mortgage types

An introduction to common mortgage & home loan types used in Australia.

Variable Rate
A Standard Variable home loan offers more flexibility, with many offering additional features such as redraw facilities, chequebooks, the ability to make lump sum payments or to transfer your loan to another property in the future.

A Basic Variable home loan is generally about 1 per cent cheaper but offers few added services. No frills and low cost.

With either type of variable loan the interest rate charged moves up or down with the official 'cash rates' as set by the Reserve Bank (RBA). So, if they go up, so do your required repayments, but if they fall so do the required repayments.

Fixed Rate
With a fixed rate your interest rate, therefore your repayments, stay the same regardless of changes to the official 'cash rates' set by the RBA. If you think interest rates will rise or you prefer to have some certainty about your repayments over the term of the loan, a fixed loan may be more suitable.

Lenders will normally offer a fixed rate for periods of up to five years.However, if you lock into a fixed mortgage and rates fall, you'll miss out on the lower rate. Also, during the fixed rate period extra repayments may not be allowed and penalties may apply for early repayment or exit.

Combination (or Split) Loans
A Combination or Split loan offers borrowers the ability to set part of their loan as a variable rate loan and the other part as a fixed-rate loan. It's akin to having a bet each way, in terms of where rates may go.

Introductory loan - Honeymoon rates
Many lenders offer so-called honeymoon rates. The interest rates offered can be significantly lower than the prevailing variable interest rate, although, the introductry rate only applies for a limited time of usually between six and twelve months. After the introductry period, generally, rates revert to the standard rate of the time.

Home equity loan or Line of Credit mortgage
From lender to lender this type of service can be structered differently, basically, it gives you access to equity that you have built (the difference between asset valuation and amount owed). So, in effect any payment you make can be drawn back out as long as the interest charges are being met. This type of loan may be useful to investors or business.

Transactional Account or All-In-One loan
This type of loan is normally set up as a complete transactional account with the mortgage, savings and cheque account combined. As a rule all your income and cash deposits are payed into this account which reduces your loan balance. A credit card is often linked to the account and monthly payments drawn from the transactional account. Gains desired could be from utilising interest free credit card periods to allow income to reduce interest costs.

Mortgage Offset account
The mortgage or loan account is linked to a savings account into which your salary and other cash can be deposited and from which you can withdraw to pay everday expenses. For as long as money sits in the savings account, it is 'offset' against your loan and no interest is charged on that amount.

Reverse Mortgage or Equity Release
This type of product may appeal to seniors where they are asset rich having payed off their home but income poor. The lender will loan you a lump sum, or provide a monthly payment, and in return take a stake in the home to an equivalent of the amount loaned plus interest. The lender generally claims their stake when the property is sold.

Shared Equity
Basically, with this type of loan the lender will offer a discount interest rate, or zero interest rate, on a portion of the loan value for a share in the capital appreciation of the property value.

The desired effect is the home buyer recieving a lower interest rate and lower repayments, reducing entry barriers to the market. This style of product was first concepted by Rismark International and known as EFM (Equity Finance Mortgage).

Other variants include SAM (Shared Appreciation Mortgage) and First Start Shared Equity Home Loan Scheme introduced by the WA government.

Bridging Finance
Bridging finance has long been viewed as the expensive answer to the dilemma of having bought one home without having sold your existing property. Most banks have some form of Bridging Finance, which are generally negotiated on a case-for-case basis.

Deposit Guarantee Bond
Deposit Bonds are commonly used in the need to raise a deposit for a new property when all your capital is tied up in your current property or other assets. Similar to Bridging Finance the terms are short usually up to 48 months.

Low-Doc or No-doc Loans
A low-doc or no-doc (doc=documentation) loan is ideally suited for investors or self employed borrowers who may not have, or want to share, income records. No tax returns or financial reports are generally required, although, a higher interest rate and/or fees may be charged.