Katrina Parrington

Mortgage & Finance Broker, Elders Home Loans – Northern Territory – P. 1300 LENDING

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  • Elders Home Loans

  • Katrina Parrington

    I am a long term Centralian resident with more than 18 years experience in the financial services industry. Initially, in Real Estate in Adelaide before pursuing a career with Elders Insurance Alice Springs and lending roles with major banking institutions where I gained extensive experience in Home Loans and Commercial Lending here in the Alice and in Darwin.

    I have a unique set of skills that ensures I understand your lending needs and can provide you with professional advice and personal service.

    Tel: 08 8953 8800
    email: katrina.parrington@eldershomeloans.com.au

Loans Explained

Types of Loans

The following information is intended to give a brief explanation of the different product and interest rate types available and should not be considered an alternative to professional advice.  Broadly, home loans can be categorised into the following product groups:

  • Line of Credit
  • Offset Home Loans
  • Conventional Home Loans
  • Split loans
  • Specialised Home Loans

There are different types of interest rate options available:

  • Variable rate
  • Fixed rate
  • Capped rate
  • Honeymoon or Introductory interest rates
  • Professional Packages

Home Loans

Line of Credit

A home loan with no set repayment term or set repayment structure. The loan allows for the borrower to decide when and how they will repay the principle. Any principle repaid can be accessed again by the borrower at any time.

Offset Home Loans

A loan with a set term (e.g. 25 years) that is repaid in instalments either weekly, fortnightly or monthly incorporating principle and interest. It also allows the borrowers bank account to be linked to the loan so that funds in the attached account reduces the interest being charged on the loan therefore shortening the time taken to repay the loan and reducing the interest paid over the term.

Conventional Home Loans

A loan with a set term (eg 25 years) that is repaid in instalments weekly, fortnightly or monthly. Some versions allow the initial term to be interest only and some allow redraw of any additional principle repaid over and above the minimum.

Split Home Loans

These are simply two or more loans operating together. Splitting loans can be used to increase flexibility and /or reducing interest rate risk. The following is an example of a $200,000 loan split into different components.

Example 1: $150000 Fixed interest rate and $50000 variable interest rate. Both loans are over the same property and the same term (say 25 years). Split to control the interest rate risk
Example 2: $150000 Basic home loan (variable) and $50000 Line of Credit (variable). Split to reduce the overall interest rate cost as the basic home loan is usually .50%pa cheaper than the line of credit
Example 3: $150,000 offset home loan (personal debt for buying the home) $50000. Offset home loan (for buying investments). Split to maximise interest deductibility for tax purposes on the investment component.

Specialised Home Loans

Loans that attract terms and conditions designed for a particular set of circumstances outside of the norm (eg bridging loans, construction loans etc)

Construction Loans are conventional home loans that fall into the specialised home loan group because of the complexity of the security being offered (the property hasn’t been built), and the way the loan is released progressively as the property is constructed.

Construction loans are designed to meet the needs of a borrower who is building a home or undertaking major renovations to an established property. The loan money is released progressively as the builder completes agreed stages under the building contract. Typically these stages are:

Base Stage Completion of foundations
Frame Stage Completion of framing and roofing
Lock – up Stage Completion of external walls, floors, doors & windows
Fixing Stage Internal walls, ceiling, cupboards, benches
Completion Appliances, painting, & occupancy permit

The major benefit is that interest is charged only on the amount outstanding not the total loan approved. The disadvantage is that some lenders will charge fees to inspect the property at each payment stage resulting in higher initial costs.

The documentation required for a construction loan is considerably more than an established property – fixed price building contract with a licensed builder, building plans, specifications and permits.

Bridging & Changeover Loans allow you to purchase and settle on a new property before the sale and settlement of your original property is completed. For a short time you own two properties.

The essential difference between a bridging loan and a changeover loan is that there is a home loan debt left over after the sale of the original property goes through. Usually this means that the purchaser is trading up rather then trading down. For example, you own a property worth $300,000 and you still owe $120000. You buy a new property for $400000 + costs of $23000. So for a short time you owe $543000. After the sale of the original property is completed the loan will reduce to approx $243000. Because there is a residual debt following the sale of the first property then this would qualify as a changeover loan. Conversely, if you own a property worth $400000 that has no debt and you purchased a property for $300000 + costs $17000 you would owe $317000 but after the sale of the original property was completed the loan would be fully paid out then this would be considered a bridging loan.

It is important to understand that the lender will require the borrower to have sufficient equity in the first property to avoid mortgage insurance. We strongly advise the need to take a conservative approach as the qualification criteria is different for these types of loans than normal home loans.

The danger with both bridging and changeover loans is that your original property may take longer to sell than was expected. This would then put borrowers under increased financial pressure to sell at a reduced price additionally the longer it takes to sell the greater the interest cost. As a result many lenders require a special condition in the loan, that the original property has to have been sold but that there are differing settlement dates resulting in the need to “bridge the difference'”. These lenders severely restrict borrowers from maximising potential profit in their original property.

Changeover Loans

A changeover loan is provided at home loan interest rates instead of the penalty rates that apply to bridging loans. In nearly all respects a changeover loan is the same as a normal home loan, with a typical 25/30 year term etc. While different lenders offer different versions essentially during the changeover period the repayments are structured so as not to cripple the borrower and are based upon the final loan not the short term debt.

Bridging Loans

A bridging loan is a very short term loan. The higher penalty interest rates that apply to this sort of loan is not reflective of risk but the profit objective because the loan may only last a month or two and not 25 years (if it was a home loan). The lender only has a limited period from which to earn a profit, so the set up costs and interest rates are much higher.

During the bridging period the borrower does not have to make any loan repayments because the debt will be fully extinguished at the settlement of the original property.

Non-Conforming or Credit Impaired Loans are specialised loans that usually attract a premium interest rate because the borrower has incurred credit defaults or judgements. The number and amount of credit default(s) will influence the interest rate penalty and the amount lent against the value of the security.

Low Doc Loans or LoDoc simply means minimal supporting documentation proving income. These loans are designed for borrowers who have difficulty providing the normal documents to support their income. This may be because they are self employed, contract or seasonal workers or the income type is not regarded by the lender as sufficiently reliable eg commission only employees or child maintenance income etc. The lender usually takes a more conservative risk limiting the loan to 60%-80% of the property value some lenders will also charge higher interest rates on these loans.

Reverse Mortgages is a loan made to borrowers who have considerable equity in a property but have limited or restricted income to repay the loan. The interest simply compounds or grows over time as the borrower is not required to make any loan repayments. The loan is eventually repaid from the sale of the property following the death of the last borrower. There are special conditions attached to these loans and example being minimum age of borrower 65 and maximum loan 20% of asset value.

Interest Rates

Variable Rate Loans

Variable Rate Loans are the most common type of loan available. The interest rate which can rise and fall throughout the term of the loan is influenced by the economic climate and official interest rates set by the Reserve Bank. There are a number of versions of variable rate loans some having more features than others.

Fixed Rate Loans

Fixed Rate Loans are conventional home loan (Basic – no frills) with the interest rate fixed for an initial period (selected by the borrower – usually 1-5 years). At the expiry of the fixed rate term the loan converts to the lenders standard variable home loan interest rate. It is important to understand that most fixed rate loans do not allow the borrower to make extra payments during the fixed term, those that do usually have a limit on the amount (eg $5000 pa). As Fixed rate loans are Basic home loan products they generally do not have redraw features and offset options. Also, the loan cannot be changed during the fixed term without incurring penalties.

Capped Rate Loans

Capped Rate Loans are variable rate conventional home loans which has a ceiling on the maximum interest rate that the lender can charge. The interest rate will still move up and down over time but only within a restricted range. The short coming with this type of loan is that the interest rate is higher than the normal rate to begin with.

Honeymoon Loans or Introductory Rate Loans

Honeymoon Loans or Introductory Rate Loans could either be offset home loans or conventional home loans. Honeymoon loans or introductory rate loans offer an attractive interest rate reduction during the first 6 or 12 months of the loan. At the completion of the introductory period the loan reverts to the lenders standard interest rate for the remaining term of the loan. This rate is often considerably higher than other loans offered by the same lender. To ensure that borrowers don’t change their loans at the end of the introductory period lenders have penalty clauses in their loan agreement which will recoup any discount given. Depending on the anticipated time a borrower may take to repay the loan a honeymoon may or may not be financially beneficial.

Professional Packages

Professional Packages are generally offered on all types of loan products with the interest rate discounted between 0.25% – 0.70% for the life of the loan below the normal interest rate. They are usually only offered for large loans or borrowers who fall into a particular industry groups.

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