Home Loan Rate – Australia

A loan is a form of debt incurred when someone, called a lender, lends an amount of money, called the principal, to another person, called the borrower. The borrower is then expected to repay an equal or greater amount of money at a later date. The money is usually expected to be repayed in regular payments of the same amount. 

In the majority of cases, the lender provides the loan at an additional cost, called interest. Without interest, there would be no financial incentive for the lender to provide the loan. In legal loans, all of these obligations are regulated by a contract. Most legal loans, such as mortgages, are obtained from financial institutions such as a bank. 

Loans are often used in major transactions such as home purchases and vehicle purchases since most buyers cannot afford to pay large amounts of money out of pocket. Often, the borrower will be required to put down a deposit on the loan in order to secure it. In cases where the loan to value ratio is high, the lender may also ask that the borrower pay mortgage insurance on the loan. 

There are several different types of loans available including standard variable loans, basic variable loans, fixed rate loans, line of credit loans, combination loans, discount variable loans, lo doc loans, and non-conforming loans. These different types of loans are detailed below. 

Standard variable loan

A standard variable home loan is a loan in which the interest rate changes throughout the duration of the loan. These types of loans may be combined with a package that allows them to eligible for a lower rate. A standard variable loan will also include a mortgage offset account. 

Basic variable loan

A basic variable loan is also a loan in which the interest rate can change throughout the duration of the loan. The interest rate for this type of loan will be similar to that of a standard variable loan, but will usually have a packaged loan discount. Basic variable loans typically have less features than the standard variable loan. 

Fixed rate loan

A fixed rate loan is a loan in which the interest rate is fixed over a set period of time. These loans usually penalize the borrower should they choose to exit the loan before it is set to end. The borrower will have to pay a “break cost,” which can be very expensive. If there is any chance that the borrower will repay the loan early, he or she should not take a fixed rate loan. 

Line of credit loan

A line of credit loan is a loan without a set amount. Instead, the borrower can draw any amount up to the credit limit at any time. There are no set repayments, and the loan will have a variable rate. Payments can be made toward the balance at any time. Some lenders ask that the borrower make at least one repayment each month, while others don’t ask for any payments until the credit limit has been reached. The required payment in the first case must usually at least equal the interest accrued in the previous month. 

Combination loan

A combination loan is an option offered by many lenders in which the borrower receives a professional package. The package includes multiple fixed rate loans, variable rate loans, and line of credit loans. The borrower will then be asked to pay an annual fee for the package. A common type of combination loan involves the borrower receiving a portion of a loan as a variable rate and the remainder as a fixed rate. This offers the borrower the benefit of not having to worry about rate increases on the fixed rate portion while still being able to make extra repayments on the variable rate loan without penalty. 

Discount variable loan

A discount variable loan is a variable rate loan that includes a lower interest rate. This discount will typically be more than the discount received with a packaged loan. The discount is typically valid for one year, so it is possible that this type of loan will work out to be more expensive in most cases. 

Lo Doc loan

A lo doc loan, or low documentation loan, is a loan in which the borrower is not required to provide tax returns or financial reports. This type of loan is most often used by borrowers that are self-employed and don’t have access to such paperwork. Most lenders do require some proof of income, however, which can be in the form of bank statements. 

Non-conforming loan

A non-conforming loan is a loan that does not require the borrower to meet the standard lending criteria. This type of loan is not usually available from mainstream lending institutions. A non-conforming loan is typically given to borrowers with credit problems or a history of late or missed repayments.

 Get more information about home loan types.

For those who have fully paid their home loan mortgage, you would think there is not much more to worry about, and you are all set for the future.  However, this is often not the case.  Homes, like people, age, and need a bit of fixing here and there from time to time.  The problem is we often do not save for these regular or major repairs that should be expected as the property is used on a daily basis.  What happens is we end up with a house that is indeed fully paid, but is badly in need of repairs and restoration.

Thankfully, the common scenario is that as homes age, the property value goes up.  Just like good wine, properties that are situated in good neighborhoods and good areas value tend to go up.  Now when the property value goes up then you should be qualified for an equity loan.  The property to be used as equity will be your current home, and the basis will be your homes current value.  Hence, with an equity loan you can make the renovations and repairs needed to keep your home feeling fresh and new.

Remember that an equity loan can likewise be used in other ways.  With the money that you get from an equity loan you can purchase another property, and this could be for investment purposes.  Hence, in addition to making possible renovations easier on the pocket, equity loans can open the door to savvy businessmen who can earn more income through the use of an equity loan.

The problem is not many banks and lenders are willing to grant an equity loan.  There are some out there who are willing to take the risk just to give you a chance to fix up your house.  For more information on how to get an equity loan, its advantages and disadvantages, it would be best to consult the experts on loans.  With their help, it will be much easier to decide whether or not an equity loan is right for you, and whether or not the timing of the sale is good or not.

Although it’s only been in the American market for a few years, the equity accelerator is poised to take the U.S. mortgage industry by storm. It may be hard to believe, but the equity accelerator can reduce the interest paid and term of a loan by 50% or greater.

The Problem

Traditionally, lenders focus borrower attention on keeping their monthly payment “comfortable.” They are careful not to mention the long-term payoff amount for a 30-year, fixed mortgage loan. The fact that total payout on a house held to term is between two and three times the original purchase price is never mentioned.

Americans move on average about every seven years. Therefore, lenders have structured their mortgage repayment plans so that almost all of the first seven years’ payments go toward interest. Very little of each payment goes toward principle.

The financial industry has also laid onerous pre-payment penalties in the $5,000 to $15,000 range on the back of borrowers. And in the past decade or so, even more creative ways have been devised to place the consumer at a disadvantage.

The notorious Adjustable Rate Mortgage, or ARM, is one of the worst. But as of mid-2008, many of these have been coming back to haunt the mortgage industry as homeowners default when ARMs adjust upward.

Consumers without question, have been foolish and gullible during the first decade of the 21st Century. But the financial industry has not hesitated to take full advantage of consumer ignorance and vulnerability.

Adding to the burden is the high level of taxation in the United States. Small business owners in particular are sometimes forced to borrow to keep them paid. Government induced inflation adds to the burden.

The Solution

The equity accelerator, also known as the mortgage accelerator, offers great potential for relieving these tensions to the benefit of both consumer and lender. There is great opportunity for creating a financial environment in which both lender and borrower may prosper.

Exactly how does the equity accelerator work its magic? The handful of companies pioneering this market each has their own unique configuration.

The bi-weekly payment plan is the forerunner of the equity accelerator. Under this system half payments are made every two weeks instead of monthly. This gives you an extra half payment every year, and shaves about 16% off your mortgage.

This is good, but it comes nowhere near the power of the equity accelerator to cut a mortgage down to size. The best plans do not require refinancing and are thus consumer oriented.

The most powerful equity accelerator plans involve setting up a money merge account in conjunction with the mortgage. The money merge account is simply a standard home equity line of credit into which the homeowner deposits all of their monthly income.

This account operates similar to a traditional interest bearing checking account with an open-end interest calculation. In addition to the monthly mortgage payment, all bills and obligations are paid from the account.

As reported in Personal Real Estate Investor magazine (March-April, 2008) the power lies in fluid movement of funds between the line of credit and the mortgage to maximize the advantage. According to Thomas Chester, CEO of United First Financial,

“the secret is repositioning regular income that is effectively idle money…The repositioning occurs when income is applied in a lump sum to the balance owing on your line of credit. This keeps the credit line balance as low as possible and significantly reduces interest charges… This means that more money goes toward paying the principal…each month and the mortgage is paid years ahead of a standard mortgage schedule.”

The beauty of the concept is that it impacts all debts in the same positive fashion, not just the home mortgage. The pay-off for credit cards, student loans, car loans and virtually all other loans can be reduced by about 50% on average.

The equity accelerator concept has been in play in Australia and other countries for about 20 years. As noted earlier it is poised to sweep the U.S. mortgage industry in the next 3-5 years. This truly is a turning point — a paradigm shift — in mortgage history. As usual, the United States is the late-adopter, but better late than never.

Mortgage managers, banks, credit unions, brokers, insurance groups all offer a seemingly endless choice of loan options – introductory rates, standard variable rates, fixed rates, redraw facilities, lines of credit loans and interest only loans, the list goes on. But with choice comes confusion. How do you determine what the best type of home loan is for you?

First, set your financial goals, determine your budget and work out how long you want to pay a mortgage for. You can do this yourself or with your financial advisor or accountant.

Second, ensure the organization or person you choose to obtain your mortgage from is a member of the Mortgage Finance Association of Australia (MFAA). The MFAA Member logo ensures you are working with a professional who is bound by a strict industry code of practice.

Third, research the types of loans available so you can explore all options available to you with your mortgage provider. Some home loan choices are:

Basic Home Loan

This loan is considered a no-frills loan and usually offers a very low variable interest rate with little or no regular fees. Be aware they usually don’t offer additional extras or flexibility in paying of extra on the loan or varying your repayments.

These loans are suited to people who don’t foresee a dramatic change in personal circumstances and thus will not need to adapt the loan in accordance with any lifestyle changes, or people who are happy to pay a set amount each month for the duration of the loan.

Introductory Rate or ‘Honeymoon’ Loan

This loan is attractive as it offers lower interest rates than the standard fixed or variable rates for the initial (honeymoon) period of the loan (i.e. six to 12 months)

before rolling over to the standard rates. The length of the honeymoon depends on the lender, as too does the rate you pay once the honeymoon is over. This loan usually allows flexibility by allowing you to pay extra off the loan. Be aware of any caps on additional repayments in the initial period, of any exit fees at any time of the loan (usually high if you change immediately after the honeymoon), and what your repayments will be after the loan rolls over to the standard interest rate.

These loans are suited to people who want to minimise their initial repayments (whilst perhaps doing renovations) or to those who wish to make a large dent in their loan through extra repayments while benefiting from the lower rate of interest.

Tip: If you start paying off this loan at the post-honeymoon rate, you are paying off extra and will not have to make a lifestyle change when the introductory offer has finished.

Redraw Facility

This loan allows you to put additional funds into the loan in order to bring down the principal amount and reduce interest charges, plus it gives the option to redraw the additional funds you put in at any time. Simply put, rather than earning (taxable) interest from your savings, putting your savings into the loan saves you money on your interest charges and helps you pay off your loan faster. Meanwhile, you are still saving for the future. The benefit of this type of loan is the interest charged is normally cheaper than the standard variable rate and it doesn’t incur regular fees. Be aware there may be an activation fee to obtain a redraw facility, there may be a fee for each time you redraw, and it may have a minimum redraw amount.

These loans are suited to low to medium income earners who can put away that little extra each month.

Line of Credit/Equity Line

This is a pre-approved limit of money you can borrow either in its entirety or in bits at a time. The popularity of these loans is due to its flexibility and ability to reduce mortgages quickly. However, they usually require the borrower to offer their house as security for the loan. A line of credit can be set to a negotiated time (normally 1-5 years) or be classed as revolving (longer terms) and you only have to pay interest on the money you use (or ‘draw down’). Interest rates are variable and due to the level of flexibility are often higher than the standard variable rate. Some lines of credit will allow you to capitalise the interest until you reach your credit limit i.e. use your line of credit to pay off the interest on your line of credit. Most of these loans have a monthly, half yearly or annual fee attached.

These loans are suited to people who are financially responsible and already have property and wish to use their property or equity in their property for renovations, investments or personal use.

All In One Accounts

This is a loan which works as an account where all income is deposited in the account and all expenses come out of the account. The benefit of the All In One Account is its ability to reduce the amount owed and thus the interest payments while providing a one-stop finance shop where your loan, cheque, credit and savings accounts are combined into one. Normally these loans will be at the standard variable rate or slightly higher and may incur monthly fees. Be aware that if the account is split into the loan account, with credit, cheque and ATM facilities placed into satellite accounts, you will need to check your access to funds, how many free transactions you receive, and what associated fees the loan may have.

These loans are suited to medium to high income earners.

100% Offset Account

This loan is similar to an All In One Account however the money is paid into an account which is linked to the loan – this account is called an Offset Account. Income is deposited into the Offset Account and you use the Offset Account for all your EFTPOS, cheque, internet banking, credit transactions. Whatever is in the Offset Account then comes directly off the loan, or ‘offsets’ the loan amount for interest. Effectively you are not earning interest on your savings, but are benefiting as what would be interest on savings is calculated on a reduction on your loan. The advantages are similar to the All In One Account. These loans normally have a higher interest rate and higher fees due to their flexibility.

These loans are suited to people on medium to high income earners, and to disciplined spenders as the more money kept in the offset account the faster you pay-off your loan.

Partial offset account and an interest offset account are also available.

Split Loans

This is a loan where the overall money borrowed is split into different segments where each segment has a different loan structure i.e. part fixed, part varied and part line of credit. Often called designer loans, you benefit from one or more types of loans. Splitting the loan offers a saving on stamp duty and other charges.

These loans are suited to people who want minimize risk and hedge their bets against interest rate changes while maintaining a good degree of flexibility.

Professional Package

This loan is available at a minimum amount to people on higher incomes or people of a specific profession if they meet certain requirements. The benefit of this loan is being able to borrow higher amounts with a high degree of flexibility and a discount on the standard variable interest rate. The level of discount is dependent on the size of the loan, and the duration of the discount depends on what’s negotiated and can sometimes apply for the life of the loan. Generally these products combine all fees into the one annual fee. Lenders of this product usually provide a lot of added values such as credit cards, discounts on their insurance and investment products.

Tip: If you don’t need the additional extras other loan types may offer a better interest rate.

Non Conforming Loan

These loans are only available from non-bank lenders where interest rates are higher due to the greater risk and shorter life of the loan. The advantage is they are available to people who don’t fill the traditional lending institution criteria. There are two types of Non Confirming loans:

1. A Low Doc Loan usually has a slightly higher interest rate and fees than the standard interest rate and will have a maximum borrowing amount and/or will usually only lend 70% of the value of the property. After demonstrating the ability to meet the payments the interest rate will often revert to the standard rate.

   These loans are suited to people who do not wish to disclose their income or have the inability to show a true income i.e. if you are self employed.

2. Sub-Prime Loans usually have a much higher interest rate and fees than the standard rate and usually require you to use an asset as security. They are based on a sliding scale in accordance to the level of risk of loaning the money. Refinancing is available once the borrower can establish a good payment record.

   These loans are suited to people with poor credit histories.

Other Loans and Products in the Market Include:

Construction Loans: For those building a home when you don’t need the entire amount from the start – you only pay interest on what you’ve spent over the stages of construction.

Bridging Loans: For when the sale of an existing property takes place after the settlement of a new property – when you want to buy a new home before selling the old one, where the funds from selling the old home are paid straight into the loan for the new home.

Consolidation Loans: Enables you to use your mortgage to consolidate other debts such as credit cards, personal loans, car loans etc. – interest rates on the mortgage are usually cheaper than personal loans.