Are you in the right mortgage?

There are three main types of loans that are commonly used for home loans, These are described below, followed by a brief discussion of other lending options:

Basic Variable Rate Home Loan

This is an on-going discounted home loan - it will be discounted off the standard variable rate loan by a set amount for the term of the loan. For example, if the standard variable rate loan is 7.07% and the discount is 0.5% then the interest rate on the basic variable rate loan is 6.57%. If the rate on the standard variable rate loan goes up by 0.2%, then the rate on the basic variable rate loan goes up by the same amount - the difference between the two rates always stays the same.

For a home loan you would normally have a Principle & Interest repayment. This means that you have a set repayment each month and a portion of that repayment pays the interest for that month and the rest pays down the actual loan amount. The latter is what reduces the loan over the term.

The longer you have had the loan the faster the loan comes down as the amount of interest each month is less and so more of your repayment goes towards paying down the balance of the loan.

These loans are a basic loan in that you do not have access to facilities such as offset accounts (see explanation down further) - however it is not necessary to have an offset account if you are only interested in paying down the loan as fast as you can.

Standard Variable Rate Home Loan

This loan is the same as the above loan except that the interest rate is not an on-going discounted rate. You can have what is called a honeymoon rate, which means for six to twelve months you have a lower interest rate and at the end of that period the rate reverts back to the standard variable rate.

You can have a 100% offset account with these loans. This is a transaction account with the same lender as your mortgage that you put your excess income into when you are not using it. When the bank calculates the interest on your loan they take the amount of funds sitting in the offset account off the balance of your loan before calculating the interest. Once again this reduces the amount of your loan repayment that is going towards interest payments and increases the amount that is going towards paying down the loan balance thereby paying the loan off faster.

Please note that you will only benefit from an offset account if you have surplus income to keep in this account.

Line of Credit (LOC)

This is an Interest Only Repayment loan facility. How this works is that the loan account also becomes your transaction account - it is an all in one facility. You have a limit that is determined by the equity available to you. For the sake of the example below we will call your limit $360,000. You deposit your entire income into the loan account each month or week etc, depending on when you are paid. For our example we will assume monthly payment. Over the month you use your credit card for your living expenses and bills, and at the end of the month you withdraw the funds from your LOC to pay your credit card bill IN FULL.

As you will see below, each month your income goes into the loan account, reducing the balance on which interest is calculated, and your expenses go out and the interest is added, increasing the balance once again. The interest is calculated daily and so the longer the excess funds stay in the loan the less interest you pay (the reason we suggest living off your credit card rather than drawing funds back throughout the month).

Example of a LOC...

Month 1 begins with your pay going in:
Limit $360,000
Loan $360,000

Pay $2,900 goes in at the end of month one you pay your credit card and interest is added:
Limit $360,000
Loan $357,100
Expenses $1,000
Interest $1,000

Leaving the balance at the end of month 1:
Limit $360,000
Loan $359,100

Month 2 begins with your pay going in:
Limit $360,000
Loan $359,100

Pay $2,900 goes in at the end of month 2, you pay your credit card and interest is added:
Limit $360,000
Loan $356,200
Expenses $1,000
Interest $995

Leaving the balance at the end of month 2:
Limit $360,000
Loan $358,195

As you can see, PROVIDED YOU CAN STICK TO A STRICT BUDGET, a Line of Credit can be a great way to pay down your loan quickly. However, I would stress that this is not the best type of loan for a lot of people because of the hole that you can dig for yourself if you overspend. Please read our article "The Line of Credit myth exposed" for more about this before you commit yourself to a LOC.

Added to the options above are of course Fixed Rate Loans, Professional Packages and Investment Loans. You can also have a Fixed Rate Principle & Interest Loan or a Fixed Rate Interest Only Loan. Or you can split your loan between Fixed and Variable rates...the possibilities are endless!

Now that you have your head around that -

How many lenders do we have all offering the above mix of loans and variations on them?

Each lender may have a similar loan but they will all be different in rates, on-going fees and features. There are literally hundreds of options for you to choose from...but which one is the right one for you?

This is what we do here in Hudson Finance - we sift through all these variations and possible combinations and work out the best one for you, your circumstances, properties and location, budgets and cash flows.

So before making your next choice on loan, talk to us and we can run over this with you and help you make the right choice for you.