a credit card.

It is usually chosen for those who like to have funds readily available for a variety reasons, whether they be for personal use such as for holidays or home improvements. Some mortgage holders use them for business reasons or to have on hand for future investment.

Split Loans

What is a Split Rate Mortgage?

Your loan amount is split, so one part is variable, and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with the certainty of a fixed rate loan.

Pros

• Your regular repayments will vary less when interest rates change, making it easier to budget.
• If interest rates fall, your regular repayments on the variable portion will too.
• You can repay the variable part of the loan quicker if you wish.

Cons

• If interest rates rise, your regular repayments on the variable portion will too.
• Only limited additional repayments of the fixed rate portion are allowed.
• You will be penalised financially if you exit the fixed portion of the loan early.

Why choose a Split Loan?

It gives you the best of both worlds. Recently, fixed rate loans have been priced extremely competitively and we are seeing more mortgage holders pursuing this loan product option. But when features like offset accounts and the ability to pay extra into the loan are required then a variable rate loan is the solution.

What’s more there is no set amounts each product needs to be. For instance, you can split the loan amounts right down the middle or you can opt to have either a greater fixed or greater variable – it’s your choice.

As part of the service, the Blackburne Mortgage brokers will explain how the structure works the features and benefits of each product and guide you to make a suitable selection based on your own financial goals and personal circumstance.

Interest-Only Loans

What Are Interest-Only Loans?

You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold, having achieved capital growth.

Pros

• Lower regular repayments during the interest only period.
• If it is not a fixed rate loan, you have the flexibility to pay off, and often redraw, the principal at your convenience.

Cons

• At the end of the interest only period you have the same level of debt as when you started.
• If you’re not able to extend your interest-only period, you could face the possibility of increased repayments.
• You could face a sudden increase in regular repayments at the end of the interest-only period.

Lending restrictions in recent years has prompted lenders to curb the amount of interest only loans they hold at their institution. This has resulted in interest only products being priced higher than their principal and interest counterparts. As a result even investors are now often turning away from these products for their investment loans, whereas once interest only loans were the staple product for practically all investment purposes.

Our brokers will be able to help you choose whether an interest only loan is suitable for your unique circumstance in consultation with advice from your accountant or financial planner.

Guarantor Home Loans

How does a Guarantor Home Loan work?

If you do not have a deposit available to put towards a property purchase, a suitable option is often a family guarantee.

A guarantor loan is when a family member (usually a parent) offers security in their own home in lieu of the purchaser having little or no cash deposit. Not only will this assist the prospective new homeowner in obtaining their first home sooner, but it will also eliminate paying Lender’s Mortgage Insurance.

In most cases the lender will limit the guarantee to only the amount needed to keep the lending against the purchase at an 80% Loan to value ratio.

What to consider when offering a guarantee:

• If there is already a guarantee in place for another child, adequate equity must exist in the property.
• If the guarantor has a home loan of their own their must be adequate equity available and the existing lender must have a family guarantee policy.
• If existing lender does not have a family guarantee policy, the prospective guarantors must qualify to refinance to a lender that does.
• Legal advice is often a requirement by some lenders for guarantors to obtain prior to settlement.
• The guarantee will remain in place until the bank deems there is enough equity in the child’s property either through paying the home loan down or by favorable valuation.

Guarantees are a viable and common way to assist in purchasing a home when a deposit is lacking yet the capacity to pay a loan is evident.

Bridging Finance & Relocation Loans

How does a Guarantor Home Loan work?

If you do not have a deposit available to put towards a property purchase, a suitable option is often a family guarantee.

A guarantor loan is when a family member (usually a parent) offers security in their own home in lieu of the purchaser having little or no cash deposit. Not only will this assist the prospective new homeowner in obtaining their first home sooner, but it will also eliminate paying Lender’s Mortgage Insurance.

In most cases the lender will limit the guarantee to only the amount needed to keep the lending against the purchase at an 80% Loan to value ratio.

What to consider when offering a guarantee:

• If there is already a guarantee in place for another child, adequate equity must exist in the property.
• If the guarantor has a home loan of their own their must be adequate equity available and the existing lender must have a family guarantee policy.
• If existing lender does not have a family guarantee policy, the prospective guarantors must qualify to refinance to a lender that does.
• Legal advice is often a requirement by some lenders for guarantors to obtain prior to settlement.
• The guarantee will remain in place until the bank deems there is enough equity in the child’s property either through paying the home loan down or by favourable valuation.

Guarantees are a viable and common way to assist in purchasing a home when a deposit is lacking yet the capacity to pay a loan is evident.