Different loan types

Finding the right home loan is as important as finding the right property.

There are literally hundreds of home loans available, with new products emerging all the time.

An AFG broker can help you find a loan that suits your particular needs, help you complete the paperwork, professionally package it with your supporting documents and submit it to your chosen lender.

When you’re ready, ask your broker to call you to discuss next steps. Here’s a snapshot of the main types of home loans and some of their pros and cons.

Variable

Standard variable loans are the most popular home loan in Australia. Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and funding costs. Your regular repayments pay off both the interest and some of the principal.

You can also choose a basic variable loan, which offers a discounted interest rate but has fewer loan features, such as a redraw facility and repayment flexibility.

Pros

  • If interest rates fall, the size of your minimum repayments will too.
  • Standard variable loans allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
  • Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.

Cons

  • If interest rates rise, the size of your repayments will too.
  • Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
  • You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
  • If you have a basic variable loan, you won’t be able to pay it off quicker or get access to money you have already repaid if you ever need it.

Fixed

The interest rate is fixed for a certain period, usually the first one to five years of the loan. This means your regular repayments stay the same regardless of changes in interest rates. At the end of the fixed period, you can decide whether to fix the rate again, at whatever rate lenders are offering, or move to a variable loan.

Pros
Your regular repayments are unaffected by increases in interest rates.
You can manage your household budget better during the fixed period, knowing exactly how much is needed to repay your home loan.

Cons
If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.

There is very limited opportunity for additional repayments during the fixed rate period.
You may be penalised financially if you exit the loan before the end of the fixed rate period.

Split rate loans

Your loan amount is split, so one part is variable, and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with the certainty of a fixed rate loan.

Pros

  • Your regular repayments will vary less when interest rates change, making it easier to budget.
  • If interest rates fall, your regular repayments on the variable portion will too.
  • You can repay the variable part of the loan quicker if you wish.

Cons

  • If interest rates rise, your regular repayments on the variable portion will too.
  • Only limited additional repayments of the fixed rate portion are allowed.
  • You will be penalised financially if you exit the fixed portion of the loan early.

Interest only

You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold, having achieved capital growth.

Pros

  • Lower regular repayments during the interest only period.
  • If it is not a fixed rate loan, you have the flexibility to pay off, and often redraw, the principal at your convenience.

Cons

  • At the end of the interest-only period, you have the same level of debt as when you started.
  • If you’re not able to extend your interest-only period, you could face the possibility of increased repayments.
  • You could face a sudden increase in regular repayments at the end of the interest-only period.

 

Low Doc

Popular with self-employed people, these loans require less documentation or proof of income than most, but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk. In most cases, you will be financially better off getting together full documentation for another type of loan. But if this isn’t possible, a low doc loan may be your best opportunity to borrow money.

Pros

  • Lower requirement for evidence of income. May overlook non-existent or poor credit rating.

Cons

  • You will probably pay higher interest than with other home loan types or may need a larger deposit, or both.

Explaining the loan process

Find out what’s involved in taking out a loan, from start to finish.

Talk to us, it costs nothing to speak to a friendly and professional AFG broker, who can quickly help find out how much you can borrow and which loan may suit your needs, plus answer any questions about the process.

How does the process work?

Arrange a pre-approved loan

If you haven’t started your property search, or are still looking, a pre-approved loan can be useful.  It gives you a clear picture of what you’re spending limits are and gives you peace of mind that if you find a property you really interested in you can move quickly to make an offer.  And it may put you in a stronger negotiating position than other potential buyers who don’t have pre-approval.  An AFG broker can take care of the paperwork to lodge a loan application.

Find your property

Make sure you do plenty of homework when you’re on the hunt for a new property. Research property prices in the area, potential capital growth and existing and planned infrastructure, such as roads, public transport, schools and shops. If you’re unfamiliar with property values in the area, consider a full valuation carried out by a registered valuer before making a final decision.

Make an offer and sign a Contract of Sale

Whether you buy property at auction or make an offer on a listing, your agreement with the vendor only becomes a legal commitment when a Contract of Sale (Offer of Acceptance in WA) has been signed by both parties. This contract will confirm the selling price as well as any terms and conditions. Your commitment will usually be subject to lender approval, a building inspection report and a pest inspection.

The period from signing a Contract of Sale to Settlement – when the property becomes legally yours – is usually six weeks (shorter in some states, such as Queensland). Note: even if you have a pre-approved loan, your lender will still need to complete a valuation of the property you have chosen before issuing full approval.

Pay a deposit

A deposit is required once a Contract of Sale has been signed by both parties (sometimes called ‘exchanging contracts.’)  You won’t yet have access to your home loan, so your deposit will need to come from savings or elsewhere.  You may also be able to arrange a deposit bond until settlement. Speak to an AFG broker about your deposit options.

Appoint a conveyancer

You will need a solicitor or conveyancer to check the legalities of the Contract of Sale. Your conveyancer will also check all rates and taxes have been paid, check land use or building approvals for the property and order any relevant searches. They may also help sort out any inspections.

On settlement day, the conveyancer will check the correct amount of money has been transferred from your lender to the seller and all fees – such as Stamp Duty – are paid, so you can take legal ownership of the property.

Cooling off period

If you didn’t buy your property at auction, you may have a cooling off period when you can cancel the contract, although there may be a small penalty.  Cooling off periods vary from state to state so check with your relevant state authority in terms of what your rights may be.

Guide to home loans

Variable

Variable rate loans often provide additional flexibility and are the most popular type of home loan in Australia. As the name suggests the interest rate is variable and therefore fluctuates with the Reserve Bank of Australia’s movement and the cost of the financial institution sourcing funds to lend. Variable rates are generally broken into two categories by financial institutions: basic and standard.

As the name suggests the basic variable rate only covers the basic home loan features. On these loans you won’t have access to features such as a redraw facility; however, this also means the interest rate is generally slightly lower than other loans.

The standard variable rate is traditionally slightly higher than the basic variable, however along with this you receive extra features such as a redraw facility, repayment frequency flexibility, portability and the option to pay in advance.

Variable loans generally require closer monitoring, especially if you overcapitalise and interest rates rise. It is important to make sure that you budget and plan for the future should interest rates rise, to ensure that you are able to meet the required repayments.

Fixed

Fixed-rate loans generally have all of the features of a standard variable product; however, the interest rate is fixed generally from one to five years. Fixed rate products are great products to help maintain the household budget because the repayments will not change during the fixed period.

However, a fixed rate loan means you could end up paying more if interest rates fall. It is possible to exit the loan agreement if you feel it is right to do so, although lenders will generally charge penalty fees to compensate for any loss in profits they may suffer.

Introductory and Honeymoon

Introductory or Honeymoon loans are generally popular for first home buyers, however, this doesn’t mean that these are the only people who can access these products. Honeymoon loans give individuals a discounted interest rate for the first six to twelve months depending on the product. After this period expires, the loan generally reverts to the lender’s standard variable product.

Although it may be tempting to take out a Honeymoon loan because of it’s reduced interest rate, it is important to watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the availability of features (such as redraw facilities, repayments etc.) to offset the lower interest rate. In some cases, this can mean less flexibility over the life of the loan.

Interest Only

Interest only loans are particularly popular for investors. The repayments of interest only loans will be lower than an ordinary loan because you only pay the interest charges each month – you aren’t required to pay off the principal.

Some interest only loans are available for owner-occupier clients; however, these can be risky because your level of debt will not fall for the life of the loan. Interest only loans should be a short term option (about 5 years at the most). Also, in times when house prices may fall this may mean you have negative equity – you have borrowed more than your house is worth.

Low Doc and No Doc

Low and No Doc loans are increasingly popular in Australia, especially for self-employed or contractors. As the name suggests you require less documentation to take out the loan (this is essentially proof of income and other debts etc).

Although it is generally much easier to be found eligible for these loans, it is not always the best way to go. As a result of providing less documentation, the bank will generally charge a higher interest rate or additional fees because there is a higher perceived risk with applicants. If possible, in most cases you will be better off with a full doc loan (full documentation – providing the required proof of income etc) because they are a cheaper product in the long run. Although it may be less work to apply for a low or no doc option, the extra work can be worthwhile applying for a full doc loan.

So how do I know which loan to choose?

That is one of the most frequently asked questions and something that needs to be carefully considered before jumping in and signing loan documents. Really, it comes down to what you think is right for you. Speaking to a broker is a really great way to find out what loan is most appropriate for you.

A broker won’t force you to take out a product; they recommend a loan that will suit you based on the information you have given them and take care of all of the paperwork and application requirements. If you specifically would like a certain type of loan a broker is able to compare a wide range of them.

Investing in property

Research and having the right people to help you are the keys when investing in property.

It definitely pays to do your research on the property market before you dive in, and we’re thrilled to be on board to help you when it comes to financing your decision. Recent share market slides, tight rental markets in most capital cities and a whiff of increase in property prices are seeing many mum and dad investors retreat to bricks and mortar.

Generally, property in Australia is still considered to be a sound investment due to steady and consistent increases over time.

But it’s not a quick win. Property usually has a seven to ten-year cycle, with highs, lows and steady stints in between.

Fortunately, an ongoing housing shortage in Australia and a tax system that allows negative gearing on a property (where any investment losses can be claimed as tax deductions) continue to favour housing as a solid, long-term investment.

But credit has tightened in the wake of the Global Financial Crisis so lenders are more cautious about who borrows and for what. Your broker is your best ally in finding the right lender and loan for your circumstances in this new environment. They can also wade through the many investment loan options on offer, leaving you more time to find the ideal property.

Reviewing your finances?

Many people refinance their homes or investment properties to reduce their monthly home loan repayments. What other aspects of your finances can you review to help save money?

1. Review the frequency of your home loan repayments
If you are paid weekly or fortnightly, see if you can change the frequency of your home loan repayments to fit in (this may not be possible on all products). Because the interest on your home loan is calculated daily, making a payment two weeks earlier each month saves you money in the long term, and in the short term helps make ongoing budgeting easier.

2. Consolidate debt
If you’re paying high rates of interest for debt on credit and store cards – each of which will probably have an annual charge – think of consolidating debt in one place. You may very well be able to access a lower overall interest rate, reducing your monthly outgoings. You will avoid paying duplicate fees. Plus, a single monthly debt repayment is easier to manage than having to pay multiple credit card bills.

3. Cars
Cars are often the biggest family expense after home loan repayments. But as family needs change over time and the price of petrol rises, we can find we have more expensive cars than we need. Could you downsize your car/s, not only reducing monthly repayments but also potentially saving in maintenance, insurance and fuel costs? Have you thought about buying a scooter for short, local trips? Are you getting the best deal for the money you spend on your car insurance and repairs?

4. Insurance
There are three ways you may be able to save money on your insurance premiums. First, shop around when your renewals fall due rather than simply continue with your existing provider.

Also, you may be able to reduce monthly premiums raising the excess payable, or improving the security on your home.

Finally, some insurers provide discounted rates for bundling together policies such as home, contents, car, health or life insurance. Perhaps you could make an overall saving this way?

Organising your insurance through an AFG broker could save you money. For example, if you take out home insurance you could be eligible a discounted policy through one of our preferred insurance partners. Why not get a complimentary quote? What have you got to lose?

5. Clear out the shed!
Perhaps you have items of value gathering dust in your shed or garage? Whether you hold an old-fashioned garage sale or go onto eBay, perhaps now is a good time to get money for the belongings you’re never going to use.

Refinancing your home loan

As time marches on, situations change. Perhaps you’ve changed jobs? Or there’s a new addition to the family? Maybe you would just like a better rate? Maybe it’s the advent of school fees, or perhaps the kids have flown the coop? Or maybe that leaking shower or tired kitchen has just reached the end of its life. A shift in circumstances may mean it is time to revisit your home finances.

For many, the idea of refinancing a mortgage can be daunting. Fees, fixed versus variable interest rates and monthly charges all need to be considered. The right refinanced loan could help you pay off your mortgage faster and for less, clear unhealthy debt or help you upgrade and add value your home, all of which are steps in the right direction.

But where to start? An AFG broker can help you weigh it all up.

Can I get a mortgage where I pay less than I’m paying now?
With lenders adjusting their rates outside of the reserve bank now is a great time to shop around check that you have the right loan for your needs, and an AFG broker is a great starting point. It will depend on what interest rate you’re currently paying, what type of home loan you have (e.g. fixed, variable, interest only, line of credit) and what features you want in your loan.

Can I consolidate credit card or other debts into a home loan?
This is one of the reasons many people refinance.  The advantage is that you pay a much lower interest rate on a mortgage than for most other forms of debt – e.g. credit cards, overdraft facilities, personal loans etc.

Providing you have sufficient equity in your property, you may be able to consolidate all your debt on a home loan. If you take this option though it is important to make sure you maintain your repayments at their current level or you could end up paying more over a longer period of time.

How much money can I borrow?
We’re all unique when it comes to our finances and borrowing needs. Get an estimate on how much you could by contacting an AFG broker who can help with calculations based on your circumstances.

How do I choose the loan that’s right for me?
Our guides to loan types and features will help you learn about the main options available.  There are hundreds of different home loans available, so contact an AFG broker who can recommend the right loan(s) for you.

How often do I make home loan repayments – weekly, fortnightly or monthly?
Most lenders offer flexible repayment options to suit your pay cycle. Aim for weekly or fortnightly repayments, instead of monthly, as you will make more payments in a year, which can save dollars and time off your loan.

What fees/costs are involved in switching mortgages?
Penalty fees could apply if you’re paying off your current mortgage early, especially if you’re exiting a fixed home loan.  But these may be offset by repayment savings when you switch home loans.

Contact an AFG broker to discuss which fees would apply in your circumstances.

Should I refinance?

My lender is charging me a higher home loan rate than I see advertised elsewhere. Can I change lenders?
This is exactly the reason why most people change lenders. There may be a penalty clause in your current home loan, meaning you may need to pay a discharge fee, but it could still be in your financial interests to change. When shopping around it is always important to look for the comparison rate of a product. A comparison rate is essentially the true rate, taking into account the fees and charges you will pay on the loan. So even though you see a lower rate it doesn’t mean the repayments are less. AFG brokers are able to take the hassle out of this for you.

I have just come off a ‘honeymoon’ interest rate to a much higher rate. Can I move lenders or am I locked into my mortgage?
You can walk away from most mortgages, although penalty fees sometimes apply. To review your options, why not contact an AFG broker?

If I move my mortgage to a new lender, is there anything stopping that lender from increasing their rates in a few months time?
This depends on what kind of product you have. If you’re concerned about rising rates, perhaps you should consider a fixed rate home loan, where repayments are fixed for a period from 1 to 5 years.

Why do some lenders charge more than others for lending the same amount of money?
Banks and other lenders pay different amounts for the money they on-lend to you, they have different overhead structures and different profit expectations. All these factors affect how much they charge to lend people money.

What documentation do I need to refinance?
The last 3 – 6 months of mortgage statements is sufficient to begin this process. An AFG broker can advise on other documentation.

Typical loan features

One size doesn’t fit all when it comes to home loans.

Make sure you choose a loan with the features and benefits that are right for you. An AFG broker can recommend a loan for your particular needs – and take care of all the paperwork. When you’re ready, talk you your broker to discuss next steps.

Typical home loan feature list

Interest only repayments
You only pay the interest on the loan, not the principal, usually for the first one to five years although some lenders offer longer terms. Many lenders give borrowers the option of a further interest-only period. Because you’re not paying off the principal, your monthly repayments are lower. These loans are especially popular with investors who pay off the principal when the property is sold, having achieved capital growth.

Extra repayments
If you pay more than the required regular repayment, the extra amount is deducted from the principal. This not only reduces the amount you owe but lowers the amount of interest you repay. Making extra repayments regularly, even small ones, is the best way to pay off your home loan quicker and save on interest charges.

Weekly or fortnightly repayments
Instead of a regular monthly repayment, you pay off your home loan weekly or fortnightly. This can suit people who are paid on a weekly or fortnightly basis and will save you money because you end up making more payments in a year, cutting the life of the loan.

Redraw facility
This allows you to access any extra repayments you have made. Knowing you have access to funds can provide peace of mind. Be aware lenders may charge a redraw fee and have a minimum redraw amount.

Repayment holiday
You can take a complete break from repayments, or make reduced repayments, for an agreed period of time. This can be useful for travel, maternity leave or a career change.

Offset account
This is a savings account linked to your home loan. Any money paid into the savings account is deducted from the balance of your home loan before interest is calculated. The more money you save, the lower your regular home loan repayments. You can access your savings in the usual way, by EFTPOS and ATMs. This is a great way to reduce your loan interest, as well as eliminate the tax bill on your savings. Lenders provide partial as well as 100% offset accounts. Be aware the account may have higher monthly fees or require a minimum balance.

Direct debit
Your lender automatically draws repayments from a chosen bank account. Apart from ensuring there is enough cash in the account, you don’t have to worry about making repayments.

All in one home loan
This combines a home loan with a cheque, savings and credit card account. You can have your salary paid into it directly. By keeping cash in the account for as long as possible each month you can reduce the principal and interest charges. Used with discipline, the all-in-one feature offers both flexibility and interest savings. Interest rates charged to these loans can be higher.

Professional package
Home loans over a certain value are offered at a discounted rate, combined with discounted fees on other banking services. These can be attractively priced, but if you don’t use the banking services you may be better off with a basic variable loan.

Portable loans
If you sell your current property and buy somewhere else you can take your home loan with you. This can save time and set-up fees, but you may incur other charges.

Top 10 tips to improve your home security

The good news is that there are plenty of simple, low-cost steps you can take to greatly reduce your chance of getting burgled. Remember, it’s all about making your home a harder target to break into than other people’s. Most burglars enter via a garage door, back door, kitchen or bedroom window. Burglar-proof these and you’ll significantly improve your chances of never suffering from a break-in.

1. Door locks
Have key-operated two-cylinder deadlocks fitted to all external hinged doors. A quality knob-inlock set will have a ‘dead latch’ mechanism to stop burglars using a credit card to open it.

While looking at external doors, you may also want to check that they are solid and robust. If not, perhaps you should replace them, or add a security screen. You may also want to consider fitting a wide angle peephole on your front door.

2. Sliding doors
A favourite point of entry for burglars! Fit key-operated locks or patio bolts to all external sliding doors, such as patio/veranda doors.

Sliding doors can also be made more secure by inserting a wood or metal dowel into the track to limit movement.

3. Windows
An open window, visible from the street, may be the only reason that your home is chosen by a burglar. Ground floor windows are more susceptible for obvious reasons.

Make sure you have a security grill, security screen or burglar bars applied to all accessible windows, or alternatively have key-operated single cylinder window locks fitted.

4. Warning stickers
Place highly visible stickers on or near front doors and windows, which indicate an alarm system, dog or membership of neighbourhood watch. Your local police station should have an anti-crime adviser who can help provide these.

5. Light timers
Install light timers to switch on automatically if you aren’t home when it gets dark, or have gone away for a few days. The timers should mimic when you would usually switch lights on or off. They are not expensive and are available at most hardware stores.

6. Exterior lighting
Exterior lighting is also a good deterrent, provided it is switched on and off as though someone is at home. Make sure the approach to your house, especially any entryway, is brightly lit, controlled by a light timer if necessary – this also makes it safer and more comfortable if you come home after dark.

7. Motion sensor lights
These are useful to install, especially at the back of a house or apartment. Infra-red motion sensor lights are also easily available and not very expensive. An unexpected light going on is a definite deterrent to a burglar who will wonder what other security devices you have in place.

8. Alarm systems
Burglar alarms definitely increase the potential and fear of being caught by the police.

There are a wide variety of alarms available – you need to make sure that the one you choose has visible signage and is properly programmed, installed and maintained.

Some alarms are routed to a police station or alarm control centre. If yours relies on neighbourhood response, make sure your neighbours are able and willing to respond.

9. Home safes
Burglars know all the hidden spots to look for keys, valuables and important documents. The price of a good home safe is falling, so setting one up could be a good investment. Home safes need to be anchored into the floor or permanent shelving, and should not be kept in the master bedroom or cupboard. Use a safe regularly, so it becomes routine and always keep the code secret.

10. Protect your ID
It’s a good idea to take photographs around your house of all your valuables – important proof for an insurance claim if you ever need to make one. This can be kept in a safety deposit box, safe, or with a relative. Receipts for bigger ticket items are also useful to keep for the same reason.

Consider taking photocopies of your passport, driver’s license and all the cards in your wallet and store these in a safe place.

Why use an AFG Broker?

Having an AFG broker negotiate finance on your behalf if the smart way to go as they look to save you time, stress, and money.

When should I see a broker and what can I expect?
You can see an AFG broker at any stage in your financial journey. You might still be saving for your first home, wishing to use the equity in your current one, or wondering if you’re getting the right possible deal with your existing lender.

You can make an obligation-free appointment with an AFG broker at a time and place that suits you.

Your broker will ask about your financial circumstances and objectives to find out what’s important to you in a home loan. For example, flexibility might be important because you plan to start a family or you may want ready access to equity for a rental property or renovations. Whatever your plans, your broker will research the market and recommend the right home loan to suit your needs. An AFG broker always looks for the right loan for you, not the lender.

Once you have agreed on a loan, your broker will manage the application and make sure everything is in order for the approval process.