Owner Occupied Homes

Refinance

Debt Consolidation

Home improvements

Construction

Land Only

Owner Builder

Removal Homes

Residential Investment Properties

Cars, Holidays, any good purpose

A. Part 1
Generally there are 5 classes of mortgage loans found in the marketplace.

1. Owner Occupied:
   Used by people to purchase a home they intend to live in.
2. Residential Investment:
   Borrowers use these loans to purchase a residential investment property.
3. Business:
   These are similar to home loans with interest rates that can be variable, fixed or capped, and offering similar features. Their interest rate is usually comprised of a base interest rate linked to bank bill rates with an additional margin (based on risk evaluation), added.
4. Construction:
   These are similar to a residential loan except the property used as security has yet to be built when the loan is advanced. The loan amount is given in progressive instalments (progress payments) in accordance with progressive valuations conducted at determined stages of construction. In addition to the regular construction loan with a registered builder, there are 2 special types of construction loans in the marketplace as well. Firstly there is the construction loan for owner builders; and secondly there is the construction loan for Removal homes. Both of these types of loans require special consideration.
5. Bridging:
   Bridging finance is usually a short term loan that covers the financial gap between the purchase of a new property and the sale of the old property.

A. Part 2
Mortgage Loan Products:

There are 7 common groupings of Mortgage Loan Products available.

1. Standard Variable Loans:
These are loans where the interest rate can vary throughout the term of the loan. That is to say the interest rate may go up or down during the loan term.

Advantages:
• If interest rates drop, repayments also drop
• Generally, additional or extra payments reducing the principal can be made without penalty, allowing the loan to be paid off faster.
• This product is flexible and often has more features.

Disadvantages:
• If interest rates rise, repayments also rise along with the amount of interest paid. The borrower is then required to make larger repayments.

2. Basic Variable Loans:
Basic variable loans are loans with lower interest rates, but with fewer features than a standard variable loan. The interest rate can, as the name indicates, vary over the term of the loan. Therefore, the interest rate can rise or fall over the term of the loan. These loans are typically “no frills” loan products.

Advantages:
• Lower interest rate than the standard variable loans (usually around 0.5% less)
• Repayments are lower than standard variable loans
• If interest rates drop, repayments also drop.

Disadvantages:
• Usually not as flexible as standard variable loans (not portable)
• Offer less features
• If interest rates rise, repayments also rise. The borrower is then required to make larger repayments.

3. Discount Variable/Honeymoon/Introductory Loans:
These are variable rate loans with a discounted interest rate off the standard variable rate (commonly over 1% less), lasting a certain period of time, usually 1 year. After this period, they normally revert back to standard variable rates. Sometimes, depending on the lender, rates can be fixed or capped during the initial/honeymoon period.

Advantages:
• Among the lowest rates available
• Repayments made at introductory rates can reduce principle quickly as there is less interest charged during the specified period, compared to higher variable interest rate loans.

Disadvantages:
• Repayments increase after the introductory period, since the interest rate reverts to the standard variable rate
• May have early repayment fees (or exit fees).

4. Fixed Rate Loans:
These are loans where the borrower’s interest rate and repayments are fixed for a set period, usually from 1 to 10 years, and sometimes longer. These loans revert to the standard variable rate at the time the fixed rate period has expired, unless “rolled over” for another fixed rate term (at prevailing rates)

Advantages:
• Borrowers have certainty of repayment amounts. Even if the interest rates rise, the repayments on these loans stays the same as their interest rate is fixed for the duration of the agreed period. This allows for more accurate cashflow budgeting into the future.

Disadvantages:
• Reduced flexibility
• If interest rates fall, the repayments will not, as the rate remains fixed
• Additional repayments are limited, and exceeding these limits may incur break costs/fees

5. Line of Credit/Equity Loans:
These loans allow borrowers to borrow up to a specified limit which is secured by a registered mortgage over residential property. These loans provide access to funds, when required, up to the original limit set. Normally, the minimum repayment required is the interest only. Some lenders, however, do require that principal reductions begin to be made after a certain period of time. These loans can be a creative way to generate funds for investment purposes up to the pre-determined limit.

Advantages:
• Most flexible product available in the marketplace
• Money can be used as needed and paid back in a flexible manner without structured minimum principal and interest repayments. The minimum required is the interest on the outstanding principal
• Since it is secured by residential property, the interest rate is less than credit cards and personal loans

Disadvantages:
• Requires strict discipline to ensure that over time the principal (the amount of the debt) is being reduced. Having a minimum interest only repayment does not require the borrower to reduce the principal (though some lenders do after a certain term) therefore the debt may still be the same as it was in the beginning even after making years of Interest only repayments. (NB: To help borrowers set up a mortgage reduction strategy we at The Reflexions & Echoes Trust have Comprehensive Mortgage Reduction Strategies available for our clients.)
• Interest rates can be higher than for the other types of loans, i.e. the most expensive

6. Combination/Split Loans:
Allows borrowers to take part of their loan as a variable rate loan and the other part as a fixed rate loan.

Advantages:
• Offers borrowers a chance to hedge their bets in times of rising interest rates and gives a blend of repayment flexibility and interest rate security.

Disadvantages:
• Variable portion is still vulnerable to interest rate rises. If interest rates rise, repayments on the variable portion also rise. The borrower is then required to make larger repayments on this variable portion.

7. Low Doc/No Doc Loans:
These are products available for borrowers who are normally self employed or do not have tax returns or financial reports.

Advantages:
• Borrower completes a simple income declaration form.
• No tax returns required
• No financial reports required

Disadvantages:
• Generally attracts a higher interest rate.
• Generally attracts a higher amount of equity required from the borrower.