Your Loan Options
Second, research the types of loans available so you can explore all options
when talking to your mortgage provider. Some of the more popular loan choices
for investments are:
Interest Only Loan
This loan allows you to structure you payments where you are only paying the
accrued interest – the repayments are a less than those for a principal and
interest loan. They are usually taken over a normal term (i.e. 25 years) with
the interest only option being 1-5 years, then renegotiated.
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These loans are suitable if the investor is relying on a capital gain in the
short to medium term.
Introductory Rate or ‘Honeymoon’ Loan
This type of loan marketing tool can be seen as attractive as it offers lower
initial interest rates (i.e. six to 12 months) before reverting to the standard
rates. The length of the honeymoon depends on the lender, as does the rate once
the honeymoon is over. This loan may allow you to pay extra off the loan. Be
aware of any caps on additional repayments in the initial period, of exit fees
(these may be high if you change during or immediately after the honeymoon),
and what your repayments will be after the loan reverts to the standard rate.
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These loans are attractive to an owner-builder or DIY investor who in the short
term will use the property as a primary place of residence and use their skills
to improve the property at the same time building some equity. After the
renovation they can sell for capital gain, live in it, or rent it and build
further equity.
Line of Credit/Equity Line
This is a pre-approved limit of money you can borrow either in its entirety or
in bits at a time. The popularity of this loan is due to its flexibility and
ability to reduce loans quickly. They usually require the investor to offer
security for the loan i.e. principal place of residence or other property. A
line of credit can be set up over a normal term (i.e. 30 years) with the line
of credit option being 1-10 years or revolving (longer terms) where you only
pay interest on the money you use (or ‘draw down’). Interest rates are variable
and due to the level of flexibility are often higher than the standard variable
rate. Some lines of credit will allow you to capitalise the interest until you
reach your credit limit i.e. use your line of credit to pay off the interest on
your line of credit. Most of these loans have a monthly, half yearly or annual
fee attached.
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These loans are very popular with property investors. For those building a
property portfolio and constantly on the lookout for the next bargain in a
growth area, they can have a loan approved and waiting. For the renovator, they
only have to pay interest on the money when they draw it down in each step of
the project. For those seeking capital gain they can use the line of credit to
purchase the property then use it to make the repayments on the property. For
both investors all income is put into the line of credit to bring down the
principal and interest in the loan and build equity in the property. Longer
term investors may want to change a line of credit loan to a principal and
interest or variable rate loan to get lower interest rates.
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These loans are suited to people who are financially responsible and are
usually on high incomes.
Redraw Facility
This loan allows you to put additional funds into the loan in order to bring
down the principal amount and reduce interest charges, plus it gives the option
to redraw the additional funds you put in at any time. Simply put, rather than
earning (taxable) interest from your savings, putting your savings into the
loan saves you money on your interest charges and helps you pay off your loan
faster. Meanwhile, you are still saving for the future (or your next investment
property). The benefit of this type of loan is the interest charged is normally
cheaper than the standard variable rate and it doesn’t incur regular fees. Be
aware there may be an activation fee to obtain a redraw facility, there may be
a fee for each time you redraw, and it may have a minimum redraw amount.
All In One Accounts
This is where all income is deposited in the loan account and all expenses come
out of the account. The benefit of the All In One Account is its ability to
reduce the amount owed and thus the interest payments while providing a
one-stop finance shop where your loan, cheque, credit and savings accounts are
combined. Normally these loans will be at the standard variable rate or
slightly higher and may incur monthly fees.
Be aware that if the account is split into the loan account, with credit, cheque
and ATM facilities placed into satellite accounts, you will need to check your
access to funds, how many free transactions you receive, and what associated
fees the loan may have.
100% Offset Account
This loan is similar to an All In One Account however the money is paid into an
account which is linked to the loan – this account is called an Offset Account.
Income is deposited into the Offset Account and you use the Offset Account for
all your EFTPOS, cheque, internet banking and credit transactions. Whatever is
in the Offset Account then comes directly off the loan, or ‘offsets’ the loan
amount for interest. Effectively you are not earning interest on your savings,
but are benefiting as what would be interest on savings is calculated on a
reduction on your loan. The advantages are similar to the All In One Account.
These loans normally have a higher interest rate and higher fees due to their
flexibility.
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The above three loans are for the longer term investor seeking to build equity
through a property portfolio and being able to use the investment properties
for tax benefits.
Split Loans
This is a loan where the overall money borrowed is split into different segments
where each segment has a different loan structure i.e. part fixed, part varied
and part line of credit. Often called ‘designer loans’, the investor benefits
from one or more types of loans.
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This type of loan is good for people with one investment property and a primary
residence and who may be looking for a further investment property.
The one loan for both properties can be split into three components, paying
principal & interest on the primary residence and interest only on the
investment property, plus having a line of credit option if seeking to purchase
a second investment property.
Construction Loans
These loans are tailored to those building a home when you don’t need the entire
amount from the start – you only pay interest on what you’ve spent over the
stages of construction.