Which Loan Is Right For You
Illawarra Mercury
Saturday March 1, 2003
Unsure about the types of home-loans offered by mortgage brokers and lending institutions? The Mortgage Industry Association of Australasia (MIAA) says there is no single loan suitable to everyone's needs. The right loan is the one that fits a client's particular circumstances.
MIAA CEO Phil Naylor says that when seeking a loan for the purchase of a house, borrowers should first make sure they are dealing with a member of the MIAA.
``By dealing with an MIAA member, borrowers can be reassured they are working with a trained professional, who is bound by a code of practice, and who participates in the Mortgage Industry Ombudsman Scheme (MIOS) which ensures consumer protection," he said.
The MIAA describes the most common types of loans available for financing home purchase and who might consider them.
1. Introductory or honeymoon loan
This loan is usually offered at a lower fixed interest rate or at a discount to the standard variable rate for a set period of the loan (ie six to 12 months), before switching to the standard variable interest rate.
The lenders will lend up to 95 per cent value of the property, and offer redraw facilities. This type of loan is attractive to homebuyers who wish to minimise their initial repayments - while perhaps doing renovations - or to people who wish to make a large dent in their loan, through extra repayments, while benefiting from a lower rate of interest.
2. Basic home loan
As the name suggests this product offers a no-frills home loan. It doesn't offer extra facilities like redraw, cheque accounts or credit cards - and for this reason the variable rate of interest will be less than other loans.
This type of loan suits those who are not interested in all the ``bells and whistles" - but are attracted by the lower interest rate, which offers the opportunity of accelerated repayments. Generally if you wish to fix this interest rate the charges will be higher than the normal cost, as you are effectively changing loans.
3. Line of credit/equity lines
Lines of credit or equity lines offer a flexible loan facility - where your house is usually offered as security for a new loan. This is often used by those people who have paid off their home, or have a large amount of equity in their home to purchase additional property, shares, cars or holidays.
Interest on the loan is usually charged at a slightly higher rate than the standard variable rate, and these loans do not offer many ``extras". Most also have a monthly, half yearly or annual fee attached.
4. Professional package
A professional package is offered to borrowers on higher incomes or people of a specific profession - who are usually borrowing larger sums.
Borrowers need to meet certain requirements before qualifying (ie minimum income or certain occupation). Typically these packages offer an interest rate about half a per cent lower than the standard variable rate. They may also involve the taking up of a credit card, and offer discounts on other insurance and investment products offered by the lending institution. An annual fee may be charged.
5. Non-conforming loan
Non-conforming loans are taken out by people who do not fit the criteria for traditional lenders.
There are two types of non-conforming loans.
a) Low Document loans - for borrowers with a good credit history who cannot, or don't wish to reveal their financial details. Interest rate charges on these loans are generally higher than the standard variable rate. After two years of meeting repayments at this level - the interest rate will often revert to the standard variable rate.
b) Sub-prime loans - for borrowers with an impaired credit rating. These loans charge a minimum three per cent more than the standard variable interest rate - typically around nine per cent (at present).
Non conforming lenders take no more risk than other traditional lenders, as they will not lend as much against the value of the property. The Loan to Value Ration is normally around 75-80 per cent.
Charges tend to be higher because the life of the loan is less - with borrowers refinancing once they have been able to establish a repayment record.
If you are looking for a trained mortgage professional in your area - visit the MIAA website at www.miaa.com.au which lists all MIAA members and their contact details.
(Courtesy: Mortgage Industry Association of Australia)
© 2003 Illawarra Mercury
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