The Right Loan for You

Honeymoon Loans
Honeymoon rate loans are another example. Like a honeymoon, they are a sweet deal for the first 6-12 months, then the options change after the period expires. By definition, Honeymoon Loans (sometimes known as discounted variable loans or introductory rate loans) charge you a cheaper interest rate for the first 6- 12 months, sometimes 1% below the banks standard or basic variable loans, then when the loan expires your loan interest rate reverts to the banks standard variable or basic variable rate.

If your honeymoon rate loan allows you to make additional repayments, you can reap the benefits by paying a higher amount in this period as your interest rate is lower, thus anything extra you pay just means you are paying your loan off sooner. The problem many face is that during the honeymoon period, they don’t make additional repayments, thus after the period expires, they just pay a higher interest rate. So Honeymoon rate loans should be managed closely as some also come with high exit fees to stop you refinancing each year.

In english; 1 year good rate, 29 years of a bad rate........

To see if a Honeymoon loan will suit you, speak with the professionals @ wHere finance today.

Professional Loans
Professional Loans are a third type of variable loan facility. Professional Loans generally give you a discount based on the amount of borrowing you have with a lender. For example, if you borrow more than $250,000 some banks may give you a discount of up to 0.70% off the Standard Variable rate. This all comes at a cost, and generally anything from $250 - $395 per annum. The key to professional loans when investing in property is that the lenders will charge you one fee across your entire loan portfolio of properties (providing you are with one lender) and this can save you interest and your annual fee can be a tax deduction. Some lenders will also reward customers who have a professional loan by giving discounts on home and contents insurance, waving the annual fee on your credit card if you open up a transaction account plus wave the account keeping fee on the transaction account.
Many professional rate loans will also allow you to link a honeymoon rate loan and a fixed rate loan into the product facility which gives you flexibility to manage your repayments according to your long and short term investment needs.

Standard Variable
The fourth type of variable type loan is the Standard Variable loan. In general terms this is the standard rate the bank charges, has no features or benefits, and is the highest rate payable. However, this loan may be acceptable to borrowers who have very little borrowings so do not require the additional features that come with other types of loans. We @ wHere finance do not recommend this type of loan to our customers as you can get this type of service from a Basic Variable loan, pay less interest and just pay for the features as or if you need them.

You should check your loan statements to see what type of loan you have, as many banks will revert fixed rates and honeymoon rates to Standard Variable loans, this in turn could be costing your thousands of dollars in interest per year.

Fixed Rate Loans
Fixed rate loans can range between anything from 1 to 15 year terms, meaning the interest rate you lock into will remain the same for that period. You may even have the facility to fix your loan in various terms. For example if your borrowing is $500,000, you could fix half your loan @ 3 years, then a quarter @ 5 years, leaving $125,000 at a variable amount. This will ultimately depend on your needs.
Fixed rate loans generally have a capped limit on the additional amount you pay off the loan in a 12 month period, however, some lenders allow you to make additional repayments, like Heritage Building Society, and The Rock Building Society.

Fixed rate loans lock in a specific interest rate for a term. Currently about one fifth of all home loans in Australia are fixed.

It’s best to speak with a professional @ wHere finance before fixing your loan.

There are costs to fix your loan, for example if you are applying for a loan with a fix rate, sometimes you may have to pay a rate lock fee, this guarantees you to secure the rate at today’s rate. This will come with some conditions around time periods etc.

There are costs to break a fixed loan too. For example if you fix your loan at a higher rate and the banks rates come down, you will be faced with what is called an “economic cost”. This term refers to the cost of breaking your fixed rate term. It’s always a wise decision to do some calculations prior to fixing as no one has a glass ball as to when rates will go up and down.

As rates went up from 2007 and 2008, then began to fall with the Financial crisis at the end of 2008, many customers found themselves up for huge costs to break their fixed loans, the reasons behind this are the economic costs, below is a basic example of how a lender may calculate the cost;

Initial Loan amount            $350,000
Fixed Rate Locked in        8.5%
Term of fixed rate              5 years
% of loan fixed                 100%
Fixed Rate today              6.5%
Difference in rates             2%

Now if this loan was settled 1 year ago from today, which means that the remaining months of the fixed rate term, are 48 months

Calculating the economic cost;
2% x $350,000 $7000 / 12 (months)
$583.00
Now multiply this by 48 $27,984

What we have done here is worked out the difference in the cost of the change in rate per annum, then calculated monthly, then multiplied by the months left in the fixed rate period.

As you see, it can be a very expensive cost to break a fixed rate, however, there is no requirement to break your fix rate, it is only if your loan is paid out, meaning you refinance your loan or sell the property and pay your loan down.

The costs not to fix can be just as high, because if you had fixed @ 6.50% and interest rates go up to 8.5% and stay that high, that cost above is the additional interest you could be paying.

We @ wHere finance believe fixing for the cheapest rate is okay, as long is it’s for the right reasons.

Just remember the following tips when deciding if a fixed rate is the best option for you;

• Are you able to make additional repayments, if so, how much and at what cost
• Are you planning on selling your property during the fixed rate period, if so, fixing may not be such a good decision
• Are interest rates at an all time high, if so, records show this would only last for a maximum of 12-18 months, so fixing anything past a 12 month term could cost you more interest than you need to pay?

Low Doc Loans
Low Doc loans are primarily used by self employed applicants who have fluctuating income and are unable to show adequate servicing based on Tax returns.

In many cases, lenders will charge a higher interest rate for low doc loans; however, some major banks will allow you to have a professional package as long as the Loan to Value Ratio (LVR) is below 60%.

Lenders Mortgage Insurance is generally payable on Low doc loans when the Loan to Value Ratio (LVR) exceeds 60%. The maximum LVR for low doc loans in this current market is 80%.

Low doc loans should be a last resort, if your finance broker has not looked at your annual turnover for the past 3 years including BAS Statements, P & L statements, and tax returns, you should ask why not?

Self Employed customers are very different to other Salary/PAYG customers, so, it’s important that your finance broker understands how to read financial statements, and how to gain the highest amount of income from a tax return, if your finance broker doesn’t do this, it could be costing you thousands of dollars in interest which is totally unnecessary.

Family Pledge Loans
Family Pledge loans is where another family member (ideally parents with equity) supports your application for a home loan by either offering the equity in their own property to help you obtain a loan than you would otherwise be eligible for.

Why would you use Family Pledge?
As you use the equity in another property, plus a deposit you have, the LVR is below 80% and this means you are not required to pay mortgage insurance. This saving can be anything from $5000 to $10,000.

Secondly, due to the changes in the financial markets, lenders in general no longer offer 100% loans, so even if you earn a high income, saving a deposit whilst renting can be very difficult, so coming up with a 5-10% deposit can sometimes feel like a huge amount, the Family Pledge allows you get into the property market sooner rather than later.
Like anything there are risks, and these should be carefully considered prior to taking this type of facility on board, especially for the parties supplying the equity.

There are only limited lenders who provide this type of home loan, to find out more, contact the team @ wHere finance today.

Like to know more?

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