Home Loans Types and Structures Part 2

Home Equity Home Loans - Buying your own home is probably the biggest investment you'll ever make. Your home is also likely to be your biggest asset. Why not put this asset to work by taking out a home equity loan? What is equity? Equity is simply the difference between what your property is worth and what you owe. For example, if you have $200,000 to pay off on a home worth $500,000, you have $300,000 worth of equity. You may be able to borrow against this amount to renovate, invest in shares or managed funds, buy another property or refinance your mortgage.

How it works? An equity home loan gives you a line of credit on your mortgage up to an approved amount. The loan can be taken in full or in stages, making it particularly useful for renovating or investing. How much you can borrow depends on your situation - your existing borrowings, income and assets are taken into account. And if the equity is for an investment property, your new and current property values will be assessed.

Benefits: Saving for renovations or a deposit can take time. Taking out an equity home loan means you can start your renovations or buy an investment property sooner. However, it is important to remember that all debt needs to be carefully managed to maximise investment returns and minimise risks.

First Home Buyer Home Loans - While finding the perfect first home can be challenging, finding the right home loan can be even more so. Today, first home buyers can choose from a wide range of lenders and loan products. Before signing on the dotted line, it pays to do your homework and think about the type of features you need and how much you are prepared to pay. Here is a quick overview of the major loan types recommended for first home buyers. Standard variable or fixed rate home loan? If you don't need the 'bells and whistles' that come with many loans (at a price), then a basic home loan could be the answer. Popular with first home buyers, basic home loans typically offer interest rates of half to one per cent below the standard variable rate. Many also have lower ongoing fees. In return for a lower interest rate, basic home loans have fewer features and can be less flexible. Some lenders may offer the option to pay for extra features when you need them. There may also be fees and charges if you decide to switch loans or lenders, or pay off the loan sooner.

Split rate home loans - If you are concerned about where interest rates are headed, you can choose a split rate home loan, whereby part of the loan is on a floating or variable interest rate and the other part is at a fixed rate. These loans generally offer all the features of a normal loan, however it there could be penalties for early repayment of the fixed portion.

Honeymoon home loans - Similar to a standard home loan, except offering a lower rate of interest for a fixed period at the start of the loan. This can be particularly beneficial for first home buyers as the lower repayments coincide with the costs of purchasing and setting up a new home. Beware, however, as these loans generally revert to a higher rate of interest after the honeymoon is over.

Features you may wish to consider including in your home loan:

  • redraw
  • offset
  • flexible repayments
  • portability
  • line of credit.

    Investment Property Home Loans - When it comes to making the most of an investment property, finding the right home in the right location is only half the battle; finding the best finance is other half. Many options are available and the choice of home loan will ultimately depend on your particular investment strategy and the type of property.

    Here are the three main choices.

    1. Standard variable rate or fixed rate home loan - Depending on your circumstances, most lenders will let you borrow up to 90 per cent of the purchase price of an investment property. You may, however, be required to take out lenders mortgage insurance.

    2. Interest only home loan - With an interest only home loan, repayments only cover the interest component. The principal is repaid in full at the end of the loan term (usually three to five years). Because borrowers only repay the interest component, interest only loans have lower repayments than principal and interest loans.

    3. Equity home loan - If you already own or substantially own your home, you can borrow against the 'equity' your have accumulated. Equity is simply the difference between what your property is worth and what you owe. For example, if you have $200,000 to pay off on a home worth $500,000, you have $300,000 worth of equity. An equity home loan gives you a line of credit on your mortgage up to an approved amount. The loan can be taken in full or in stages, making it particularly useful for property investing.

    Important extras:

    Loan features that may offer tax benefits or help you pay off your investment loan sooner include: interest in advance home loan (lets you pay next year's interest in the current financial year, thus creating a tax deduction for eligible borrowers) mortgage offset account (lets you use savings and interest earned on savings to pay off the loan principle).

    No Deposit Home Loans - Many Australians dream of owning their own home. But with property prices rising faster than incomes, first home buyers are finding increasingly difficult to raise the traditional 5 to 10 per cent deposit required for a standard home loan. To help you get into your new home sooner, many lenders now approve loans of up to 100 per cent of the value of a property. While this can be a good option for some buyers, remember that you still need to save for purchase costs such as stamp duty and conveyancing. And most lenders require you to show a savings history of at least six months.

    Check the fine print - When considering a no deposit home loan, check and compare interest rates as most attract higher interest rates and fees. Also check the borrowing requirements as many lenders impose stricter rules than if you were applying for a standard home loan. Remember the more cash you save now, the sooner you'll own your home, mortgage free.

    Second Home Loans - Many Australians own more than one home in their lifetime. When it comes time to sell one home and purchase another, your experience the first time around should make the process a whole lot easier. Every time you buy and sell, however, the market will be a little bit different. The same goes for finding the right home loan second time around. Here are some factors to consider when choosing your next home loan. Portability - if you are happy with your current loan, you may be able to take it with you. Find out if you can substitute a new property as security for your existing loan. There may be a portability fee, typically anything up to $500. Size of loan - if portability seems like a sensible option, check with your lender about whether you can increase the loan amount. Some lenders allow you to transfer a loan only if it's the same amount as your existing loan. A further restriction may be the need to settle on the same day for both the existing and new properties. New loan, same lender - if you feel a better product is out there, check with your original lender. You may be able to receive a discount or avoid some fees, particularly if you now use more products with the same institution. Switching costs - to make sure you're getting the best deal possible, find out whether the costs of paying out your loan and switching lenders is going to cost more than remaining loyal. Try to negotiate with your lender. Find another loan - do your research to find a loan that better suits your needs. You can always go back to your original lender, who may be able to match the offer.

    Home Improvement Home Loans - There are plenty of good reasons for choosing to renovate rather than move. For most people, the high cost of purchasing a new home outweighs the challenges of renovating. Recent big house price rises also means many home owners have considerable equity in their property. This can make getting a renovation loan easier and reduces the risk of over capitalising. The right finance. When you decide to renovate, finding the best loan to suit your needs is particularly important. Renovation loans can streamline the whole process and save you money. Be clear about your needs, plan for the future, and brush up on your handyman skills.

    Range of options: Home owners can choose from a range of finance options available. Which one you choose will depend on the size and scope of the project: whether it is a simple kitchen update, emergency repairs, home extension or full renovation.

  • Redraw facility - for smaller projects such as a new room or sun deck
  • Home equity loan - for medium sized projects such as kitchen or pool
  • Line of credit - similar to a home equity loan
  • Construction loan - for larger scale projects such as complete renovation that require council approval and the services of a licensed builder.

    Construction Home Loans - If you're building a new home or planning major renovations to your existing home, a construction loan is generally the most appropriate funding option. The difference between a construction loan and a standard home loan is that instead of a lump sum payment at agreement signoff, the loan is usually drawn down in stages. Payments (or draw downs) coincide with the initial purchase of the land followed by a number of key construction stages.

    Interest payments: This type of loan is ideal for building, as you only pay interest on the amount you draw down. For instance, if you have borrowed $250,000 for a house and land package, but have only drawn down $100,000 to pay for the land, you only pay interest on the $100,000 not the full amount.

    Process: Before building starts, you will need to pay a deposit to your builder as well as paying a deposit for the land if you are buying land. As work progresses you will need to make payments to the builder. Certain loans can be structured for progress payments to be made during construction.

    PART 1 - Home Loans Types and Structures

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    No investment advice provided to you. This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs. You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any financial adviser.

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