Home Loan Rate – Australia

An interest in advance loan enables you to pre-pay the interest of the loan for the following financial year. These are available from a number of different lenders with fixed rates for a period of up to 5 years.

As a borrower there are two benefits you can receive; rate discounts and tax deductions. The first is a discount on the interest rate as the lender has your payments earlier.

In some cases the lenders will allow the rates to be fixed for longer which is beneficial in a period where they are rising.

Tax deductions are the main reason people opt for interest in advance loans. Paying the sum before the end of the financial year allows investors to reduce their taxable income for that year and therefore pay less tax.

1. Who can apply for a loan?

Generally these loans are only available to investors, and to people who switch to a fixed rate when refinancing their mortgage. If your loan is not tax deductable there is a far smaller savings benefit and therefore little reason to pay your interest in advance.

2. How much can I borrow?

Most lenders are willing to loan up to 80% of the property value (80% loan to value ratio or LVR). This is especially true if you are also borrowing funds to pay the interest in advance.

With LMI (lenders mortgage insurance) however you may be eligible to borrow up to 95% LVR.

3. How much can I save?

As mentioned above this type of loan has two types of savings;

• Discount interest rates: Generally you can save between 0.15% and 0.20% off your rate.
• Tax deductions: If you own an investment property or are refinancing, you should be eligible to apply for tax deductions. Paying your interest in advance therefore lowers your taxable income for the current year. This means you pay less tax. How much you save depends upon how much you can deduct.

4. You can borrow to pay the interest.

As lenders require you to pay in advance, you are unable to proceed if you cannot supply these funds. Some lenders therefore will allow you to borrow the funds to pay the interest for the following year.

By doing this you free up your funds for other purposes, however you must make sure that the tax and interest rate savings you have on your loan outweigh the cost of borrowing the payments.

5. What are the disadvantages?

Unlike with other types of loans the additional repayments you may make on the loan are restricted. It can also be difficult to get features such as redraw, 100% offsets and portability.

6. Where can I find more information?

Not all banks and lenders allow you to pre-pay the interest on your loan. Mortgage brokers that work with many different lenders and specialise in areas such as interest in advance home loans will know their lending policies. Thy will be able to guide you in the right direction and find you a lender with which you have the best chance of being approved.

It is also important to speak to your financial advisor such as an accountant or taxation agent. They should be able to give you a good idea whether this type of financial product will suit you and your taxation requirements.

What is a fixed rate home loan?

A fixed rate home loan will allow you to lock in an interest rate during the entire fixed term period. A locked interest rate is a fixed interest rate that many bank lenders offer to borrowers for a specified amount of time. You can choose from a 3, 5, 7, 10, 15 or 20 year fixed rate period.

This means that you will be able to know exactly how much your mortgage payments will be for the duration of the fixed rate term. For example, a 10 year fixed term loan will remain at the agreed upon interest rate for the entire 10 years, regardless of variable interest rate fluctuations.

What is a “rate lock”?

Fixed interest rates change very frequently and can change between the time you have applied and the time when your loan settles. A rate lock is the term used to describe when a lender holds a borrower’s current fixed rate quote for a short period of time. Borrowers may request a rate lock for up to 90 days.

If you apply for a fixed rate loan without getting a “rate lock”, there is a chance that you may end up with a rate higher interest than the fixed rate you initially applied to receive. Borrowers usually are required to pay a “rate lock” fee to insure that the interest rate which they applied for has been locked for them. Lenders typically charge a percentage of the loan amount that is borrowed which is usually around 0.15%. Check with your lender because every lender has different policies and rules.

What are the differences between the 3, 5, 7, 10, 15 and 20 year fixed rate loans?

3 Year Fixed Rate Loan
The most popular fixed rate loan is for 3 years. The interest rates are much lower than any other multiple year fixed rate loans, besides the 1 or 2 year loans which have even lower interest rates.

5 Year Fixed Rate Loans
Lenders offer 5 year fixed rate loans at higher interest rates than the 3 year fixed interest rates. The 5 year fixed rate loan is great for borrowers who cannot afford to pay the loan off in 3 years.

7, 10 and 15 Year Fixed Rate Loans
Some lenders may offer fixed rate loans for 7, 10 or 15 years. However, there will be a large break cost to pay off the loans early and break the contract. If you are thinking of getting this kind of loan, you need to be sure that you will be able to keep the property for the length of the fixed rate loan duration.

20 Year Fixed Rate Loans and 30 Year Fixed Rate Loans
The 20 year fixed rate loans and 30 year fixed rate loans are only available to Americans. They are not available in Australia or the UK. These lengthy fixed rate loans do not have any break fees because American borrowers usually have a higher profit margin on their loans.

What are the advantages of a fixed rate loan?

One of the main advantages of having a fixed rate loan is the security of knowing that your interest rate will be locked for the duration of your fixed rate term even if interest rates have increased during that time. This can save you a lot of money in the future.

Some bank lenders that offer fixed rate loans may allow you to make an unlimited number of extra repayments and redraw those extra repayments without incurring any penalties.

What are the disadvantages of a fixed rate loan?

Many lenders who offer a fixed rate mortgages have a limit on the number of extra payments that borrowers can make without the lender charging a penalty fee for the overpayment. Usually these types of loans have a higher upfront cost. They might also restrict the borrower from redrawing extra payments during the fixed loan term. Some lenders may also charge a “break fee” if the borrower terminates the fixed loan term earlier than planned. Break fees can end up costing thousands of dollars. Another disadvantage of a fixed rate loan is that you will not benefit from a lower repayment if interest rates decrease and they do not allow an offset.

What exactly is a break fee?

Lenders who offer fixed rate loans will usually borrow the funds from the money market themselves for around the same amount of time that they give the customer for the fixed rate loan. These lenders “buy” the loan money at wholesale rates and “sell” it to the borrowers at retail rates. The difference between the two loans is the margin of profit gained from the loan.

If a borrower pays off their loan contract early by making extra payments or by paying in full, then the lender will have to lend that money to another borrower or sell it back into the money market. The point of a fixed rate loan is so that the lender can control the repayment amount and number of payments that you have to repay. If you decide to pay off the fixed rate home loan early and the money market’s interest rates have decreased, the lender might lose money. To offset the estimated margin loss, the lender charges their customers break fees for paying off the loan early. However, if there is an increase on the interest rates then the lender may offer the borrower a deal to pay off the loan early. The lender will be able to use the money to lend to another borrower at a higher interest rate, resulting in a higher profit margin for the lender.

Break fees can end up being extremely high. It is highly recommended that you apply for a fixed rate loan for 5 years or less. For example, a $400,000 fixed rate loan for 5 years has a wholesale interest rate of 4.5%. If the borrower pays off the loan in 2 years when the money market’s interest rate is 3%, then the break cost can end up costing $18,000! To calculate this, you take the current loan amount, multiply it by the wholesale rate change, and multiply that by the term remaining on the loan. $400,000 x 1.5% x 3% = $18,000.

Almost everyone will need to take out a loan at some point in his or her life. Whether it be in the form of a home loan, to start a business, or to purchase a vehicle, loans are necessary for many of the major transactions we enter into. Choosing the best loan, however, can be a very tricky process at times. With all of the different terminology involved, the lending process is confusing for a lot of people. However, if you make an effort to understand the various options available, you can save yourself a lot of trouble later on. This article will discuss one of the most popular loan options- the 3 year fixed rate loan.

When looking for a loan, there are several different types you can consider. Some loans are variable rate loans, which means that the interest rate is subject to change over time, while other loans are fixed rate loans. A fixed rate loan is a type of loan in which the interest rate will remain the same for a predetermined period of time. One of the most common fixed rate loans is the 3 year fixed rate loan, though other lengths are also available such a 5 year or 10 year fixed rates.

If you decide to obtain a fixed rate loan, you will probably want to find the lowest rate possible. Since the fixed rates available are constantly changing, the lender that has the cheapest rate today may not be the same one whose rate is cheapest tomorrow. The best plan of action when applying for a 3 year fixed rate loan is to wait until you are ready to go through with the transaction and compare the rates available at that time.

Though the rate percentage is extremely important, there are several other aspects of the loan other than the rate percentage that should be taken into consideration. First of all, one needs to consider the rate lock fee. These fees can be considerably different depending on the lender. Some lending institutions charge on flat fee for the rate lock, while others may charge a given percentage of the loan amount. If your loan will be relatively small, it will probably be in your best interest to find a lender that charges based on percentages. However, borrowers of large loans will benefit more from a flat fee. Finally, there are some lenders that may not charge any rate lock fees, so it is important to compare all of your options before you make a final decision.

Another aspect that needs to be taken into consideration when choosing a bank is the revert rate. Some fixed rate loans revert to the variable rate at the completion of the fixed rate period with no discount whatsoever. However, it is possible to find fixed rate loans that revert to a rate that will likely be lower than the standard variable rate.

Finally, when you are considering different lenders, you need to pay attention to the flexibility allowed. A lot of fixed rate loans will not allow you to make any extra repayments for the duration of the fixed rate period. However, some lenders will allow the borrower to make repayments during this time. This extra flexibility can be very beneficial should you feel the need to pay the loan off early. Believe it or not, some lenders allow you to make extra repayments on a fixed rate loan.

The 3 year fixed rate loan is the most popular among fixed rate loans because many of these types of agreements will penalize the borrower should he or she decide to make extra repayments or exit the loan early. In fact, many fixed rate loans require the borrower to pay something called a “break cost” if they end the loan early. A break cost can be very expensive. For this reason, 3 year loans are often preferred because the time is long enough to make the fixed rate worthwhile, but not so long that the borrower would feel the need to exit early. That being said, it is very important to understand the break costs you will incur should you choose to exit the fixed rate loan before its predetermined end date, so be sure to factor these costs into your comparison as well.

In order to get the best of both worlds, many clients choose to take out a split loans or mortgages in which part of the loan is a fixed rate and the other portion is a variable rate. This option allows the client the security of a fixed rate on one portion of the loan while allowing him or her to make extra repayments on the variable rate portion if he or she so desires.

It should be noted that taking out a 3 year fixed rate loan in the last 20 years has actually been more expensive than a standard variable rate loan in the end due to the trends of the variable rate. For this reason, it is very important to compare your options carefully before signing any type of loan agreement so you don’t lose in the long run.

“Capped”, it usually means that there is a limit or there is a certain boundary that cannot be crossed.   A capped loan similarly would mean that the interest rates have a limit set to them, and cannot go above a certain point.  This is of course limited to a certain period, which may be a number of years.

Due to the fact that a loan is capped, this simply means that no matter how high the interest rate goes up, the boundary is what would have been agreed upon in the capped loan contract.  However, when interest rates go down, the interest you pay can also go down.  This is because the cap is only applicable upwards and not downwards.

Currently, most capped home loans on offer have a 7.5% cap until 2012.  Any interest above 7.5% would not be allowable.    The lowest capped loan on offer is set at 7.49%, so one has to decide based on the product features which capped rate loan would be most suitable. The expert consensus, however, seems to be that interest rates will stay low for the next few years. These rates will then slowly go up once again as the effect of the subprime mortgage crisis in the United States slowly settles, and the real estate market begins to recover.

People who are on the fence can therefore, take a chance with this loan product.  It has the flexibility of a variable rate loan, and the cap is akin to a fixed rate loan where the rates are inflexible.

With the help of the experts on home loans, it would be much easier to gain access to a capped home loan.  They can also advise you if getting such a loan would be wise, and even offer different products which may compare in price to such a loan.  So do not hesitate to try and benefit from various home loan products, as they could save you a lot of time and effort.

To fix or not to fix your loan is a common question.  Another common question is for how long you should fix your loan rate. This can last from a few years to several years.  Deciding on whether or not to fix is also essential as this can have great impact on the interest rate you will be paying and your total expenses.

Fixing the rate of your loan is a good idea, especially if rates are on the rise, and are becoming unaffordable.  This is especially true if the trends show that there is little chance of the rates going down once again.  Another good time to fix rates is when the rates are at an all time low.  With rates set so low, paying that rate of interest for many years will ultimately save you a lot of money in the end.

The common length of time that rates are fixed is usually for a 3 year period.  However, this can be fixed for a longer or shorter period depending on the financial environment.  After the period lapses, the loan is usually transformed into a standard, variable rate loan.

For others who are unsure whether or not the interest rate is at a good level, in order to get the best of both worlds, a portion of the loan will be fixed, while another portion will be variable and will move up or down depending on the prevailing interests that banks and lenders charge.

The home loan experts have the expertise in dealing with such situations.  They can help you decide on whether or not a fixed rate loan would be suitable to your needs.  They can also give you different options for your home loan.  They could suggest different types of loans, or suggest how long you should fix your loan for.  They will ensure that you get a good deal especially on a 3 year fixed rate home loan

Do All Mortgage Holders Benefit?

Australia’s Reserve Bank, like so many around the world, has been cutting interest rates for months and in December 2008, the country’s official interest rate was reduced to its lowest level since May 2002.

It is understandable that mortgage holders might rejoice at the news, but not all of the big banks pass on the full cuts to their variable mortgage rates. And just a very few of the top non-bank lenders pass on the full rate cuts.

Such actions by the banks are not restricted to Australia and mortgage owners throughout the western world struggle to grasp with their banks unwillingness to give them a break. Each time the Reserve Bank makes an interest rate cut announcement, Australia’s politicians implore the banks to allow struggling home owners to benefit by passing on the rate cuts in full.

Home Loans

The rate cuts are welcomed, understandably, by housing lobby groups. They say that a 1% or 100 basis point cut reduces by around $220, the monthly repayment on a $350,000 mortgage – a big saving for young Australian families.

Housing industry experts believe that rate cuts not only provide mortgage relief to existing home owners, but importantly they help more first home buyers purchase a home of their own.

Substantial drops in interest rates increase the borrowing capacity of entry level buyers.

Refinancing

Borrowers who are locked in to a fixed-rate mortgage however, may not be celebrating during times of lowering interest rates. When looking to refinance, they face a difficult choice: continue to pay a higher interest rate, or incur what is often thousands of dollars in penalty fees in order to break their current fixed contract.

They need to consider more than the interest rate – there can be a plethora of conditions attached to exit fees. For instance major banks charge upfront exit fees ranging from hundreds to over a thousand dollars. Charges can also be levied by the new lender.

While fees vary, a borrower who cancels his loan within the fixed period will usually be forced to compensate their mortgage provider for the “economic cost” of breaking their contract. As interest rates fall, this cost becomes greater, and it may already be too late for fixed borrowers to save by refinancing.

Such fees can often come as a shock to people who are on a fixed-term mortgage. They can be very are surprised when they hear what the break free cost is – often it can be far higher than people expect.

After you have decided the home you want to buy, you will have to look for a loan to finance the buying of the home. This is the tricky part. There are different types of home loans available marketed by different banks and lenders and offering different interest rates and benefits.

So the first thing that you need to identify is the interest rate: should you go for a fixed home loan or a variable home loan? Both the loans have their own pros and cons. Once you have decided between fixed and variable, you can move ahead and choose the type of loan you want in that particular category.

The first thing you need to do is check which of these two are doing well in the market. The basic difference is that in a fixed rate home loan, you will be charged a flat interest rate through the entire period of the loan. In the variable rate home loan, the interest rate will change according to the market movement and sometimes you might pay a lower interest and in other times you might have to pay a higher rate of interest. The interest is charged in the monthly payments.

Fixed rate home loan

Fixed rate home loans are considered a safer bet by many industry experts due to the fixed interest rate that never changes throughout the life of the loan. The pros of a fixed rate home loan are:

• The interest rate will never change even when the market is volatile
• The payment amount, which includes the principal and the interest, will not be affected by the market conditions.
• There is a sense of security as well as the stability offered by fixed rate especially because you are aware of the amount you need to pay at the end of each month. This will help you to keep the amount aside each month out of your monthly budget.

Variable rate home loan

The variable rate home loan is more popular in Australia. This loan comes with a variable interest rate, which basically means that the interest you pay will be depend on the market condition. Interest rates in this type of loan can and will fluctuate. You will be charged an interest rate that is dependent on the financial index rate listed in the Reserve Bank of Australia. For example: If the current index is 3.5% then the lender will add another 0.5% to make the interest rate 4%.

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.