Refinancing Loan Types
and Features

Standard variable loans are Australia’s most popular type of home loan. The interest rate varies throughout the loan term. These loans generally offer excellent flexibility, low fees and often offer great features such as an offset facility, redraw facility, no limits on additional repayments and in most cases, no early pay-out penalties.

Advantages:

• Flexibility
• Lump-sum payments can be made without incurring a penalty.
• If interest rates fall, your repayments will fall.
• Often offer extra features.

Disadvantages:

• If interest rates rise, your repayments will increase.

Usually, basic variable loans have lower interest rates and features than regular variable loans. You also have the luxury of paying for extra features. Over the loan period, interest rates and reimbursements differ.

Advantages:

• Relatively lower interest rate
• Lower repayments

Disadvantages:

• Many of these loans do not have the same features or flexibility as other variable loans

An introductory rate loan has a low fixed rate for a set amount of time – usually 12 months – during which it reverts to the standard variable rate. It is possible to get a fixed or variable cost.

Advantages:

• Usually, the lowest rates on the market
• Some lenders provide offset accounts on these loans
• Opportunity to reduce the principal quickly during the ‘honeymoon period

Disadvantages:

• Payments will increase after the initial introductory/’honeymoon’ period

A fixed-rate loan has an interest rate that is fixed for a set amount of time, typically one to five years. This loan gives you the security of knowing exactly what your monthly expenses will be and the assurance that they will not increase. If prices fall within the fixed term, though, you would not benefit.

Advantages:

• Guaranteed rate, if interest rates rise, your repayments won’t.
• Budgeting is made easier as your home loan repayments don’t change for the fixed-rate period
• Reduced risk of defaulting on your mortgage repayments should the interest rates rise

Disadvantages:

• Reduced flexibility
• Extra repayments may incur a fee or be limited
• In some cases, the fixed rate can be higher than variable interest rates of the time
• Depending on the lender and product, you could potentially be charged a fee for exiting the fixed rate before the fixed expiry ends, depending on the lender

A bridging home loan is a loan that is used if you are selling your owner-occupied home to purchase a new home. It allows you to purchase a home before you sell your existing home.

Advantages:

• Allows you to have a new home available so that you can move into the home without being displaced and waiting for your home to settle before you purchase a new home

Disadvantages:

• Bridging loans can be more expensive than normal residential loans as there is more risk to the lender
• Additional fee’s such as interest repayments on the additional loan, are included over the bridging period

A 100% offset home loan is a home loan that comes with a linked bank account called an offset account. This offset account functions very similar to a normal savings account but with one main difference, any savings you have in the account reduces the amount of interest you pay on the linked home loan.

Advantages:

• Can save you a substantial amount of interest if used correctly
• Operates like a normal transaction account and has a chequebook, ATM card, etc. attached

Disadvantages:

• May have higher monthly fees attached to the account
• May require a minimum balance in the account

Up to a pre-approved cap, a line of credit loan gives you access to the equity of your home or investment assets. You have access to the funds as required. A line of credit loan usually has a variable interest rate and interest-only repayments.

Advantages:

• You can use the money when you need it and pay it back when you can
• Rates are generally lower than a personal loan or credit card
• In some cases, your interest repayments can capitalise if you have available funds meaning you don’t need to make regular repayments

Disadvantages:

• Unless care is shown, it is possible to reduce the equity you have built-in your home

A low documentation (or no documentation) loan is suited to investors or self-employed borrowers who do not meet the ‘standard’ lending criteria.

This may include people who have a poor financial background, can’t supply the necessary paperwork to validate their loan application, or want to borrow more than 100% of the property’s worth.

Advantages:

• In some cases, you only need to provide 12 months BAS statements and not full tax returns
• Can have features such as redraw, line of credit, variable or fixed rates, principal and interest or interest only

Disadvantages:

• Generally, a higher interest rate than a full documentation home loan; however, this is not always the case as it can vary between lenders

If you are building your own home or investment property, a construction loan may be suitable for you. This loan requires a fixed price building contract from a registered builder. These loans are usually interest-only for the period of building and then become principal and interest once the building is finished.

A construction loan helps you to generate profit during building. With the usual necessary documents required when applying for a loan, construction loans also require a ‘fixed price building contract’ and ‘council approved plans’.

Advantages:

• Competitive variable interest rates
• Facility to draw money when necessary whilst building
• Interest-only payments during the building period
• Additional payments can be made

Disadvantages:

• Requires a fixed price building contract leaving little room for change whilst building
• Some lenders charge a fee for every time you draw money whilst building
• Given it is a variable loan, loan repayments will increase if interest rates increase.