Loan Types

A bit of variety

They say that variety is the spice of life. Unfortunately, too much variety can cause unwanted stress. We are there to sort through the various kinds of loans out there so that you get the loan that suits you best. Here is a brief overview of the key loan types. 

Variable Loans

Standard variable loans are the most popular type of home loan in Australia. Repayments go off the interest and the principal. Standard variable loans allow you to make additional repayments and this can cut the length and the cost of the mortgage.

Basic variable loans offer a discounted interest but does not have a redraw facility or repayment facility. 

Fixed Interest Loans

Fixed loans maintain a fixed rate for a specified period from one to five years. Your repayments will stay the same during this period. At the end of the period you can elect to take another fixed interest term or move to a variable rate. The problem with the fixed interest term is that you are very limited in your ability to make additional repayments and you may be penalised for ending the loan before the end of the fixed rate period. 

Interest Only

Investors who want to pay off the loan principal when the property is sold within the first five years of ownership are typically those who are most attracted to Interest Only loans. If you are taking out this kind of loan you want to be reasonably sure of capital growth on the property that you are investing in. The key advantage with this kind of loan is that the monthly repayment amount is lower during the interest only period (typically from 1 to 5 years). At the end of the interest only period you will face a sudden increase in the repayments that are due.

Low Doc Loans 

Low doc loans tend to be offered to people with an unblemished credit history. It also helps if the loan applicant is mortgage insured and does not want to borrow more than 80 per cent of the home value. If an applicant has a poor credit history or has not been employed long enough to show an earning history a “non-conforming loan” may be more suitable. Low doc loans now comprise around one in ten home loans though they are a reasonably recent loan type. They’re popular because there are self-employed people out there who do not have the traditional “proof of income” as a result of putting profits back into a business  or writing off business expenses. As a result, they require a declaration from the borrower that they can afford the loan. This declaration is called “self certification”. 

Line of Credit Loans

So long as you meet the required repayments per month you can withdraw and pay into your home loan. Line of credit can help disciplined people to pay the maximum amount off their mortgage quickly. Your entire salary might go into the line of credit account and you will draw on that account for all of your expenses. These loans provide a lot of flexibility though the penalty might be a slightly higher interest rate. 

Split rate loans

This is a loan where part is fixed interest and part is variable rate. You will be asked to decide on how much of the loan is fixed and how much is variable. This offers a compromise between the flexibility of a variable loan and the certainty of a fixed rate loan. The advantage is that it will be easier to budget with this type of loan than with a variable rate loan. The fixed rate portion of the loan may limit the amount of additional repayments, though and you will be penalised financially if you want to pay out the fixed component early.

Financial Freedom 

The right strategy

The price of your financial freedom is often the difference between what lenders say you can afford and what you can truly afford. We will show you how to free yourself financially by securing the right loan for the right amount, and give you strategies for paying less interest and paying less tax.

The first step

The first step in the selection process is understanding the types of loans being offered. Not all loans were created equal and the loan jargon can be confusing. Let's start by unravelling some of the jargon.

Shopping Around

It is worthwhile knowing what the banks are offering as this offers us a benchmark against which we measure loans from other institutions. Of course, Sherwood Financial's job is to save you time and the prospect of costly mistakes by doing all of the shopping around for you and presenting you with the best results for your needs.

Novated leasing

You cannot pay your home loan with pre-tax dollars, but what if you could use pre-tax dollars for many other big expenses? Computer equipment, vehicles, that boat you have always wanted can be bought with pre-tax dollars providing the purchase satisfies the right criteria. We can show you how to lessen your effective tax bill by using leasing strategies. 

Bank mortgage lenders

The Big Four banks sometimes masquerade as independent lenders. Aussie Home Loans is owned by a bank though their products might try to imitate the look of a non-bank lender's products. 

Building societies

Technically, because building societies raise some of their security through customer deposits they are treated as banks under Australian Law. Some building society products are only available to members of a union, however this is not strictly the case, and it is worthwhile knowing when you can take advantage of what building societies have to offer. As they are not created to serve share investors, building societies tend to offer products that serve their customers better.

Non-bank mortgage lenders

Not all loans are created equal. Non-mortgage lenders sell your debt without having to run all of the other financial machinery that a bank does. This means that they are far more nimble than a bank and can offer lend money at more competitive rates.