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.

Most people think of banks when buying a home, but banks are not the only ones writing mortgages. An Australian banking license is not required for issuing a mortgage, and sometime non bank lenders can provide you with more competitive terms and better rates. Before making a decision on financing, you should understand some basic information about mortgages. 

Understand the Terms

All lenders use the same terms. Here’s a quick review of what you must know when seeking a home loan, regardless of what type of lender you choose. 

Loan to Value Ratio (LVR) – The bank will not loan you more money than the house is worth, and they like to loan you a little less. LVR is determined by dividing the amount of the mortgage by the value of the home. If your house is worth $100,000 and you borrow $80,000 towards it, then your LVR is 80%. 

Assets – Any property you own is an asset. Your home will be the largest asset you own. 

Equity – The home’s value above and beyond what is owed on a mortgage is the equity. A home that is worth $200,000 with only $75,000 owed on it has $125,000 in equity. 

Liabilities – Any other debt you have is a liability. This includes loans for University, credit cards, and autos. 

Loan Maintenance Fee – This is a fee levied by lenders over the term of the loan. 

Principal – This is the amount of money that is currently owed and that interest will be paid on. 

Types of Mortgages

Basic Variable 
This mortgage is very basic. The interest rate is set according to the Reserve Bank and will go up or down along with it. Extra payments are typically allowed, and terms are usually 25 or 30 years. 

Standard Variable 
This is the most popular mortgage type. The interest rate will be slightly higher than a basic variable loan, but there is more flexibility. Extra payments can be made and there are other attractive features. Terms are typically 25 or 30 years. 

The Honeymoon Rate 
Also known as an introductory rate, these loans feature a low fixed interest for the first year. After that, it reverts to a variable rate. It’s a good idea when interest rates are rising fast, but can work against you if the interest rates fall during that first year. Most banks expect that you will keep these mortgages for 3 to 4 years and will charge penalties for not doing so. 

Fixed Rate 
The interest rate, and the payments, can be locked in for a period of 10 years or less. Once that time is done, it will revert to a variable rate. This is another good option in times of rising interest rates, but can work against you should the rates begin to fall. 

100% Offset Accounts 
These are essentially savings accounts that can be attached to your variable or introductory rate mortgages. This account works to help you reduce the amount of interest you pay every month. 

All in One Loans 
Your home loan and transaction account are combined. Payments are made directly from the account, allowing you to keep the funds available to you for as long as possible. Interest rates may be higher, or you may have to pay a monthly fee for these loans. 

Line of Credit 
You can take a line of credit against the equity you have built up in your home. There is no set term, and it’s good to have the money available in case you need to make repairs. However, it is easy to spend that equity and these loans should only be used with great care. 

Know the Types of Titles

Torrens Title 
Traditional single family homes typically have a Torrens title clearly naming who the owner of the property is. 

Strata Title 
Townhomes and condos are popular because owners do not have to do as much maintenance. Strata titles define the individual unit by the airspace it occupies, and a strata corporation is named to handle the common areas shared with your neighbours. 

Community Title 
Buying in a community with its’ own pools, parks and playgrounds provides you with plenty of entertainment for the kids. It also means that you might have a community title. Your home will be owned by you, but the community title is necessary to cover those shared areas. 

Company Title 
When buying a condo, townhome, or apartment you should check to see if a Company title is in place. Rather than an individual owning any one unit, all units are owned by the company and buyers purchase shares in the company. Company titles are set up so that all owners in the company can have some impact on any potential sales of other units. This means that the neighbours could prevent you from buying the apartment, or selling it later. Most lenders are leery of these properties, and might require a larger down payment from you. 

Advantages of a Non Bank Lender

• Oftentimes, you can get a lower interest rate by going through a non traditional lender 
• They may provide you with better customer service, including faster application times. 
• People with credit problems, unusual properties, or specialized loans are more likely to be approved with these lenders. 
• They will make loans with higher LVR’s, allowing you to put less money down. 
• Self-employed people do not have to produce as much paperwork. 

Disadvantages of a Non Bank Lender

• Upfront fees and loan maintenance fees might be higher, offsetting savings from lower interest rates. 
• The chances of your loan being sold are higher with non bank lenders. 
• There is a higher risk of the institution going out of business, wiping out any benefit from superior customer service. 
• They might be slow to pass on dropping interest rates to their customers, in some cases the decreases won’t be passed on at all. Increases to the interest rate, however, are passed on as soon as they occur. 
• They are quicker to repossess if you fall behind. 

Competition is always a good thing. Lower rates and better terms result when banks and non bank lenders are competing for your business. Before signing any mortgage, however, you should understand how the process works, know the terms, and know exactly what to expect out of your new mortgage.