Loan Types Explained...

As you can imagine there are literally hundreds of loan products out in the market place.  Here are a few  for you to consider:

Construction Loans

This type of funding is growing in popularity with First Home Buyers.  The First Home Owners Grant Boost of $7,000 helps clients build their dream home.

A construction loan works a little differently to a home loan for the purchase of an established property.  When you buy an existing house, the lender will provide the full amount of funds borrowed at settlement.  You get your keys and you are officially a home owner.  However, with construction there are many steps involved.  Firstly, you need to have sought a block of land.  Most builders will require you to have a block in mind, so that they can draw the house to scale on the actual piece of land. 

You do not need to have a house and land package to get a construction loan.  This is usually the case with First Home Buyers though, as they need to show the Office of State Revenue that they have entered into a building contract to qualify for the Stamp Duty concessions and First Home Owners Grant.  You should speak with your Finance Broker if you intend to purchase the land separately, as you may have to fund the costs yourself and then receive a rebate once the building contract has been signed.  This is for First Time Buyers only.

In all other cases, you can buy the land separately without any additional costs.

Once you have the block and decided on a builder you will need to supply the contracts and offer and acceptance to your lender.  The lender will calculate the value of the property based on the land amount and contract price from the builder.  Remember, that lending criteria has changed and in some cases you will need to find a 10% deposit with 5% being genuine savings.

The next step in the process once you have obtained a finance approval is the settlement of the block of land.  This is the first progress payment made from your loan account.  Any shortfall of funds will be paid at this stage, so that the remainder of the loan monies can be used solely to pay towards the building costs. 

The builder will request progress payments during the course of the loan until the home is finished.  All progress payments will need to be authorised by you prior to payment to the builder.  You are probably visiting the house daily anyway and will know whether the work has been completed or not.

After the final progress payment you will arrange to meet the builder and receive your keys.  Also known as "hand over".  One month after the final progress payment, you will be required to start making monthly loan repayments.  Unless you have chosen a weekly or fortnightly option instead, then you would pay one week or fortnight after the final progress payment.

Commercial Loans

This type of lending is specialised and not all Finance Brokers or branch lenders are accredited to handle this type of enquiry.  The Team at Diversifi have a number of qualified brokers in house that can assist with this type of funding.

Commercial loans are available to business and investors. 

This type of loan is usually required when businesses or investors purchase commercial property such as shops, factories, warehouses and offices.  It can also be used for the purchase of a business.

Another type of commercial loan is where a developer may be looking at subdividing a residential block to build more than 4 or in some cases 3 properties.  The lenders’ policy will differ here so it is best to have your Finance Broker check the criteria prior to lodging an application.

Interest rates and fees on a commercial loan will also be different from a standard residential loan.

If you are purchasing a new business venture, the bank will be able to assess serviceability based on income projections.  Your accountant will need to provide this for you.

Lo Doc Loans

This is one area of home loan funding that has changed over the past few months.  The policy for lending to self employed or contractors has tightened up with some lenders only funding up to 60% of the value of the property being used as security.  This lower value alleviates the need for mortgage insurance.

I have access to a vast panel of lenders, but the most we can lend on a Lo Doc basis at the moment is 80% of the security value.  There are many restrictions placed on length of employment, length of time for an ABN, GST registration and whether or not you need to supply 12 months worth of BAS Statements.

One reason for taking a Lo Doc loan could be that your financials are not ready, or you have a complex income structure.  You need to be able to declare your taxable income for calculation purposes to your Finance Broker.  Your broker cannot assist you with this declaration.  You will be asked to sign a self certification form to declare your annual income.

The Lo Doc policy can apply to most loan products.  Even fixed rates.

Loan Features:

What is a redraw facility?

Most loan types can now have a redraw facility.  This enables you to make additional repayments over and above your standard loan repayment and accrue a surplus.  The surplus funds can be withdrawn at any time, either at a branch, over the phone or via internet.

Be careful, some Basic Home loans have a service fee for each redraw.  In some cases it could be as much as $25.00 for each transaction.  Regardless of how the withdrawal is made.  There may also be amount restrictions.  Ie. A minimum withdrawal amount.

I would not suggest using this facility as a transactional account.  If you are paying regular amounts in and withdrawing often, you could be diminishing the interest benefit by paying excessive redraw fees.  If this is the case you may wish to consider an offset account instead.

What is an offset facility?

An offset facility is a separate bank account that is linked to your home loan.  You can have a transactional account with ATM and internet access.  Whatever amount is in your offset account will save you interest on your home loan.

For example: if you have $10,000 in a 100% offset account, then $10,000 of your home loan will not be charged interest.  This will be a considerable saving over the term of your loan.

You can have your salary directly credited to the offset account.  There is really no need for other transactional accounts.  Transfer all savings into your offset to get the maximum interest saving.

Withdrawals, as per redraw, can be made at anytime via ATM, branch or internet.  There is no additional fee to withdraw these funds as they are your funds.  It is your bank account that you can do with what you wish.  The longer you can leave the funds in the account untouched, the more benefit you will receive.

A Financial Planner or Advisor is qualified to give more advice on this type of account.

While we have taken all reasonable care in producing the information contained in this article, we do not promise that it contains all the information you need to answer all your questions. This document is for information purposes only, and must not be relied upon as a substitute for professional services or legal advice. Diversifi Pty Ltd does not guarantee the accuracy of information provided by third parties linked to this site.  Contact: admin@diversifi.com.au or 1300 55 99 49.