What's the difference between a fixed and variable rate home loan?
A fixed rate home loan means your loan's fixed interest rate will stay the same for the fixed rate period. For example, during a 3 year fixed rate home loan, the interest rate will stay the same for 3 years. This means your repayments won’t change during that period. For a fixed rate home loan, you usually do not have the flexibility to make too much extra repayment during the fixed term. Furthermore, most lenders do not offer offset facility for fixed rate loan. Fixed rate loan also have a break cost if you choose to change or pay off the loan during fixed term.
A variable rate home loan means your loan's variable interest rate could move up or down during the loan term. This means your minimum repayments could change too. A variable rate loan is more flexible in general. Redraw, offset and extra repayment all available to most variable rate products. Variable rate loan generally does not have break cost or exit fee.
What’s the difference between a ‘principal and interest loan’ and an ‘interest only’ loan?
A principal and interest loan means that when you make your home loan repayments, the repayment is paying off the interest charged for that week/fortnight/month and part of the principal (the amount that you borrowed).
With an interest only loan, the repayment only pays off the interest charges. The principal is then paid off in full at the end of the loan period or gradually paid off when you switch the loan to ‘principal and interest’.
What’s the difference between a line of credit and a standard home loan?
A line of credit is similar to an overdraft facility in that you have access to a pre-approved credit limit (e.g. $150,000), which you can access at anytime through a transaction account. You can use as much or as little as you like and only pay interest on what you’ve used. There is no regular repayment schedule and no principal repayments are required unless the credit limit is reached or cancelled.
With a standard home loan, interest is charged on the principal (the amount you still have owing) and a regular repayment schedule is required.
How does 100% Offset work?
100% Offset is an optional feature available to most of the variable rate under the professional package that allows you to pay off your home loan sooner while keeping your savings separate. The money that you have in your transaction/deposit account is used to ‘offset’ your loan.
For example, if you had a home loan (variable rate) of $100,000 and $10,000 in your "linked" deposit account, you would only be charged interest on $90,000 of your loan amount. By having your salary as well as your savings deposited directly into your "linked" deposit account you could save even more.
100% Offset may also be a tax effective arrangement because you do not earn any interest on the amount in your "linked" deposit account which would normally have been treated as income and subject to taxation at your normal marginal rate.
Do home loans have redraw?
Yes. If you're far enough ahead of your scheduled repayments, you can redraw the extra funds if eligible. Redraw is available with most of variable rate home loans. For fixed rate home loans, redraw is only available at the end of the fixed rate period (i.e. when the rate becomes variable). Some lender will have minimum redraw amount requirement.
What is LVR?
LVR stands for Loan to valuation Ratio. This is the measure of the amount of the loan compared to the value of the property. For example, if you have borrowed $160,000 and your property is valued at $200,000, the LVR would be 80%.
Does my loan have exit fees?
Loans contracted on or after 1 July 2011 are not subject to exit fee or Deferred Establishment Fees (DEFs) as government has banned exit fee on all variable rate home loan. Prior to this time most lenders included DEFs in mortgage products. These fees would only be levied in the event that the loan was discharged within a specified period. If your loan contract is dated prior to 1 July 2011, it may be subject to a DEF, and this will be outlined in your loan contract. However, discharge fee and break cost for fixed term loan still applies. Every home loan has a small discharge fee (typically around $350 per property) which covers the cost of the lender removing the mortgage that has been registered on the title of your property. This fee is reasonable as it is an actual cost incurred by the bank and, consequently, discharge fees were not been banned by the government.
What is a Comparison Rate?
A Comparison Rate reflects some of the costs of a loan into a single interest rate. The aim of the Comparison Rate is to help you make a more informed decision on the costs associated with a loan, and help you to compare various loans and services offered by financial institutions and mortgage providers. The formula for calculating a comparison rate is regulated by the Consumer Credit Code, and all Australian financial institutions and mortgage providers use this same formula. The comparison rate is calculated based on the following numbers, no matter what your loan size is
$150,000 loan amount
25 year term
principal and interest loan
What is a Lender Mortgage Insurance?
It's a one-off cost that's added to your home loan (so you don’t have to pay anything upfront) and allows you to borrow more than 80% of the property value for standard home loans, or 60% of the property value for Low Doc Home Loans.
For example, if you want to buy a house that’s $500,000 and you have a deposit of $60,000, we could normally only lend you $400,000 towards the price of the property. However, if your income could support the loan and you took advantage of Lenders’ Mortgage Insurance, we could lend you the full $440,000 that you need to buy your new home.
Lenders’ Mortgage Insurance is designed to protect us against the risks of providing you with a home loan, in the event that you default on repayments.