WHAT ARE THE DIFFERENT LOAN TYPES?
Standard variable loans are the most popular home loan in Australia. Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and funding costs. Your regular repayments pay off both the interest and some of the principal.
You can also choose a basic variable loan, which offers a discounted interest rate, but has fewer loan features such as a redraw facility and repayment flexibility.
The interest rate is fixed for a certain period, usually the first one to five years of the loan. This means your regular repayments stay the same regardless of changes in interest rates. At the end of the fixed period you can decide whether to fix the rate again at whatever rate lenders are offering or move to a variable loan.
SPLIT RATE LOANS
Your loan amount is split, so one part is variable and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with the certainty of a fixed rate loan.
You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold, having achieved capital growth.
LINE OF CREDIT
You can pay into and withdraw from your home loan every month so long as you keep up the regular required repayments. Many people choose to have their salary paid into their line of credit account. This type of loan is good for people who want to maximize their income to pay off their mortgage quickly and/or who want maximum flexibility in their access to funds.
Originally designed for first home buyers but are now available more widely, introductory loans offer a discounted interest rate for the first 6 to 12 months before the rate reverts to the usual variable interest rate.
Popular with self-employed people, these loans require less documentation or proof of income than most, but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk. In most cases you will be financially better off getting together full documentation for another type of loan. But if this isn’t possible, a low doc loan may be your best opportunity to borrow money.
HOW DOES THE LOAN PROCESS WORK?
- ARRANGE A PRE-APPROVED LOAN
If you haven’t started your property search, or are still looking, a pre-approved loan can be useful. It gives you a clear picture of what you’re spending limits are and gives you peace of mind that if you find a property you really interested in you can move quickly to make an offer. Having a pre-approved loan may put you in a stronger negotiating position than other potential buyers who don’t have pre-approval. An AFG broker can take care of the paperwork to lodge a loan application.
- FIND YOUR PROPERTY
Make sure you do plenty of homework when you’re on the hunt for a new property. Research property prices in the area, potential capital growth, and existing and planned infrastructure such as roads, public transport, schools, and shops. If you’re unfamiliar with property values in the area, consider a full valuation carried out by a registered valuer before making a final decision.
- MAKE AN OFFER AND SIGN A CONTRACT OF SALE
Whether you buy property at auction or make an offer on a listing, your agreement with the vendor only becomes a legal commitment when a Contract of Sale (Offer of Acceptance in WA) has been signed by both parties. This contract will confirm the selling price as well as any terms and conditions. Your commitment will usually be subject to lender approval, a building inspection report, and a pest inspection.
- The period from signing a Contract of Sale to settlement – when the property becomes legally yours – is usually six weeks (shorter in some states, such as Queensland). Note: even if you have a pre-approved loan, your lender will still need to complete a valuation of the property you have chosen before issuing full approval.
- PAY A DEPOSIT
A deposit is required once a Contract of Sale has been signed by both parties (sometimes called ‘exchanging contracts’). You won’t yet have access to your home loan, so your deposit will need to come from savings or elsewhere. You may also be able to arrange a deposit bond until settlement.
- APPOINT A CONVEYANCER
You will need a solicitor or conveyancer to check the legalities of the Contract of Sale. Your conveyancer will also check all rates and taxes have been paid, check land use or building approvals for the property, and order any relevant searches. They may also help sort out any inspections.
- On settlement day, the conveyancer will check the correct amount of money has been transferred from your lender to the seller and all fees – such as Stamp Duty – are paid, so you can take legal ownership of the property.
- COOLING OFF PERIOD
If you didn’t buy your property at auction, you may have a cooling off period when you can cancel the contract. Although there may be a small penalty. Cooling off periods vary from state to state so check with your relevant state authority in terms of what your rights may be.