Home and Investment Loans:
Principal and Interest or Interest Only Loans
This is a choice between whether you wish to have the loan balance reducing by making principal and interest repayments or have the loan remain at the original level borrowed by only making interest repayments. Investors are usually advised to take an Interest Only loan, the theory being that principal reductions on an investment loan are not tax deductible, so therefore that money that forms the principal repayment could be used to further invest in another tax advantaged investment, thereby maximising your tax benefit or be utilized to make extra repayments to your home loan.
Fixed or Variable Interest Rates
This choice is about whether you are comfortable with your loan repayments fluctuating with interest rate movements. Clients who select a fixed rate ensure a consistent monthly repayment amount allowing ease of budgeting, so should rates move up your repayment will not be affected. These days fixed rate loans are not as restricted as they once were, where many lenders allow some principal payments to be made without penalty, although in most cases penalties still exist should you pay out the entire loan whilst still in the fixed period. Also, most lending institutions have little if any difference in interest rate between an investor or owner-occupier loan.
There are four basic types of loans that lenders offer and that are available for property purchase. Each lender has their specific name for their product and each will operate a little differently from any other but what follows is a brief outline.
Standard Amortising 30 year loan
This is your standard loan that we all have become accustomed to over the years. You select the term that you wish it to run and decide whether you would like a fixed or variable rate. Usually the fixed terms run between 1 to 5 years although a couple of lenders do offer up to 10 years. Quite often you will also have the option of an initial interest only period of generally up to 5 years.
Line of Credit Loan
As the name suggests this loan is a line of credit, which means the bank will approve a maximum loan amount against the property that secures the loan (generally 80% of the value), and you are free to draw this facility up and down at will. It operates like an overdraft account and most often comes with a chequebook and debit card for ease of access to funds. Generally these loans are interest only and have no term attached, which suits an investor as they are most often advised to get an Interest Only loan. This loan could be used on the investment property or the family home or perhaps one on each. These loans have a high level of flexibility in that you can park money in your loan when it is available and draw it as required without notifying the bank, as long as you stay within your approved limit.
Multi Account Loan
This loan has a bit of everything and provides the maximum flexibility of all loans. The loan is set up with sub-accounts so you can separate your different lending requirements and each account can be tailored with the features you need to suit the occasion. For example, lets say Account 1 is your home loan and you might like to have it as a principal and interest loan with a 3 year fixed rate, Account 2 could be $30,000 Interest Only line of credit on variable interest and used for say your share trading and Account 3 could also be an Interest Only loan with a 5 year fixed rate for the investment property. The Multi Account Loan and the Line of Credit Loan usually have a higher interest rate than a standard amortising loan - this is a charge for the added flexibility and complexity.
Offset Account Loan
The Offset Account loan is generally on the home loan. An Offset Account loan has a deposit account linked to the loan, the benefit is that any surplus funds that you might have, can be deposited into the deposit account and this is offset against the loan it is linked to. For example, if the loan amount outstanding is $100,000 and there is $5,000 in the offset account the interest that is charged on the loan will be calculated on $95,000. The effect this has is that the home loan gets paid out at a faster rate because your standard monthly repayment has been calculated on the full amount outstanding. Offset Account loans vary in the amount that is offset, meaning that some lenders may offset only 50% of the funds held in the account whilst others offset the full 100%, so you need to pay attention to ensure you get the best loan for your needs.
Reverse Mortgage Loan
Reverse Mortgages are for clients who are no longer working and over 60 years young. A Reverse Mortgage allows clients to access the equity that they have built up in their property to improve their standard of living in retirement. Funds can be accessed for many reasons from home improvements, buying a car, helping out family in need, providing a lump sum for that holiday you have always dreamed of to providing a regular monthly income to ensure you have the retirement you were dreaming about.