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The lending market can be so confusing with so many different loan structures available.
We want to simplify that for you and break them down into the 5 main categories of loan types
1. Standard Variable Rate (SVR)
A Standard Variable loan usually fluctuates with changes in the cash rate but it is important to understand it is the relevant bank’s increases or decreases to their lending rate that impacts the actual change in the rate offered.
It’s main feature is that it offers flexibility as you are not locked into a fixed term agreement.
It also usually offers an offset account option and/or a redraw facility which normally has no penalties if you make lump sum or extra repayments.
When to use:
This depends on the current cash rate movements and economic factors.
You may use this type of loan if rates are high and predicted to head down.
You could also use it if you wanted to pay down the loan faster by making lump sum payments or if you wanted to utilise facilities like an offset account – see our other videos explaining these facilities.
2. Fix Interest
A fixed rate does not fluctuate like a SVR rate and will remain at a set rate for a fixed period of time. This means your repayments will always be the same over the term of the fixed period – most commonly between 1 to 5yrs.
When to use:
Depends on current rate movements, economic factors and how you feel best about servicing your loan repayments.
Fixing a rate gives you peace of mind. Your not worried every time a bank makes a rate announcement or if the RBA is going to increase the cash rate.
It also helps you budget your household and living expenses.
The downside of a fixed rate is that it can have large break costs if you close that loan down within the fixed rate period. So you may consider the need to be sure your future plans are to hold that property for the length of time of the fixed period at least.
You would consider fixing if you thought the fixed rates were low and/or at a reasonable price that your budget could afford.
3. Line of Credit (LOC)
A line of credit is a set amount of money that the bank has agreed to lend you that allows you to draw on the funds as required up to that limit. You only pay interest on the debit balance level at the time of the interest calculation.
Its a full transaction account which means it has a cheque account, direct debit and credit facilities.
The rate is always Interest Only over 25yrs. This type of facility offers complete flexibility and thus rates are substantially higher.
When to use:
A line of credit is increasingly hard to get. Rates are often 1 – 1.5% higher. The main benefit is that they lock in a 25 yr interest only period that is a flexible source of liquid funds.
4. Principal and Interest (P&I)
P&I refers to the distribution of the interest payment of your loan. Basically you are paying two parts to your interest repayments and one part to paying down a portion of the actual principal loan amount.
So your home loan in reducing down a set amount each month to ensure it is paid off within the term of your loan, which is usually 25 or 30 years.
When to use:
Most owner occupied loans (home owners) like to use P&I repayments to see the actual loan on their home reducing down.
This can also create equity in the home in times of no capital growth, providing the property holds it’s initial purchase price value.
5. Interest Only (IO)
With an IO loan you only pay the interest that the bank is charging you on your loan. The loan balance does not reduce down over the IO period.
The advantage is that your repayments are less than a P&I loan.
Where to use:
Investors tend to like to choose Interest Only loans to take full advantage of government tax incentives.
The best advice is to be aware and informed of what is available and if it’s right for you.
Need more personalised information on your situation Call Me on 1300 INK 000 (1300 465 000).
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