One of the key strategies to saving money during the term of your loan is to make sure that you have the right product suited to your needs, this article will explain the different types of home loans Reduce offers and explains the advantages and disadvantages of each.
Standard Variable Rate
The standard variable is the most common of all home loans. The rate is based on the official Reserve Bank of Australia (henceforth called RBA) and varies during the term of your loan, depending on market fluctuations. If the RBA’s rate goes up then you could find your rate increasing also, thus increasing your monthly repayments. On the other hand, however if times are good and the RBA drops their official interest rate then your repayments will be decreased. This type of loan is the most flexible and normally will include optional features such as being able to make extra repayments, split the loan, redraw funds and it is often possible to incorporate an introductory (or honeymoon rate) for the first 12 months. At the end of this 12 month period your rates will increase back to the standard variable rate. Reduce Loan’s standard variable is one of the cheapest on the market at time of writing, choosing a standard variable rate from Reduce Home Loans will ensure that your rate is always REDUCED.
Basic Variable Rate Home Loan
A Basic Variable Rate loan is usually a ‘no frills’ version of the Standard Variable loan, good for the budget concious who are reading this. It can sometimes offer a lower interest rate than the Standard Variable but there are normally restrictions that come with having a cheaper rate. Some of these can be less options and sometimes extra fees. As with the Standard Variable the Basic Variable rate is determined by the Reserve bank’s official interest rate.
Fixed Rate Home Loan
The Fixed Rate Loan offers a fixed rate, as opposed to the two variable loans mentioned above this loan has a predetermined rate as opposed to rising and falling with the market. Fixed Rate loans are based on a set interest rate for an agreed time period. Fixed Rate loans can range anywhere from 6 months to 10 years. The main idea behind these loans is to protect your rate from rising with the Reserve Bank, however being immune to rate rises also means you do not benefit from when the Reserve Bank’s rate goes down. This means you could potentially be stuck paying a much higher interest rate than the current market.
Fixed rate loans aren’t as flexible as the Variable Loans, and sometimes do not provide you with the option of additional repayments.
Honeymoon Rate Home Loan
Honeymoon Loans offer a lower interest rate than the standard variable rate, for an initial period of time. In general this time is normally the first year of the loan. This rate can be a fixed or variable rate once the honeymoon period ends. The advantage of a honeymoon rate is to ease new home buyers into the massive burden that comes with a mortgage. It also helps with the principle loan amount if your loan terms allow you to make extra repayments as during the first year the money you save can used to Reduce the principle loan amount.
Lo Docs vs Full Docs
Before Lo Docs people who were self employed had a hard time proving their income and getting a loan. Providing documentation is a big part of the loan process as lenders may not loan money to someone who may be unable to make repayments. A Full Doc loan refers to a loan where all documentation required is given to the lender. There are several different types of Lo Doc loans, some allowing customers to simply state their income while others do not require any information about income, assets or any existing debts.
Lo Doc loans will normally require a higher level of deposit or a higher interest rate due to the significant risk of lending to someone without documentation proving their financial situation. However most Lo Doc loans are able to be swapped back to a conventional variable rate after a period of time, without the need to provide full financial statements, assuming they have maintained good credit history.
Split Loan
A split loan offers the best of both the Variable and Fixed rate loans mentioned above. If you are concerned about rising interest rates but want to maintain the ability to make additional repayments without being charged, then a split loan might be the product you are after. Essentially you split the loan in half, one portion having a fixed rate and the other a variable. How the loan is partitioned is up to you, but typically a 60/40 split is most common.
All in One Loan
The all in one loan combines your home loan account with your everyday spending account. This allows you to have your salary deposited into the account then withdraw funds as you need them. The major reason for taking out this loan is to decrease the interest charged on the loan by keeping your salary, savings and other income in the account for as long as possible. This can be a downfall however, if you were undisciplined with your budgeting and withdrew more funds than you put in you could fall behind on repayments.
As a result, this loan suits only disciplined first time borrowers or seasoned investors.
Line of Credit Home Loan
Line of Credit loans, sometimes referred to as an Equity Loan offers high flexibility, it is set up similar to a credit card. The lender assigns a credit limit secured against your property and when you need cash for bills or other spendings, you simply draw against that limit. As you pay the loan the money becomes available to you again.
