Home Loan Products
There are a few options to consider when selecting loan products and depending on your personal circumstances you may have a need for one more than the other. Below are some of the different product options to consider.
Principle and interest vs. interest only loans
Currently in our lending market, principle and interest (P&I) loans are favoured by lenders and regulators as they want the total national debt to reduce. Lending and household debt in Australia is very high which carries risk should something significant occur such as a GFC or similar.
Therefore if you are selecting P&I repayments, you will gradually reduce the principal (balance) of the loan and likely secure better interest rates.
P&I repayments mean you are paying down the principal (loan balance) and the interest component at the same time. Therefore repayments are higher than paying interest only.
To calculate the P&I repayments you may be required to make, go to our loan repayment calculator.
P&I repayments may be preferred by homeowners wanting to pay off their loan to take full ownership and be debt free (very common). P&I repayments may be preferred by investors who want to increase the equity in their properties or reduce debt as they head into retirement.
*Equity is the dollar value between what you own the lender and what the property is worth. For example: you own the bank $100,000 and your property is worth $500,000, you then have $400,000 of equity in your property.
Interest only repayments do not reduce the principal (loan balance) over time, they simply pay the interest component of the loan. Therefore interest only repayments are lower than P&I.
Interest only (IO) repayments may be preferred by investors who want to reduce outgoings (costs to hold the asset) as much as possible. This strategy can assist to build surplus cash for additional investments. IO repayments are typical when applying for a construction loan as lenders understand that during construction, it is beneficial to reduce outgoings and do not necessarily require principle to be repaid during this period. IO repayments may also be preferred if there is a short term reduction in household income, such as maternity leave.
There may be many other reasonable requirements for IO repayments however there generally needs to be a suitable explanation for an IO request.
Variable vs. fixed term interest rates
When looking at interest rates you have the option to select standard variable rates (SVR) or a fixed rate.
SVR means that your interest rate will go up and down as and when lenders move their rates. For example if the Royal Bank of Australia (RBA) increases the cash rate, lenders will also increase their rates. There are some other reasons for interest rate movement but the point is that you have no control over the movement of your interest rate.
There are pros and cons to SVR rates simply due to the fact that if rates go down, you pay less interest, if rate go up, you pay more.
To emphasise this, if you have $1,000,000 owes to the bank and interest rates go up by half a percent (0.50%), that means you have another $5,000 of interest repayments to make per year (or close to $100 per week), which can be significant depending on your circumstances.
If it goes the other way (0.50% less), then happy days, you have some extra saving to tuck away.
Fixed term interest rates mean you choose to fix the rate for a period of time. Generally that is 1-5yrs fixed and in some cases it can be longer.
Fixed term interest rates can also be good or bad depending on when you fix your rates and what happens with the market. For example if you fix at very low interest rates, thinking the rates will go up in the near future, and they do go up, then you made a great decision. However if you fix and the rates go down, then you are paying higher interest rates for the remainder of the fixed term of the loan.
For example, if you fixed your loan 3-4 years ago at 5.07% thinking rates were likely to increase, you would be a little disappointed that rates dropped to mid-high 3’s. That’s approximately 1.5% more than market rates.
There are some fine print details associated with fixed term interest rates such as break costs and rate lock options which you should speak with our brokers to ensure you have a full understanding of before selecting this product option.
There are also basic vs. professional products most lender have which you should discuss with one of our brokers.
To book an appointment, go to our contact us page, complete the form and we will send you an invite to meet and discuss in full detail all the above.Apply for Property Finance