Australia is home to many lenders offering thousands of home loan products between them. The biggest difference between loan types is their interest rate: some are variable rate loans;others are fixed-rate.
However, there are plenty of other features and options that can separate loans from one another. It’s often difficult to figure out all of these specialist products, so let us do the hard work for you with this guide.
Introductory Rate Loans
Also known as “honeymoon loans”, introductory rate loans are usually for those who are buying their first home. The “honeymoon” part comes from the starting period of the loan, during which the borrower enjoys a lower interest rate.
This low interest rate may spark your interest, but you only receive it for a small amount of time. Usually, this is 12 months, though some lenders offer it for less, and others may extend the honeymoon period for a couple of years.
Your introductory rate will either be a discounted fixed rate or a fixed discount. They sound similar, but there are a few differences between them.
A discounted fixed rate is a rate that your lender fixes based on the current national interest rate. It’s slightly lower than the national rate and won’t change for the agreed upon time period.
A fixed discount rate does vary, but lenders ensure this variance stays within certain confines. As such, it never strays too far below the lender’s standard variable rate. However, if that standard variable rate increases, so too does the amount of interest you’ll pay. Of course, the opposite happens if the standard rate falls.
The Loan Structure
Lenders use introductory loans to attract new borrowers, so it’s unlikely you’ll be able to access the product if you already have a loan with the lender. Most of them use their standard variable rates once your honeymoon period ends, which could spell bad news for you. If your lender places you on the most expensive rate from their selection of variable loans, you may end up losing any money you have saved during the honeymoon period.
Many lenders also limit extra repayments during your honeymoon period, which means you usually can’t take full advantage of the low interest to pay off more of your home loan principal.
As such, you may consider ignoring the honeymoon period entirely. Instead, you could start making repayments at the standard variable rate the lender offers. This means you won’t have to deal with the shock that higher repayments cause once your honeymoon period ends.
Furthermore, lenders don’t want you to get out of your loan after the honeymoon period is over.
It’s not impossible to take advantage of a honeymoon period and then exit the loan. However, you will need to read your contract carefully to make sure you can do it.
Read Between the Lines
The most important thing to remember is that lenders design introductory home loans to catch your attention. They’re not always as good as they seem, so you need to think about the rate you’ll pay after the honeymoon period.
Look for a loan that offers an attractive interest rate for the entire term. That way, you can treat the honeymoon period as a bonus rather than getting caught up in the initial low rate and getting stung when the loan switches to its higher rate.
Checking the comparison rate can also help, but this won’t show you how the loan’s features affect you. Because of this, we recommend that you speak to a home loan consultant if you’re worried about any honeymoon period-related issues.
Professional Home Loans
Often referred to as “pro-packs,” these loans were originally designed for high earners. However, you may be able to access a pro-pack if you borrow enough money.
Lenders customise their basic home loan packages if you borrow large amounts. Most will start adding extra features if you borrow more than $250,000, though some may create a professional loan for those who borrow less.
The features you receive in a pro-pack vary depending on the lender. However, the loans usually contain the following:
- A selection of credit cards that have no yearly fees attached;
- Discounts on the standard variable rate of interest;
- Discounts or waivers for common home loan fees, such as those charged for property valuations;
- Insurance discounts;
- Waived or discounted fees for other products, such as savings and offset accounts.
The Pro-Pack Structure
Your home loan will need to exceed a certain amount before you can access a pro-pack. As mentioned, this is often $250,000, though some lenders also offer pro-packs on home loans that exceed $100,000. You’ll often receive an interest rate discount, which increases along with the loan. For example, somebody who borrows $150,000 may receive a 0.1% interest rate discount, whereas somebody borrowing $1 million may get a discount of 1%.
Pro-packs also come with fees that you pay annually or monthly. Those borrowing lower amounts may find that these fees exceed the savings they would make via the interest rate discount.
Banks often put more into a pro-pack than other lenders because they want to attract more of your business. You may receive discounts for any financial services the bank offers and could even gain access to margin loans. Investors often use margin loans to buy shares or handle their managed funds. A bank may also offer discounts for insurance packages and allow you to apply those discounts across several properties.
Some lenders counter these incentives with other offers. You may find that your lender waives their annual fees, though you’ll likely pay a higher interest rate for the privilege.
Most lenders use their standard variable rates to create their pro-packs. Those rates, plus all the extras you might receive, vary depending on the lender. As such, you need to research both the home loan, and all other products it may provide access to.
Should I Choose a Pro-Pack?
It really depends on your circumstances. A pro-pack may work for you if you meet the following criteria:
- You want to borrow over $250,000;
- It’s likely that you will change your borrowing over time;
- You want the option to use fixed rates at various points during the loan period; or
- You want, or currently use, a credit card.
However, you may find a pro-pack does not suit your needs if the following applies to you:
- You only want to take out a home loan on one security property;
- The loan is for less than $250,000;
- You haven’t taken out any personal loans; or
- You don’t use or want a credit card.
These are general criteria, so you should speak to a professional before making any decisions.
Maybe you want to build your new home instead of buying an existing one. That’s where a construction home loan could help you.
Most lenders break down their construction loans into five stages. This ensures you don’t pay interest on the entire home loan before you have a home to live in. These stages include:
- Buying the land;
- The pad, which covers the laying of the floor;
- The roof;
- Lock up, which is the point where you’re able to secure the property;
- Final, which is the full home loan amount.
Until you complete construction, your loan will increase progressively during these five stages. Because of this, you’ll only pay interest for the state of construction as it stands at a particular moment. Most lenders also allow you to choose the type of home loan you want once construction ends.
Furthermore, most lenders offer interest-only options for construction loans. This lowers your monthly repayments during construction, after which you’ll likely move onto a more traditional Principal and Interest (P&I) home loan. Of course, this also means that you won’t pay any of the loan’s principal during construction.
You’ll need to provide plans for the new property that have a seal of approval from your local council. Lenders will also want to see the fixed building contract before they approve any construction loans.
How Much Can I Borrow?
This depends on the value of your land and the cost of construction. You may need to take out a land loan to buy the land before you take out a construction loan. Most lenders allow you to borrow between 60% and 65% of the value of the land.
Once you move onto the construction phase, your lender will estimate the loan amount based on the land’s value, combined with the materials you need to build the property.
Let’s look at an example. Your land may be worth $175,000 and it will cost you $95,000 to build your new home. This means you would borrow $270,000 using a construction loan. You might find similar properties in the same area cost more than the combined cost of your land and building materials.
Furthermore, many lenders allow you to revalue your home to access more money for extra work. For example, if you want to do some landscaping after building the property, most lenders will reassess your home loan accordingly.
Dealing with the Phases
You need to satisfy your lender’s conditions at each stage of construction. Upon completion of each stage, your lender will send a valuer to inspect the property. If the valuer leaves satisfied, you gain access to the next stage of your construction loan.
You may also need to pay your contractors during the course of construction, rather than once it ends. If that’s the case, you could consider opening a line of credit to pay these fees. This allows you to pay your contractors at the end of each stage, after which you can use the money you receive for moving onto the next stage to bring your line of credit back down to zero.
What Documents Do I Need?
Most lenders use a standard procedure to assess construction loans. You will usually need to provide the following documents:
- Building plans that have approval from the council
- A copy of your building contractor’s insurance documents
- A signed building contract with a fixed price.
What Features Should I Look For?
The features you receive with a construction loan vary depending on the lender. Ideally, your loan should offer the following:
- The ability to repay the interest alone during construction, after which you move onto a P&I home loan
- A redraw facility
- The option to make additional repayments.
You’ll also find that many lenders let you use an offset account as part of the loan. This allows you to place your savings into an account and use them to offset the loan’s principal, which means you pay less interest over the course of the loan.
What Benefits Does a Construction Loan Offer?
You’ll receive several benefits with a construction loan that you may not have access to with more traditional home loans. These include the following:
- Savings on interest payments during the construction period, as you only pay interest on the loan amount released for the stage of construction you’re currently in.
- Access to interest-only repayment options.
- The ability to borrow against the property as though construction has ended, regardless of the stage you’re currently in.
- Regular valuations throughout the construction process. This prevents you from paying for shoddy work, as the valuer may spot issues that constitute a violation of the contract you have with your builder.
Low Doc Loans
Low doc loans became popular with smaller lenders prior to the Global Financial Crisis (GFC). They allow you to access home loans without the all of the documentation that you would normally need for a standard loan. They fell out of favour for a while during the GFC, but have regained their popularity as market confidence has grown. Now, many traditional lenders offer low doc loans so they can compete with specialist lenders.
You will likely need to provide a Business Activity Statement, which confirms you can afford the repayments when applying for a low doc loan. As such, these loans offer investors and self-employed people the ability to borrow, even if they can’t demonstrate a high income.
Most lenders will only allow you to borrow up to 80% of the value of your home with a low doc loan. You’ll also usually have to pay LMI on any low doc loan with an LVR of 70%, with some lenders asking you to pay it on loans with a 60% LVR. Furthermore, you’ll usually have a higher interest rate than you would with a traditional home loan product.
So, low doc loans come with some catches. You should speak with a mortgage expert to understand these before you apply for one.
Low Doc Loan Application Criteria
Most lenders will ask that you meet the following criteria when applying for a low doc home loan:
- You can confirm self-employed status with an accountant’s letter or your Australian Business Number (ABN);
- You’re willing to self-certify your income;
- Your credit report is clean and shows that you have a history of repaying other loans.
Also, keep in mind that Australia only has two mortgage insurers. This could present a problem if you lodge more than one low doc application. If these applications have any discrepancies, you’ll need to explain them.
You could access a non-conforming loan through some specialist lenders if you have black marks on your credit report.
Are Low Doc and Non-Conforming Loans the Same?
No, they aren’t. The key difference is that you will need a clean credit history to access low doc loan products. Furthermore, low doc loans can’t be for more than 80% of the property’s value and usually come with LMI.
Non-conforming loans are more specialised, so you may be able to access them even if you have blemishes on your credit report. These types of loans don’t conform to the criteria the lender normally uses when considering a home loan application. This makes them ideal for those who can’t demonstrate a history of earnings or those who have credit report issues. You may also use a nonconforming loan to pay for properties that lenders usually consider to be risky. These could include rural properties or apartments in the inner city. Finally, some lenders offer more than 80% LVR for their non-conforming loans.
Other Types of Loans
That covers the main home loan products that most lenders offer. There are also some others that you should keep in mind.
Bridging loans come into play when you’re moving house or want to sell one property to fund the purchase of another. They bridge the gap between the selling and buying transactions, making them useful for those who buy the new property first and sell the old one later.
With a bridging loan, you essentially make repayments for both properties until you can complete the sale of your old home. Your lender takes both properties as security on the loan, usually offering an LVR that does not exceed 80% of the value of both properties combined. Upon sale of the old property, you will pay back the bridging loan and switch to a more traditional home loan for your new property.
Your lender may allow you to capitalise your interest payments of your bridging loan, up to the 80% threshold. This can make your bridging loan easier to repay. Plus, you should receive your choice of home loan products once the bridging loan ends. However, you will likely place yourself under a heavy financial burden for the duration of the bridging loan.
A product focused on retirees, reverse mortgages allow you to use the equity you’ve built in your home. As such, most lenders only make these loans available to those above 65. Your lender will let you borrow money against your equity and you can choose to receive this money in instalments or as a lump sum.
Usually, you won’t have to make any repayments on the loan with a reverse mortgage. Instead, your lender will add your repayments and any other fees onto the balance of your loan. Your lender usually receives this money back upon your passing, or if you decide to sell the property. However, you have the option to make repayments if you wish to.
Most lenders place a cap on the amount of equity you can use for a reverse mortgage. This may be a fixed amount or a percentage of your home’s value. You’ll also find that you usually have to borrow a minimum of $10,000 with a reverse mortgage.
It’s important to consider the status of the loan after your passing. If you don’t make any repayments on a reverse mortgage, you may pass the debt onto your loved ones if the sale of the house doesn’t cover it.
Line of Credit
Also referred to as an “equity loan”, a line of credit allows you to use the equity in your home to fund major purchases. You only pay interest on the money you use. The rest stays accessible, without building any interest.
Let’s look at an example. Your lender may provide you with $150,000 as a line of credit. You then spend $50,000 of that money on renovations. You’ll only pay interest, usually at the same rate as your home loan, on that $50,000. The other $100,000 stays untouched in your line of credit account.
Because of this, many use lines of credit to fund home improvements and investments.
What to Do Next
We hope that this article has given you a better idea of the home loan products that are available to you. Before moving forward, we recommend you:
This information is general in nature, and you should always seek professional advice when making financial decisions.