With the sheer number of loan types and home loan features available it can be confusing as to how these features work and which ones are right for you. Having the right home loan features could help you save on your mortgage. So, if you are feeling a little bewildered, and possibly lost in your search for a home loan, then you have come to the right place. Why? Well, we’re about to explain the different home loan features and how they could help you.
Let’s look at the most commonly encountered features now.
A basic home loan is as simple as loans get. This type of loan has no features. But, in return, you get a low ongoing rate. Plus, in most cases, this loan also does not incur fees. However, the trade-off is there are no offset or redraw facilities hooked to this account. It’s a no-frills home loan.
So, who suits a basic loan?
- Borrowers looking to a secure a loan for under $250,000.
- Those who crave simplicity.
- People looking to reduce costs.
- Home buyers who just know they won’t use loan features.
The 100% offset loan is a common home loan feature that allows you to pay off your home sooner. This feature works by linking your loan to an account that you use every day, such as your saving account. The balance of your savings account then reduces or offsets against your home loan. For instance, let’s say you have $50,000 in your everyday offset account, and you have a home loan of $400,000. This $50,000 then reduces your mortgage principal to $350,000 so that you only pay interest on this amount, not the full $400,000.
How does this loan feature help me?
- Reduces the amount of interest you pay on your home loan.
- Helps you to pay off your home faster.
- Encourages you to build up a nest egg or a buffer, so you avoid mortgage stress.
- Creates good savings and money management habits.
Fixed rate loans enable you to secure the interest rate on your loan for one to five years. This option gives you peace-of-mind and allows you to know what you’re paying each month. However, the trade-off is you lose loan flexibility.
How does a fixed rate loan differ to other loans?
- Most fixed loans don’t come with offset or redraw capabilities.
- You cannot make extra repayments without incurring a penalty, or the extra amount that you can pay off your loan has a cap to a specific amount.
- Rates may be higher than the market rate.
The line of credit loan is like a cheque account. This type of loan enables you to draw down funds when and where you need them. Then you repay the part of the loan used monthly. However, this type of loan needs exceptional money management skills and the ability to increase repayments to suit the amount of funding used.
So, how does the line of credit loan work?
- You need to have equity in a property.
- This property then becomes loan security.
- You can then borrow up to 80% of the home’s value, less what you owe on the property already.
What are the terms of this loan?
- Higher than basic and standard variable rates apply to this loan.
- Interest is payable on the amount borrowed, not the full loan amount.
- Payments are flexible so that you can pay more, without penalty.
- Funds are available for any purpose, including medical expenses, renovations, or the purchase of an investment property.
An equity loan enables you to access the wealth that you’ve accumulated in a property. For instance, let’s say that you own a home valued at $1.2 million, and you owe $200,000 on the property. This scenario means you have $1 million in equity, which you can use to buy an investment property, carry out home renovations or invest in shares.
Who suits this type of loan?
- This loan is best suited to homeowners who own more than 20% of their home.
- Those wishing to carry out renovations or who are looking to improve a property.
- Times when needing greater financial flexibility.
The best way to calculate how much equity you have in a property is to visit a real estate site to estimate the current market value of your home. Then, use an ‘equity calculator.’ These are online based and will usually ask for your property value and outstanding home loan balance. Once you’ve entered these values, then the calculator will give you the estimated equity value and increased loan repayment value, if you borrow the full amount of equity available.
The Low doc loan is perfect for self-employed people and contractors who don’t have the necessary documentation that employees do. This loan is ideal for those with a strong income and assets.
Low doc loans use a self-verification method to prove income. However, the lender usually carries out a credit assessment and check to make sure the loan is affordable. Plus, this type of loan incurs higher fees.
Who can apply for a Low Doc loan?
- Self-employed contractors.
- Business owners.
- Commission-based workers.
What do lenders typically look for?
- An ABN/ GST registration that’s older than 2-years. Some lenders only require 6-months, but these are exceptions and typically charge a higher interest rate.
- A loan value ratio of 60% at standard rates.
- Reasonable income declared for the business over a number of years.
- A clean credit history.
- Favourable security risk, where the property bought is not in a state of disrepair or is difficult to sell.
Are you looking for a home loan and trying to decide which home loan features are right for you? Then contact eChoice, our brokers have access to 100’s of products, so we could help find you a competitive mortgage.
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