Different types of loans available.
Depending on whether you are buying a home or an investment property, there are many different types of loans available.
Let’s take a look at some of the most common ones and who they suit best.
The standard variable rate loan.
As its name suggests, this type of loan has an interest rate that may go up or down depending on the cash rate set by the RBA.
This can be a good option to choose when it looks like the RBA will lower rates.
On the other hand, it may not be the best choice for those who want certainty in the amount they repay each month.
This type of loan would suit clients who are actively trying to expand their portfolio since it allows them to release equity without needing to break from a fixed term contract.
The fixed rate loan.
This is a loan in which interest rates are fixed for a specified term. This means that cash rate movements cannot affect your repayments.
If it looks like a cash rate increase is on the cards, entering a fixed rate term can protect you from spending more on repayments.
It can also help you streamline your cashflow since you are paying the same amount each month.
This sort of loan is not ideal for investors as it doesn’t allow you to release equity for further purchases. On the other hand, it does suit borrowers who are looking to buy one property and want certainty in the amount they repay.
The split loan.
In this sort of loan, it is possible to fix rates for one portion and leave the remaining amount variable. This gives some certainty as to the amount you need to repay each month while allowing flexibility in order to tap into equity.
If you do want to release equity, it needs to be with the same financial institution. Otherwise, you would be liable to pay break costs.
This sort of loan is great for homebuyers who are unsure if they will release equity after a couple of years in order to buy an investment property.
It’s also good for borrowers who are unsure whether rates will rise or fall.
Owner occupier loans.
These loans are for those buying a property to live in. Borrowers usually pay both principal and interest repayments in order to pay off their debt.
There is also an option to pay interest only for the first couple of years. This means you aren’t paying off the principal loan amount, so it is not a viable strategy over the long term. It can be useful for those who have a reduced income over the short term but are expecting to receive more in the near future, such as those on maternity leave.
Interest only investment loans.
Designed for property investors, these types of loans are often structured with interest only repayments for the first couple of years.
Interest rates tend to be higher than what you would get in an owner-occupier loan. This is largely because of the APRA regulations that came in a few years ago to increase lending to owner-occupiers.
Having an interest only loan can be helpful for investors who want to sell for profit after the property has gone up in value.
Investment loans with P+I repayments.
These types of loans are great for property investors who want to pay down their debt and reduce their loan size.
The interest rate is usually higher than what you’d get in an owner-occupier loan, but lower than that of an interest only option.
Line of credit loans.
Line of credit loans are only available to those who have a property. They enable you to borrow against the property’s value by providing a line of credit that is left open for whenever you need it.
You then make repayments and pay interest on whatever portion you use.
Since the purpose of this type of lend can be unclear, banks usually don’t take negative gearing into account for servicing purposes.
A line of credit can be helpful for those with an existing property who want to purchase another one but aren’t sure exactly when they will do it.
Similar to a line of credit, this sort of loan allows you to tap into a portion of your equity. This is better suited to investors than a line of credit because you receive it as a lump sum amount that you start paying interest on immediately. Many investors tap into their equity and use the lump sum they receive as a deposit for their next property.
Most of the major banks have pulled out from this type of lending, with only second tier lenders getting involved.
SMSF lending is full of restrictions. The LVR needs to be no greater than 70% and the properties that you invest in can’t come from certain postcodes that are deemed higher risk. If the property is part of an apartment complex, there are also restrictions on the number of units that can be in the building.
To borrow through your SMSF you must have a statement of advice from a financial planner. It is also best to see a mortgage broker who specialises in this type of lend.