Different Loans Explained

Loan Types Explained

There are thousands of different loans on the market, all with different rates, fees and features. If you haven't already decided, the following might help you choose the type of loan that's best suited to your situation. Home & investment loans are generally categorized under:

Standard Variable Rate

Standard Variable Rate loans offer you maximum flexibility and great features, including the option to fix or split your loan, the ability to make additional repayments when you want, and the option to redraw these funds for any purpose when you require it.

Basic Variable Rate

Basic Variable Rate loans offer a lower interest rate, but fewer features. In certain cases you usually have the option to pay for additional flexibility and features when you need them. Its all about what best suits you in deciding. Please feel free to ask your RRE Home Loans representative any questions, we are her to help.

Fixed Rate Loans

Fixed Rate loans protect you against interest rate changes for an agreed time, so you have peace of mind knowing your repayments won't increase. Fixed rate loans lack the flexibility of variable rate loans suck as ability to make additional repayments as you like. This is a trade off for the certainty in locking in rate. If variable rates go down during the fixed rate term you wont benefit, break costs may apply if you wish to revert to a variable rate before the end of your fixed rate term. It is very important to know how much your break costs will be if you decide to refinance or sell your property. These costs are different with every bank.

Non Conforming Loans

Non Conforming Loans have been designed especially to help borrowers who do not meet normal lending criteria. Borrowers that fit into this category include those who have an impaired credit history, such as judgments or defaults. Loans are also categorised as non-conforming if borrowers wish to borrower more than standard amounts against their property value i.e. 100% of the security value. Usually the downside of these loans are a higher interest rate.

Home Equity Loans

Home Equity Loans allow you to unlock the equity in your existing property for other opportunities such as renovating your home, investing in shares or financing an investment property.

Line of Credit (LOC)

Line of Credit loans are interest only variable rate loans that have full flexibility attached to them such as cheque books and credit cards. These are ideal for wealth most line of credit loans offer interest capitalisation features, provided that the borrower has sufficient equity in the loan account no minimum repayment is required. Line of credit rates are generally higher than standard variable rate term loans.

Lo Doc Loans

Lo Doc loans are loan which do not require any formal financial documentation from the borrower. Lo Doc loans are generally used by self employed business people with lack of financial statements or complex entity structures making proof of income difficult. Tax returns or financial statements are not required.

Lenders usually base their qualification for such loans on an income declaration but no proof of income is required. Terms and credit requirements for lo docs vary from lender to lender including mortgage insurance premiums.

 

What is LMI ? - Lenders Mortgage Insurance

When you buy a property and need to borrow at more than 80 percent of its value, you are highly likely to be asked to pay a one-off insurance premium at the time of settlement.

There are two players in the market offering LMI — Genworth Financial and PMI. Their rates are quite similar.

If you had a 20 percent deposit and were borrowing $250,000, both companies would charge a one-off premium of $800. If you only have a 10 percent deposit and borrow 90 percent, the premium jumps to just over $2800. These figures are inclusive of GST but exclude stamp duty, which can range from five percent to 10 percent of the premium, depending on which state you live in.

Many lenders allow you to capitalise the cost of this insurance into your loan to make it easier. That is the premium is added on top of the loan.

While it may seem like you are paying insurance cover to benefit somebody else, the fact that LMI exists means that owning a home is more affordable. After all, if the lenders could not cover their risk, they would not be so willing to lend up to 95 percent, even, in some cases, 97 percent of your property's value.

Please ask your RRE Representitive for more information regarding LMI is you have less than 20% of the purchase price of the property you are considering. In our experience 74.2% of Loans we have covered to date had LMI requirements as most people do not have 20% deposit.