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Which Home loan Suits Your Needs?

One of the most important decisions you can make when starting your finance search is what style of loan ultimately suits your particular needs. Of course we help our clients determine the best options available to them. However if you have some general knowledge of what each loan style has as its advantages and disadvantages you will be better able to decide what style of loan will help you achieve your goals best.
Variable home loans
The rate charged on a variable loan moves up or down in accordance with movements in interest rates, as set by the Reserve Bank or the lender. These can be either principle & interest or interest only payment loans & have a maximum loan term of between 25 – 30 years. Variable rate loans tend to be much more flexible in payment options & allowing additional lump sums. They also can come with many extra features that may help save interest or pay your loan out sooner.

Fixed rate home loans

A fixed rate loan is a loan that has a fixed interest rate and therefore fixed loan repayments. The time period of these loans can vary, however you can usually take between 1-5 years (some lenders will allow up to 10 years). Although you may take a fixed rate for say 3 years, the total length of the loan itself can still be 25 or 30 years.

At the end of the fixed loan period you can decide whether to fix the loan again for another period of time at the current market rates or convert the loan to a variable interest rate for the remaining time left on the loan. Fixed rates tend to have fewer features and generally do not allow any more than $10,000 per annum in additional payments without penalty. The benefit is seen to be a known rate that cannot change for the period selected and security of consistent payments over the term chosen.

Combination loans

A combination loan allows you to combine different loans to take advantage of the differing features. A common example would be to take part variable & part fixed. This would hedge against any rate rises yet also still allow the variable section of your loan to have flexible payment options or offset accounts etc.

Offset account home loans

There are some home loans that allow an offset account to be attached to the loan. The offset account is a transaction account or savings account that has one special feature. Any money held in that account offsets the equal amount on your home loan when the bank calculates interest on your loan for that month. So if you had a $100K loan and also had $10K in your offset account for the whole month the bank would only calculate interest on $90K as the other $10K has been offset by your savings.

If it is a full transaction account then you can use this just like any other day to day account yet still have the benefit of the offset. Used well these accounts may save thousands over the life of the loan in interest and also reduce the amount of time to pay the loan off. Generally they are only available with variable loans or variable sections of combinations loans.

Line of credit (LOC) loans

A LOC works similar to a business overdraft. You are approved for a certain amount & can pay down & redraw back up to the limit at any time over the life of the LOC. They are in effect an interest only loan and only get paid down by leaving funds in the LOC overtime. They can save interest similar to the offset account idea however the LOC itself is the transaction account. So if you have $100K LOC & you place $10K into the LOC you will only be charged interest on the $90K balance.

Again used well they can provide interest savings & time savings on paying off a loan. These loans should only be used by people who are willing to keep a household monthly budget. This is due to the fact that all income from all sources is deposited into the LOC and all living expenses and debts (including loan interest) are taken from the LOC. Because there is no defined loan account or savings account a budget is a must to follow the path of your money so you can be sure you are actually paying some of the loan off over time.

Because you are always able to redraw back to original loan amount and there is no set requirement to make principle reductions, the danger without a budget is that you will spend as much as your save and after 5 years for example will have paid nothing off your home loan.

Most LOC’s are up to 5 years however some lenders will allow longer. You can also at the end of your 5 years negotiate (at lenders discretion) to take another term of LOC.

All in one account loans

These loans are very similar to a LOC in the fact you can have income from all sources (wages, rent etc) paid directly into the home loan to help reduce interest payments just like LOC or offset. However just like an offset account if you take a principle & interest payment you will make a set principle reduction every monthly payment.

Basic variable loans

Generally have fewer loan features than a standard variable loan. They can offer better rates for loans with a lower amount such as under $250K. As the name suggests they are very basic in that they are either principle and interest or interest only payments. However do not usually offer other features such as offset.

Package loans

Package loans are generally for borrowings over $250K or people looking to take multiple loans over time. There is an annual fee charged to provide the package of benefits, Including & not limited to –

- Interest rate discounts off standard variable rates

- Offset or transaction accounts with no monthly fees

- No loan account keeping fees

- No application fees for up to 5 loans under the one package

- Credit cards with no annual fees

- Discounts on insurances

- Discounts on fixed interest rates
* The above information is intended only as a guide to the most common types of loans on offer from lenders and there can be variations on each depending on the ultimate lender used. Once you have a good idea of the general style of loan that would suit your needs we can then search for the best actual product from the lenders.
Please contact us if you require further information on any points contained in this guide. 


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