The following information on home mortgage loans (aka mortgages or homeloans) will help you better understand the different types and styles of home mortgage loans and the features that are available with them. Please note that home mortgage loans and their features may vary slightly in purpose, application and cost between lenders.
2 Types of Home Mortgage Loans
The Australian Mortgage industry is constantly evolving and new product variations, special rates and limited offers come and go regularly but technically there are only 2 types of home mortgage loans – The Standard Amortising Home Loan and Line of Credit Home Loan.
All other home mortgage loans or referred to as Basic, No Frills, Fixed, Variable, Introductory, Honeymoon, Capped, Stepped, Split, Offset, Low Doc, No Doc, Construction, Investment, P & I, Interest Only, Bridging, Non Conforming and No Deposit are variances of a Standard Home Loan that have been specifically styled by the lender to cater to a specific borrower usage, need or purpose and then labeled accordingly to represent that purpose and/or the lender’s marketing strategy. In some cases they may involve a combination or mixture of both the Standard Home Loan and Line of Credit.
Standard Home Mortgage Loan
A Standard Home Mortgage Loan is traditionally an amortising loan which means that the loan balance must be repaid in full or to zero by systematically calculated repayments proportioned over the term of the loan i.e. 30 yr loan term will require 360 monthly repayments which reduce the loan balance to zero by the end of the 30yr term. Most lenders are flexible with the loan term with most offering 5 – 30 yr terms and some a 40 yr term.
The repayments of standard home mortgage loans are payable monthly and are by default a Principal & Interest (P&I) repayment where each repayment consists of an amount of principal and an amount of interest with the principal component reducing the loan balance by a systematically calculated amount each month effectively finalising the loan by the end of the loan term.
Line of Credit
A Line of Credit (LOC), unlike an amortising loan which has a reducing loan balance, can have the same loan balance for the entire term of the loan. Only payments of interest, not principal, are required during the loan term but full repayment of the loan is still required by the end of the term i.e. An LOC with a 20 yr loan term would require 239 monthly payments of Interest Only and full payment of the loan balance owing on the last day of the loan term.
Commonly referred to as a ‘Revolving Line of Credit’, this type of loan gives the borrower a maximum limit to their loan and allows them to readily deposit or withdraw funds as they choose provided the loan balance does not exceed the limit. It allows much greater flexibility for the borrower than a standard home loan and usually offers extra features such as access to funds via cheque book, telephone /internet, BPay, ATM, EFTPOS and linked Credit Card.
When a lender refers to their LOC as being ‘Evergreen’ they are stating that their product is a true LOC in the sense that the loan limit and Interest Only (IO) repayments will remain in place for the entire loan term. Some lenders do not have a true LOC product and advertise a featured up standard home loan with Interest Only repayments as a LOC. Be cautious of these products as they convert to an amortising loan with a P& I repayment after an initial IO period i.e. 10 yrs and the LOC limit steadily decreases in line with the amount of principal payment included in the P&I repayments.
Possibly the biggest advantage of a Line of Credit is the ready access to money. This makes it attractive to Investors and highly suitable for Mortgage Plans and Rapid Mortgage Reduction. A Line of Credit will usually have a higher interest charge (approx. 0.25%) than that of standard home mortgage loans.
Variations or Styles of Home Mortgage Loans:
Standard Variable Rate Home Mortgage Loans
The Standard Variable Rate Home Mortgage Loan, often referred to as ‘Standard Variable’ is the most commonly promoted and used home loan which consists of a Standard Home Loan with a Variable Interest Rate. The interest rate charged for a variable rate home loan is based on the Reserve Bank Official Cash Rate plus a lending margin i.e. RBA cash rate 3.75% + lending margin 2.80% = Variable Home Loan Rate 6.55%
The variable rate as the name depicts, can vary during the term of the loan, with financial market conditions and/or the RBA usually being the catalyst for any rate movements. If the Reserve Bank adjusts the official cash rate either up or down then lenders will generally adjust their variable home loan interest rates accordingly to maintain the margin to loan i.e. Cash Rate is increased by 0.25%, lenders usually increase their variable loan interest rates by 0.25%. Bear in mind that lenders have the right to adjust variable rates at their whim without any lead from the RBA and that variable home loan repayments will also be adjusted up or down in line with any interest rate movement.
Over time the standard variable loan has been developed into a product with great flexibility of use due to the amount of features that have been made available with the loan. Features such as extra repayments, increased payment frequency, funds redraw, split loan, interest offset, portability and conversion to fixed rate.
Standard variable home mortgage loans offered by the major lenders generally carry a higher interest rate then most loan products due to them offering a high range of features. However for loan amounts usually above $250,000 that are combined with a lender product package usually referred to as a ‘Professional Package’, there are generous interest rate discounts available up to 0.9%. These packages apart from the attraction of an interest rate discount often include other lender or banking products such as a credit card with no annual fee, fee free banking account or interest rate offset banking account and discounts associated with the purchase of insurance or other financial products. Unfortunately these product packages are not free with lenders charging an annual fee of approx. $300.
Fixed Rate Home Mortgage Loans
A Fixed Rate Home Mortgage Loan is a standard home loan that offers a fixed interest rate for a set period of time during the loan term. The Fixed Rate periods on offer are usually between 1 – 5 yrs with some lenders now offering 7, 10 and 15 yr terms. The interest rate of the loan does not change during the fixed rate period which also means your loan repayment does not change either i.e. If the Reserve Bank increases or decreases the cash rate your lender cannot alter your loan rate as they can with a variable rate provided your loan is still within the fixed rate period.
Although the fixed rate period may be 1 – 15 yrs, the loan term will still be 5 – 30 yrs depending on what you have agreed with your lender. On expiry of the ‘fixed rate’ period, the loan by default will convert to a standard variable rate loan however you can apply to have another fixed rate period or the loan to convert to another style of home loan i.e. 30 yr standard loan with a 5 yr fixed rate period will convert to a 25 yr variable rate loan or loan of your choice.
This style of home loan gives peace of mind for borrowers who like the surety of locking in their monthly repayments within their budget and provides security against the effects of rising interest rates but in a falling rate environment this type of loan can result in a borrower paying more than the average market rate. A fixed rate loan can be the most inflexible of all loan types as most lenders restrict features like extra repayments and redraws during the fixed rate period.
Basic Variable Rate Home Mortgage Loans
A Basic Variable Home Mortgage Loan also known as a ‘Discounted Rate Home Loan’ is generally a ‘no frills’ version of the Standard Variable Loan. It has a lower interest rate due to offering fewer features which means it usually has less flexibility and sometimes has a monthly loan fee or incurs extra loan fees for the use of certain features i.e. $8 monthly fee, $10 fee for use of redraw feature.
The features on offer vary between lenders but generally basic variable loans have insufficient features on offer for efficient minimisation of interest costs without your frequent involvement in the manual processing of redraw and extra payment transactions.
Basic Variable loans are usually attractive to the budget conscious borrower, Investor and/or First Home Buyer who are willing to trade features and flexibility for a lower interest rate. Care should be taken with this type of homeloan as the attraction of the lower rate can sometimes come at a cost.
Before selecting this type of homeloan, we suggest you seek advice from a Mortgage Planner, Lifestyle Financial Planner or highly experienced Mortgage Loan Broker, as a Basic Loan is usually more suited for use as a short term loan than a longer term loan.
Introductory Rate Home Mortgage Loans
Also known as a ‘Honeymoon Rate Home Loan’, this loan commences as a Basic Loan for a set period of time usually 1 – 3 yrs and then converts to a Standard Variable Rate Loan for the remainder of the term. Interest Rate types for the introductory period vary between lenders with some offering a variable rate and some a fixed rate.
The introductory interest rate is usually set low to attract borrowers and is mostly popular with first home buyers wishing to ease themselves into the long term commitment of a home loan or borrowers readjusting after a divorce or similar event.
Capped Rate Home Mortgage Loans
A Capped Rate Home Mortgage Loan also known as a ‘Hybrid Home Loan’ is generally a Standard or Basic Home Loan with a variable interest rate that is capped to a set maximum interest rate for a period of the loan. If interest rates increase, the rate applying to this loan cannot rise above the cap or maximum rate. If market rates rise above the cap, the loan rate will remain fixed at the capped rate until market rates fall below the cap or the capped rate period expires and the loan converts to a standard variable loan.
This type of loan could offer some surety and peace of mind for borrowers in a rising interest rate environment.
All in One Home Mortgage Loans
This type of home loan is normally seen as an alternative to a Line of Credit. The All-in-One Loan is essentially a standard variable loan with extra features that allow the loan to be used in place of an everyday transaction account. Salaries and/or varying types of income can be directly credited into the loan account and then withdrawn when required similar to the operation of a banking or savings account. Funds can usually be withdrawn via the same processes as associated with a LOC but can vary between lenders.
The interest rate may be slightly higher or a monthly fee may be charged by some lenders due to the extra costs incurred by the lender associated with the extra features on offer.
The major benefit of the All-In-One Loan is its ability to function as a transactional account which enables the borrower to minimise the interest charged on the loan by keeping salary, savings and other income in the loan account for as long a time as possible.
Transactional Home Mortgage Loans
Refer Line of Credit and All-in-One Home Loan.
Investment Home Mortgage Loans
Investment Home Loan is simply a title given to a loan used for Investment purposes. Just about any style of home loan can be used for investment purposes or as an investment loan but bear in mind that some loans due to their features will offer better benefits and/or yield better results for the investor. Loans with lower interest rates and charges tend to be the most popular with investors.
Before selecting a loan to be used for investment purposes we strongly advise that you seek advice from a Mortgage Planner, Lifestyle Financial Planner or highly experienced Mortgage Loan Broker as the benefits obtained from an investment loan and/or yields from an investment can be enhanced with a correctly structured Mortgage Plan or Lifestyle Wealth Plan.
Split Home Mortgage Loans
A Split Home Mortgage Loan is as it sounds, a loan split into sections or portions which allows your total borrowings to be spread usually between different types or styles of home loans. The most common split is either a home loan style split (part Fixed Rate and part Variable Rate) or a home loan type split (part LOC and part Standard). The split portions can be 50%-50%, 25%-75%, 90%-10% or whatever combination you select provided restrictions on minimum loan amounts are observed (usually $10,000 – $20,000).
A Split Loan can be a very effective home loan as it enables you to either, reduce interest rate risk with a Fixed Rate /Variable Rate loan combination or combine price and flexibility with a LOC /Standard loan combination or combine risk, price and flexibility with a LOC /Basic loan /Fixed Rate loan combination. You can create whatever combination you like based on your personal appetite for flexibility, risk and interest savings. Most lenders allow either 2 or 4 splits with some allowing up to 10 splits. Note that some lenders will charge a fee for split loans or combinations of loans.
Combo or Combination Home Mortgage Loans
Refer Split Home Loan. This is a term colloquially used to describe a loan with numerous splits or combinations involving varying loan types and styles i.e. LOC 10% /Basic 20% /Fixed 1yr 35% /Fixed 3yr 35%.
Stepped Home Mortgage Loans
This is a split loan that contains fixed rate portions with varying fixed rate terms i.e. $300,000 loan with 3 splits – Split 1 $90k 1yr Fixed Rate, Split 2 $105k 3yr Fixed Rate, Split 3 $105k 5yr Fixed Rate.
Stepping is mostly used by borrowers in a rising interest rate environment or who simply like the security of a fixed rate but who also wish to maintain some form of protection against the possibility that interest rates may reverse and start to fall before the expiry of the longest fixed rate term.
Hedged Rate Home Mortgage Loans
This is a term used to describe a home mortgage loan being used for the purposes of ‘rate hedging’. Rate Hedging is a strategy used to minimise interest rate risk by the use of a split loan. By splitting the loan between Fixed and Variable interest rates in portions of 50%-50% you are spreading the risk equally i.e. If rates go up you receive a benefit and protection from having a fixed rate portion, if rates go down you receive a benefit and protection from having a variable rate portion.
Vacant Land Home Mortgage Loans
Vacant Land Loan is simply a title given to a loan used for the purposes of owning unimproved Vacant Land being Land that does not contain any building or structure.
This type of loan is usually viewed as the precursor to a construction loan and for this reason some lenders limit the availability of loan styles and/or loan features. Some lenders also limit the amount of time that you can hold the loan for, before construction of a dwelling must commence which effectively at that time converts the loan to a Construction Loan.
Not all lenders offer Vacant Land loans while some limit loan sizes, restrict postcode areas and charge higher interest rates as well as fees.
Construction Home Mortgage Loans
This type of home loan is basically a standard variable rate home loan with interest only repayments and is structured so that the loan amount can be drawn down gradually as progress payments are made to the builder during the construction phase i.e. the loan will reach its full limit by the time construction is complete.
Due to the loan being drawn gradually, interest is only charged on the loan amount that has been used instead of the total loan amount available which effectively reduces the interest cost during the construction period. The loan is usually drawn down in five progress payments made to the builder at various stages of construction (Slab, Frame, Lock Up, Fit Out, Completion).
On completion of construction the loan will usually default to a standard variable rate home mortgage loan with P&I repayments unless other arrangements have been made with the lender.
Bridging Home Mortgage Loans
This is a temporary loan arrangement which allows a buyer to complete the purchase of a new property before selling their existing property or finance the construction of a new home while still living in their existing. Theoretically a Bridging Loan consists of two loans, the existing loan and the end loan with the existing loan having a maximum term of 6 or 12 months (known as the bridging period) and the end loan a regular loan term of 5 – 30 yrs.
During the bridging period only P & I repayments to the end loan are required to be made while interest is capitalised to the existing loan. Full repayment of the existing loan is required on sale of the existing property or at completion of construction of the new property or on expiry of the bridging period.
Given the high risk to the lender associated with this kind of loan, a bridging loan will usually attract a higher interest rate however arrangements can be made with the lender for the end loan to be converted to a loan of your choice on completion of the bridging period.
Non-Conforming Home Mortgage Loans
Also known as a ‘Bad Credit Home Loan’ this type of loan is marketed to borrowers that do not meet standard lending or credit criteria. Borrowers interested in this type of loan may include seasonal or contract workers (irregular income), non-residents (foreigners or Australians living abroad), self employed or start up businesses, people with income producing properties being used as security or those with a poor credit history.
Due to the perceived high risk nature of the loan, lenders generally charge a higher interest rate and only offer a standard loan with limited features.
Low Doc or No Doc Home Mortgage Loans
A ‘Low Doc or No Doc’ Home Mortgage Loan is similar to a Non-Conforming loan but specifically aimed at borrowers who are unable to provide conventional documentation like payslips or tax returns that confirm their salary or income. Depending on lenders requirements, income may be confirmed by a signed declaration or other unconventional means. This style of loan and the credit process is ideally suited to self employed borrowers and they are the borrowers that lenders predominantly market these loans to.
Due to the flexibility of proof of income, the credit standard required for this type of loan is higher than usual therefore borrowers will require stability of employment, a good credit history and higher levels of equity or savings.
Standard Variable, Fixed Rate and LOC homeloans are usually offered by most lenders for use as Low Doc loans with most lenders also charging a higher interest rate and/or extra fees. Some lenders also offer borrowers an option to convert their loan to a standard rate product after a set period of time provided they have maintained a good credit history.
Full Doc Home Mortgage Loans
This is the terminology given to a loan that is processed under standard credit criteria and where borrowers provide full details in a loan application and support that information with complete documentation. All loan types and styles are available for full doc lending with the standard variable home loan being the most popular.
Principal and Interest Repayment
This is the default repayment type for a Standard Loan.
Principal is the actual amount of money that you have borrowed under the home loan and interest is the fee that lenders charge you whilst you have the loan. A Principal and Interest repayment is simply one which includes an amount for repayment of the loan principal and an amount for payment of the interest.
Most lenders offer repayment frequencies of monthly, fortnightly and weekly with the default repayment mode predominantly being direct debit from a banking or savings account commencing one calendar month from the commencement of the loan. Some lenders offer repayment frequencies that also include twice monthly and choice of repayment date.
Interest Only Repayment
This is the default repayment type for a Line of Credit.
The name says it all as the loan repayment only accounts for payment of interest with nothing being allocated towards the repayment of the loan principal. Interest Only (IO) repayments, like fixed rates, are only available for a set period of time during the loan term except for a Line of Credit where IO repayments apply for the full loan term. IO periods are available from 1 to 10 yrs with repayments converting to P & I on expiry of the period. You can apply for an extended IO period on expiry, though some lenders do not offer that privilege.
IO repayments were initially introduced for loans where funds were being used for investment purposes, enabling investors to maximise their cashflow and returns on their investments. However in this age of high real estate prices, this type of repayment has become popular with homeowners enabling them to minimise their repayments and increase their affordability. Owner Occupiers should be cautious when selecting an IO repayment, as the interest cost will be substantially more than that of a loan with a P&I repayment, plus the loan repayment will substantially increase on expiry of the IO period and at times the resultant P&I repayment may be unaffordable for the borrower i.e. $300,000 loan @ 6.00 %:- P&I repayt = interest $347515, 10yr IO repayt then P&I = interest $395830. 10yr IO repayt = $1500 pm, at the end of 10yr IO period the P&I repayt = $2149.29 pm.
It is highly recommended that you seek advice from a Mortgage Planner, Lifestyle Financial Planner or highly experienced Mortgage Loan Broker before committing to a loan with Interest Only repayments. IO repayments can be a very effective tool when used correctly within a structured Mortgage Plan or Lifestyle Financial Plan but can be very damaging when used incorrectly or as a means for affordability.
Interest Offset or 100% Offset
An ‘Offset feature’ enables a link between a borrower’s savings or banking account and their home loan for interest reduction purposes. With an Interest Offset feature the interest charged on the home loan is offset by the perceived interest to be earned on the savings account i.e. home loan interest rate 6.50%, savings account interest rate 3.50%, savings acct balance $5000, only interest of 3.00% is charged on $5000 of the home loan balance. In the case of a 100% Interest Offset feature the interest perceived to be earned on the savings account is the same as the home loan interest rate creating a 100% offset.
Some lenders will nominate a particular type of savings account and particular style of home loan that can be linked for the offset feature.
The offset from the linked savings account effectively reduces the cost and term of the home loan. This feature is particularly attractive to borrowers who wish to reduce the interest cost of their home loan but retain instant access to their equity or cash.
This feature allows the borrower to pay an extra repayment amount by increasing the standard loan repayment. The extra repayment amount is paid on a regular basis along with the standard loan repayment by direct debit from the borrower’s nominated savings or banking account i.e. Standard Loan Repayment $1255 per f/night + extra payment of $45.00 = Total Repayment of $1300.00 per f/night. Making extra repayments reduces the interest cost and term of the loan.
Lump Sum Payments
Similar to ‘extra payments’, Lump Sum Payments are one off adhoc payments made on a non-regular basis usually by direct debit from the borrower’s nominated savings or banking account. They are common practice around July/August/September when borrowers use their taxation refunds to make one off payments to their loan.
With this feature the borrower can instigate either regular or one off payments to their loan by other means of funds transfer apart from direct debit. Most lenders allow the direct credit payments to be accepted as loan repayments in lieu of the standard loan repayments i.e. provided the direct credits at least total the amount of the standard loan repayment within the repayment period there is no requirement for a standard repayment to be made by direct debit.
This feature also enables employers and managing agents to direct credit the borrower’s salary and rental income to their loan. This is commonly known as ‘Salary Crediting’ or ‘Income Crediting’.
The major benefit of Direct Crediting is that it enables the borrower to maximise payments to the loan which in effect minimises the interest charged on the loan by keeping the loan balance as low as possible at all times and lessens the need for the borrower to operate a banking or savings account.
The redraw feature allows borrowers ready access to extra payments that have been made to their loan. If a borrower has made extra payments of $5000 to their loan, then this amount will be available for the borrower to access or redraw and use for whatever purpose they desire.
Most lenders have a minimum redraw amount and some lenders have a maximum amount allowed per redraw or per day and some lenders also charge a fee per redraw. A redraw fee is more likely to exist with a Basic Loan than a Standard Loan, All in One or LOC.
Allows the borrower to switch the loan interest from variable to fixed by switching all or part of a Variable Rate loan to a Fixed Rate loan. A switching fee is usually charged by the lender.
Refer to Split Home Loan.
This feature allows the borrower to convert all or part of their home loan, from the existing loan type or style, to a different loan type or style. This commonly occurs when the Introductory Rate period or Fixed Rate period of a loan expires and the loan is converted from a standard variable to a Line of Credit or other style of home loan. A conversion fee is usually charged by the lender.
‘Top Up’ allows the borrower to increase the amount or limit of their existing home loan by using the equity in their property. It removes the need for renegotiating a replacement homeloan when usually only a small amount of funds are required for a renovation, holiday, motor vehicle or other purpose. Fees will apply with the cost usually being less than that for a replacement homeloan.
This feature offers a break from loan repayments for a period of time from 2 – 12 months. This can be useful when making a career change or taking a break from employment such as maternity leave.
Allows you to move an existing loan to a different property when relocating or replacing an investment property. This saves you the stamp duty payable on a new mortgage and some loan establishment fees. Also removes the necessity of applying for a replacement home loan.
Promotional deals, special rates and limited offers come and go, with some only being made available through selected lending outlets and Mortgage Loan Brokers, so to receive the most correct and up to the minute home loan information, contact Mortgage Refinancing Group Australia and have us find the right home mortgage loan that will save you the most amount of money.
Apart from offering our own suite of high grade mortgage products, we also have access to more than 25 lenders offering over 200 varying types of homeloans and mortgage related products. All of these lenders along with their homeloans and service levels are systematically scrutinised by our lending panel before being placed on our recommended list of lenders as we will only recommend lenders that we judge to have acceptable home loan processing standards, home loan products and customer service that is conducive to assisting our clients achieve better financial results.