Different Types of Loans

The information listed below is general information only – please note that some points may differ from lender to lender:

Loan type	Description	Why people like them	Why people DON’T like them

Variable rate (standard)	Most common type of loan used here is Australia Interest rates move up and down (float) with changes in economic conditions Generally fairly flexible (you can pay off large chunks, etc) Lots of features – eg, redraw	Flexibility Ability to pay off large chunk and redraw from the loan if you ahead in your repayments If rates go down – eg, the RBA decides to lower rates – then your rate may go down Ability to have a separate transaction account which can OFFSET the loan balance for the purpose of a lender calculating their interest charge	Rates may go up – therefore, uncertainty over future repayment commitment

Variable rate (basic / discount)	Interest rates move up and down (float) with changes in economic conditions Lower rate than ‘Standard Variable’ loans More basic or ‘plain vanilla’ Less features – and sometimes there are fees attached to the features to compensate for the lower rate	Nice low variable rate – compared to the standard rate Simple to operate – as there are less features to use	Less flexible Less features Don’t have access to 100% offset account Usually have Early repayment fees


Fixed rate	Your rate and repayment are LOCKED in for the FIXED RATE PERIOD	Your rate is locked in – so you have certainty during the fixed period If rates go up – eg, the RBA decides to increase rates – then you may be fixed in at a lower rate Especially popular with investors Good when you are borrowing close to your maximum. Almost like insurance	Inflexible – eg, you cannot pay off large chunks – or maybe you can with a penalty involved Usually do not have the ability to use an offset account or use a redraw facility If rates go down – eg, the RBA decides to lower rates – then you may be fixed in at a higher rate

Combination / split loans	You have the ability to fix some of your loan and maintain a portion of the loan as variable	Gives you the best of both worlds Acts a bit like ‘hedging your bets’ Creates a sense of stability	If rates rise – your variable portion will still rise If rates fall – your fixed portion will still be fixed Need to be careful as can get quite expensive to run two loans with some lenders

Line of credit	Very similar to an overdraft account – however, the rate is lower than an overdraft account because your home is used as security Funds can be withdrawn up to a certain ‘approved’ limit with no principal repayment deadlines Generally used for investment but increasingly used as a ‘rainy day’ facility Interest rates are nearly always variable (standard variable)	Very flexible You only pay interest when you draw money from it – so if you have no use for the funds, you can the facility sitting there and not incurring interest costs	Some people forget that when they draw money from a Line of Credit, that they are still borrowing money It is still important to remember to pay these off These are not for people without a reasonable sense of budgeting – as it can lead to overspending



Offset / All in one	Allows you to repay extra amounts and then ‘redraw them when you need them You can make repayments ‘above’ the minimum – which lowers your loan balance and reduces the amount of interest you are charged Operates like a normal cheque account – salaries go in and funds come out via cheque book, ATM or EFTPOS as normal Some lenders do not have All-in-One accounts – instead they operate offset accounts The offset account – which is a stand-alone credit transaction account, which acts as your normal day-to-day account The outstanding balance on the account is ‘offset’ against your home loan and you only pay interest on the net amount	You have the ability of substantially lowering your interest bill (if used and understood correctly) It is operated like a normal bank account	Sometimes difficult to understand Interest rates are sometimes slightly higher – due to the additional features There are sometimes additional terms and conditions involved with the offset account – eg, having a minimum balance in the account


Honeymoon rate	Promoted by lenders to attract customers who are very sensitive to rates These are generally the rates you see flashing on your TV screen This product offers a low interest rate (fixed or variable) for a set period of time After this period, the rate will generally revert to the standard variable rate	Nice low repayments during the ‘honeymoon’ period	The shock of higher repayments once the ‘honeymoon’ is over There is usually a higher exit costs attached to leaving the lender when your honeymoon period is over

Low doc loans	These loans were invented for self-employed people who sometimes have difficulty substantiating all of their income or may not have yet submitted their tax returns They are called ‘low docs’ because – with your income - you are generally only required to supply the lender with a ‘declaration’ (specified by the lender)	Substantially lower ‘document gathering’ involved – making the process of obtaining a loan a bit easier	Each lender does have a list of fairly strict criteria in order to be eligible The fees and interest rates are generally higher than traditional loans due to the higher risk profile These loans also tend to require that a customer has existing equity in property


Interest in advance	Traditionally taken out near the end of the financial year These are FIXED RATE loans You are able to pay ALL the interest for the next financial year in advance This allows you to claim any available tax deduction in the current tax year Important to obtain financial / tax advice prior to obtaining one of these loans	This is a loan for people with investment loans Tax effective Interest rate sometimes a bit lower because the interest is being ‘prepaid’	Its not generally for people with a normal owner occupied home loan

Credit impaired products	Some lenders specialize in providing loans to people who have had loan defaults or judgments in the past These lenders are sometimes called ‘lenders of last resort’	Gives a borrower a chance to improve their credit rating by allowing the opportunity to service a new loan which hopefully helps them ‘get back on track’	Interest rates and fees are higher due to the higher risk

Professional packages	See in right menu

Always remember that the normal lending terms and conditions apply with the loans you have under these packages.