Home Loans 101: Understanding loan options

Loan options can be confusing to those new to mortgages, or sometimes even those that have had home loans for years.

Here’s a 101 to get you up to speed on loan types:

1) Basic home loans

Basic home loans or ‘no frills’ loans offer borrowers a loan with a low interest rate. This interest and principal repayment loan can be popular with first home buyers. A basic home loan’s interest rate can be half to one per cent below the standard variable rate, which is sometimes combined with minimal ongoing fees. Potential drawbacks can include limited features, less flexibility, and additional charges if you decide to switch loans or pay the loan off sooner.

2) Fixed-rate home loans

Worried about rising interest rates? A fixed-rate home loan will allow you to fix your interest rate for a specific period, usually from one to five years. It can be a sound option when interest rates are on the rise, or in times of economic uncertainty. Should interest rates plummet, however, you’ll still have to pay off your mortgage at the fixed-rate until the end of the agreed fixed-rate period. Additionally, keep in mind that you may be charged a fee commonly called a break cost or economic cost, should you decide to break your fixed term or switch to another product. You may also be limited in making extra repayments.

3) Standard variable-rate home loans

A popular mainstream choice, standard variable-rate interest and principal home loans allow you to borrow money for a set period of time, during which you make regular repayments. The interest rate can vary depending on fluctuations in the official cash rate, so it is likely to go up or down depending on the market cycle.

4) Split-rate home loans

Want the best of both worlds? A split-rate home loan offers both flexibility and security. A good product for both first time and existing borrowers, split loans allow you to customise your loan’s interest rate as you see fit: fixing a portion of your interest rate to give certainty to your monthly repayments during the fixed-rate term should rates increase, but also flexibility through taking out a variable-rate portion.

5) Interest-only home loans

Interest-only loans offer borrowers lower repayment options, while maintaining many of a traditional loan’s features. This type of loan allows you to pay only the interest component on a mortgage; it does not reduce the principal component. They are a popular choice for investors seeking good capital appreciation on their investments.

6) Low-doc home loans

If you’re self-employed, a contractor or a seasonal worker and do not have a regular income, a low-doc loan may best suit your situation.

 

Different home loan options may or may not suit you depending on your circumstances. It may also be a matter of personal choice, whether you prefer to fix in your rates for certainty, or prefer to stick with the market rate with a standard variable loan.

If you have any questions about loan types don’t hesitate to ask.

 

Want trusted advice on which loan type best suits your needs and circumstances? You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs. 

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

 

Finding a home loan when you’re self-employed

There are many perks to working for yourself, but when it comes to applying for a loan, it seems being your own boss sends up a red flag to banks and other lenders.

Andrew, owner of Tick Concepts, was one such person who found himself in a difficult position, after having left corporate life and a steady stream of high paying PAYG roles to go into business, when he went to sell the apartment he had owned in Sydney and buy a house in Adelaide. Despite the fact he was putting down a huge 50% of the equity in the new property and was doing well in his new business venture – he came up against several brick walls when looking for finance and a “sorry we can’t help”.

So why is it so difficult securing financing when you are self employed? For lenders a salaried employee has a regular, steady income and is less likely to experience the cash flow volatility of a small business owner, contractor, entrepreneur, tradesperson or freelancer.

Yet by being proactive and accessing specialist advice, self-employed applicants can also enjoy a successful and hassle-free road to securing a home loan. For Andrew this meant getting advice on an option with a Credit Union, who would take 1 year of financials rather than 3 and would accept BAS statements, making it easy for him to secure the loan for his new property.

So if you are self employed, try these 5 top tips when it comes to securing a loan.

1. Seek expert advice

Trying to navigate the home loan landscape solo may not produce the outcome you desire. There are many experts who can help self-employed people access a home loan, and a mortgage broker is a good first port of call. They will be able to provide you with an up-to-date overview of which lenders on their panel are most comfortable lending to the self-employed, and also explain what sorts of loan products are available. They can also provide valuable advice around the sort of documentation you will need to have ready before you submit your application.

2. Get your affairs in order

Many lenders will lend to self-employed borrowers who provide their full business financials. This generally includes your personal and business tax returns for the past two years. If you have these documents on hand – and they reveal a fairly consistent income – applying for a loan should be relatively straightforward.

However, the hectic schedule that comes with running your own business means many self-employed borrowers’ tax returns are not up to date. If you have time on your side, consider working with your accountant to lodge your outstanding returns. If you’re in a hurry, you may wish to explore the option of applying for a low doc loan.

3. Consider a low doc loan

Low doc loans are offered by a wide range of lenders and, as the name suggests, require less documentation than traditional loans. Many low doc loans only require 12 months of business activity statements instead of full financials, for example. A downside of some low doc loans is that they may only be available at a lower loan to property value ratio (LVR), which means you may need a larger deposit.

4. Do your homework

Checking your credit history is a good step for anyone applying for a home loan. If you’re self-employed, it’s definitely worth taking the time to make sure your credit history doesn’t include any defaults or errors – these can hold up your loan application if they are not rectified in advance.

Taking the time to work out exactly how much you’d like to borrow is also a good idea. That way, you can hit the ground running when you meet with lenders or your mortgage broker.

5. Think outside the square

It may be possible to apply for a home loan using a Certificate of Income Declaration – a document that verifies your income and is signed by your accountant. It’s wise to consult a mortgage broker before applying for a loan in this way, as they can advise which lenders will accept an income declaration. It should be noted, however, that applying for a loan using such a document may mean that the required LVR (the portion of the property value you can borrow) may be lower, so you may need a larger deposit.

So while it’s a little more complicated for self-employed borrowers, getting a home loan can be easier than you’d imagined with a good mortgage broker in your corner.

 

Self employed and looking for a home loan or refinancing? To get some specialist help and advice, you can contact Doug on (m)  0408 671 524 or (e) douglas.piening@choicehomeloans.com.au.

 

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.