19th December 2007
An investor's guide to different types of mortgages
Residential Home Loans (Regulated)
These loans are borrowed for wholly or predominantly personal purposes. e.g. to purchase an owner-occupied home or to refinance an owner-occupied home. Equity permitting, a borrower may choose to borrow extra funds for a motor vehicle or household improvements etc. The customer is protected by UCCC (Uniform Consumer Credit Code) http://www.creditcode.gov.au/ and the borrowings are not tax deductible.
Residential Investment Loans (Unregulated)
These loans are wholly or predominantly for investment purposes. e.g. to purchase a residential investment property or refinance a residential investment property. Equity permitting, the borrower may choose to borrow extra funds for improvements to the investment property. You can use your owner-occupied property to borrow for investment purposes. Typically, the borrower would be using their own home to provide extra security to borrow 100% of the purchase price plus costs of a new investment property. A borrower may also use the equity in their owner-occupied property for other investments such as shares. The customer is not protected by UCCC, however, the borrowings are tax deductible.
Low Documentation Loans
Self Employed and PAYG customers who can show stability in their employment situation and do not have available tax returns can borrow under a "low doc" policy. If the customer has equity in property or can prove they have access to funds, they can borrow up to 80% of the value of the residential security property. These loans and the security must be in personal names. These loans can be regulated or unregulated.
Existing repayment history, credit history and proven assets all contribute to determining how competitive your low doc loan will be.
No Documentation Loans
Customers can borrow up to 75% of the value of their residential property if they are self employed, with no questions asked. These loans can be short or long term. Interest rates are high and fees can be quite high also, so these loans are the last option that a financier might offer.
Non Conforming Loans (Sub-Prime)
Customers with poor credit histories, including ex bankrupts, poor current repayment histories, current defaults and judgments, can obtain finance through finance companies specialising in this area. Non Conforming loans are among the fastest growing markets in the industry. Non Conforming lenders will also help clients who have equity to start up their business and also help out those purchasing a residential property without any deposit, including purchase costs.
Standard Variable Loan
This type of product has a variable interest rate and often has low ongoing fees and low (if any) early repayment fees. Standard Variable loans can be part of a split facility (i.e. where part of the loan is on a fixed rate), redraw is usually available and minimal loan amounts are accepted under this product. They are often a good idea for individuals who plan to repay the loan in full over a short term.
Basic Variable Loans
This product has similar features to the Standard Variable loan. The interest rate is variable and is usually set at a discounted interest rate (often 0.5% lower than the standard variable rate). The lender will often charge a fee for redraw (if available) and an early repayment fee is often enforced if the loan is paid out within the first 3 years. Lenders do not generally attach interest reducing accounts to the Basic Variable product. The Basic Variable loan is an excellent product for individuals paying their loans over the long term.
This product offers the client security in knowing their repayments for a chosen fixed term because the interest rate is fixed for the term of the loan. Many clients choose to partially fix their loans to take advantage of some portion of the loan being locked into a specific repayment, whilst allowing them to reduce the variable interest rate portion at a faster pace. Most lenders will allow the customer to make some extra repayments on fixed interest loans. Remember, a fixed loan is a two way agreement between you and the lender. If you choose to pay out or switch the loan product before the fixed term is completed, you may be forced to pay a Break Cost up to the amount of interest charged on the remaining fixed term.
Line of Credit
This product allows you to borrow against the equity you have in your home and can significantly reduce the term of your loan and the overall interest charges if effectively managed. The idea is that all of your income goes into this loan account saving you daily interest charges. If you then use your credit card for household expenses (remembering to clear the credit card before you incur interest), then you are leaving more of your income in the loan account longer, saving you even more money on daily interest charges. These accounts generally have full ATM, Cheque Book, Internet and Phone Banking options allowing you to access your money at any time. This account will only be effective for individuals with a well thought out budget and the discipline to stick to that budget.
Reverse mortgages allow you to borrow cash against the value of your home. You usually don’t have to make regular repayments until you leave and move into care, sell your home or die. When the loan ends you, or your estate, must repay what's owing, usually out of the proceeds of the sale of your home. Each year the fees and interest you would ordinarily pay are added to the loan balance. Over time, you're charged interest on the interest (or compound interest) and that builds up the total amount you owe. There is a risk that the amount of the loan may increase to a point where it is more than the value of your home. This is called 'negative equity'. Some, but not all, reverse mortgage products guarantee that if this happens, you will not have to repay more than the value of your home (a no negative equity guarantee). But you may lose this protection if you don't meet the terms and conditions of the loan – for example, if you don't repair and maintain your home to a standard set by the lender.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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