Types of Loans
There are many different types of property loan products on the market.
Not surprisingly there is not a one size fits all product and before speaking to your MRD Loan specialist it is generally a good idea to have a basic understanding of the main types.
When investing in properties or saving for a house deposit, it is important that you have the right loan structure in place.
If you don't, you and your investment property could be at risk. Here is an overview of the types of loans available to you.
Interest only loans are particularly popular for property investors.
The repayments of interest only loans will be lower than an ordinary loan because you only pay the interest charges each month, you aren’t required to pay off the principal.
Some interest only loans are available for owner-occupier clients.
Variable rate loans often provide additional flexibility and are the most popular type of home loan in Australia.
As the name suggests the interest rate is variable and therefore fluctuates with the RBA interest rate movement and the cost of the financial institution sourcing funds to lend.
Variable rates are generally broken into two categories by financial institutions: basic and standard.
As the name suggests the basic variable rate only covers the basic home loan features. On these loans you won’t have access to features such as a redraw facility; however this also means the interest rate is generally slightly lower than other loans.
The standard variable rate is traditionally slightly higher than the basic variable, however along with this you receive extra features such as a redraw facility, repayment frequency flexibility, portability and the option to pay in advance.
Variable loans generally require closer monitoring, especially if you over-capitalise and interest rates rise.
It is important to make sure that you budget and plan for the future should interest rates rise, to ensure that you are able to meet the required repayments.
Fixed rate loans generally have all of the features of a standard variable product; however the interest rate is fixed generally from one to five years.
Fixed rate products are great products to help maintain the household budget because the repayments will not change during the fixed period.
However, a fixed rate loan means you could end up paying more if interest rates fall.
It is possible to exit the loan agreement if you feel it is right to do so, although lenders will generally charge penalty fees to compensate for any loss in profits they may suffer.
Introductory and Honeymoon
Introductory or Honeymoon loans are generally popular for first home buyers, however this doesn’t mean that these are the only people who can access these products.
Honeymoon loans give individuals a discounted interest rate for the first six to twelve months depending on the product.
After this period expires, the loan generally reverts to the lenders standard variable product. Although it may be tempting to take out a Honeymoon loan because of its reduced interest rate, it is important to watch out for restrictions or exclusions on other aspects of the loan.
Many lenders will limit the availability of features (such as redraw facilities, repayments etc.) to offset the lower interest rate. In some cases this can mean less flexibility over the life of the loan.
James is Marketing Manager at MRD. He has been investing in property for the last 11 years, and owns properties in Burleigh and Palm Beach on the Gold Coast. He loves family, surfing, gardening and swimming.