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Interest Only Loan
When only interest is paid back and principal remains unchanged, it is called Interest Only Loan. Such a loan is used mainly by property investors. It allows the borrower to pay only interest instead of principal and interest. This maximises the investors tax deductions whilst also freeing up cash flow for other investing opportunities. Banks extend such loans generally for a maximum period of ten years but some do for five years only.
Loan to Valuation Ratio(LVR)
Loan to Valuation Ration Ratio is obtained by dividing the loan amount by the valuation of the property. This ration determines as how much a lenader will lend you over a property. When property prices are expected to go down in future, banks lower their LVR and vice versa. Banks always want value of the property (security to bank) to remain higher than the loan amount and control it by changing LVR upto which they lend. Most banks currently lend up to 80% only but some banks go upto 95% in highly deserving cases.
Mortgage Education
There are two types of mortgages, a fixed interest rate mortgage and variable interest rate mortgage. You can take a mix of two as well by breaking your loan amount into two parts. There are obvious differences and relative benefits of the two depending on what suits you in your situation.
Your decision to choose the type of loan will depend on whether you want to pay fixed amounts regularly, or variable amount or want to pay interest only for some time and then want to make a bullet payment in full.
Fixed Rate Mortgage
Your interest rate is fixed and you set the duration of time it is fixed for. The time is usually between 6 months to 5 years. Repayments are usually calculated up to over 30 years. At the end of the fixed interest term, your lender will place it in variable term rate mortgage. You can also negotiate with your lender and fix it for another term before hand near the expiry of fixed term. Fixed term interest rate is invariably less than the variable interest rate. But in current financial situation variable rate is lower than longer term fixed term interest rates.
The other obvious benefit is that a fixed rate mortgage means fixed repayments. You pay the same amount every week, fortnight or month for the duration of the fixed rate period. If market interest rates are rising, you get the benefit of going with a fixed rate. You’ll often find that fixed rates are lower than floating rates but not always. A difference of even 0.1% can save you thousands of dollars in interest over the full course of your mortgage.
There are a couple of drawbacks with fixed rate mortgages. There are often restrictions on increasing your repayments or making lump sum payments. Some banks allow 5% of mortgage amount (maximum 10,000) to be paid as lump sum in one calendar year. Some do not allow any extra payments except at at the time of roll over when your fixed interest rate period expires.
If you fix up mortgage over a long time and interest rates go down in the meantime, you will be a looser and paying more interest. If you want to break the fixed interest rate period, bank can charge penalty depending on current interest rates at the time of break up.
Keep the interest rate trend and its expected movement in next couple of years in mind, while fixing your fixed interest rate period. For instance, if the interest rates are expected to go down in the coming years, fixing for shorter duration is advisable. On the other hand if interest rates are expected to go up, fixing for a longer duration is advisable. Contact us on 09 266 9890 for a no obligation chat or enquire online.
We always know the latest market trends for interest rates and will advise you the best option in your situation.
Floating or Variable Rate Mortgage
As the name implies, your interest rate floats according to the current market rates. Changes in other factors like inflation and the official cash rate can often trigger interest rate rise or fall. If your interest rate changes, then your repayments will change too. Consequently, you cannot control or predetermine your repayment and loan cost. Variable Rate may be higher or lower than the fixed term interest rate depending on the period you are considering.
Thus under current financial scenerio there are advantages and disadvantages both of keeping your loan on variable interest rate? There are certain advantages If you have a floating mortgage, It is easier to make lump sum repayments. This is particularly good when you get irregular lump sum payments and can use them to repay your loan. Secondly if the interest rates go down due to any reason, a change in OCR(official cash rate) or other funds availability in the market, you get the benefit of lower interest rate. But if interest rate goes up you pay more interest.
Consolidating your other short term high interest rate debt into your floating rate mortgage is often an option too. You can save on interest and it will also result in lowering your overall repayments
Mix of Both - The Best Option
Often, best option is to divide your total loan amount into two parts; keep major part at fixed interest rate and a small amount at floating interest. By doing so you get the benefit of lower interest rate on fixed amount and can place your lump sum payments in your variable portion straight away reducing your loan. This option however may not be best in all the situations. Talk to us and we will advise you the best option for your unique situation. A wise advice can save you thousands of dollars.
You should arrange to receive all your income into floating loan and pay your utility bills from here. A still better idea is to get your utility bills debited into your credit card and your credit card in turn to be paid through direct debit into your floating loan account.. Your interest cost will be reduced by your money sitting in your account till your credit card bill is debited into your loan account as banks calculate interest on daily balance in the account.
1. By doing so you will be fully paying your variable loan by the time your fixed interest period expires. So now when you fix your interest term again, break up your loan amount into two parts - fixed and variable and repeat the same exercise. Best management of revolving facility is when balance n it remains as near to “nil” as possible. By doing so you can make best use of your money and save thousands of dollars in your interest cost.
These days some people also sell this option as ‘Wonder Bullet’ in the name “SAVE THOUSANDS OF DOLLARS! BECOME DEBT FREE FASTER” and charge 1000 to 3000 thousand dollars as their fees. This is just a basic common sense of finance.
How much to keep in fixed and how much in floating? You should keep a portion equal to the amount you expect to receive as lump sum or expect to get more income during fixed interest term.
Discuss with us on 09 266 9890 or enquire online and we will advise what are the best option in your unique situation. Our advice is most professional, free and fair which is most suitable for your situation.
Loan Repayments
There are mainly three loan repayment options.:Table Loans, Reducing Loan and Revolving Line of Credit and their combinations. The features and benefits of all the three are explained below.
Table Loan
This is the most common type of home loan.
Here your repayments are fixed and you know what amount you will be paying every week, fortnight or month over entire fixed interest period. During this period if you want to increase your repayments some banks allow and some do not.
Some banks also allow you to repay 5% of loan amount more (max 10,000) per year over and above your usual repayments. Some do not allow any extra payment except at roll over time.
If you can afford to pay more, you should do so and fix your repayments accordingly. For example by paying 68 dollars per week more, you can pay a loan of 300,000 at 8.5% per annum in 20 years instead of 30 years and you save nearly 200,000 dollars in interest. Further, you become debt free 10 years earlier. That is why most of home loans are paid much earlier than the maximum period of 30 years.
In this type of loan your initial repayments go for paying mainly interest part and later repayments for principal part of loan. This is very clearly depicted by the diagram below.
Reducing Loan
In reducing loan, you pay the same amount of principal but reducing interest. Therefore here the repayments get reduced successively. The initial repayments are very high.
Such type of loans may be suitable for those people who expect their income to drop gradually.
Reducing Loans are not popular and rarely anyone opts for them.
Revolving Credit Loans
Here your total loan is basically an overdraft facility or credit line and you can deposit or withdraw any amount as and when you want without any penalty but within the facility. There are some revolving credit limits (loans) where limit gradually decrease so as to help you pay your mortgage.
Advantages
You can issue cheques and also use ATM Card to withdraw money. You can also deposit as much as you can and save interest on your loan.
Disadvantages
Revolving credit facility (Loan) is suitable only for such borrowers who are highly financially organized and disciplined and whose income is not on regular basis. Finanacially indisciplined borrowers may misuse this facility and can remain trapped in debt for ever. Interest rate on such facility is on variable basis which is often higher than fixed interest rate.