What sort of loan features are there?
Mortgage Offset Account
Mortgage Offset accounts are offered by most lending institutions which offer normal transaction type accounts. A Mortgage Offset account allows the borrower to have any savings or credit balances in their transaction account to be offset against their loan facility.
Most lending institutions will offer ‘100%’ offset, which means that all of the credit balance in the account will offset the outstanding balance of the loan facility.
A mortgage offset account does not earn any interest and so no income needs to be declared. The benefit derived is that the interest charged is calculated on the outstanding balance of the loan less the amount deposited in the offset account.
Mortgage offset accounts come under the definition of a ‘financial product’ under the Corporations Act. This means that dealing in these accounts or discussing them with borrowers which may require an Australian Financial Services Licence (which is different to a Australian Credit Licence).
Orange Mortgage and Finance Brokers can only offer information on this type of feature. If you require an offset account, the lending institution who offers the feature will provide you with a Product Disclosure Statement setting out the details of the account.
For more information about offset accounts, please see here.
If you want to see how much an offset account could save you money, have a look at our offset account savings calculator here.
Principal and Interest Payments
Principal and Interest payments (more commonly known as P&I payments) are the standard repayment method offered by lending institutions. The repayments are calculated using an amortising schedule. Making payments in accordance with the amortising schedule will ensure the principal and interest is paid over the prescribed term of the loan.
Repayments at the start of the term of the facility usually cover a small amount of principal and are substantially made up of interest charges. Thus as payments are made during the term of the loan, the principal reduction increases and interest charge decreases.
Interest Only Payments
Most lending institutions will offer both owner occupiers and investors the ability to make interest only payments for a set period.
Interest Only means that none of the monthly repayment gets applied to reducing the principal.
This means that the outstanding balance will remain unchanged during the term of the interest only period.
Generally the interest only periods offered by lending institutions are 1 – 5 years but in some cases can go to 10 years.
After the initial interest only period the loan usually reverts to the normal principal and interest repayments over the remaining term of the loan facility.
At Orange, for owner occupied loans, unless you have a good reason to have interest only repayments, we won’t recommend Interest Only repayments. We believe you should pay off your primary residence as quickly as possible and we can show you some easy ways to do this here. You only have to do small things to get ahead in a big way.
When attached to a loan facility, a redraw feature allows the borrower to withdraw any funds that they have deposited into the loan facility over and above the principal. Thus if the borrowers are repaying additional or extra repayments, the lender will allow the borrower access to these funds.
The redrawn funds can be used for any purpose. The cost of each redraw varies from nil to $50 and the consumer may be only able to use the facility a given number of times per annum or may only be able to draw set amounts as per the lender’s guidelines.
Line of Credit/Home Equity Loans
Often known as Equity Loans or Lines of Credit, these facilities offer similar benefits and operating features as the common bank overdraft.
These facilities allow the borrower to have a credit or facility limit approved and established and usually an ‘evergreen’ term.
The borrower has the ability to use the entire limit at any time and does not have to comply with a principal and interest repayment schedule. Most lending institutions who offer these types of facilities will require that the monthly interest charge be the minimum payment required to maintain the account. That means that the borrower can determine how much, if any, principal repayment they wish to make in each payment.
These facilities allow borrowers to gain access to the accumulated equity that they have in their properties. The credit limit or facility limit is normally determined by two factors: the borrower’s ability to repay and the level of equity in the property being offered as security.
Most lending institutions will allow for the borrower to operate their line of credit account as their transaction account and therefore give an ‘all in one’ account.
Lines of Credit can enable borrowers to reduce their debt in a quicker time period than traditional principal and interest facilities. By the borrower arranging for their income to be deposited directly into their line of credit facility it has the immediate result of reducing the outstanding balance, thus in turn reducing the interest being charged.
As all of the borrower’s income is deposited directly into their loan facility, the borrower would arrange for all living expenses to be deducted out of the loan facility. Thus the longer the income is reducing the outstanding balance, the greater the potential saving of interest.
Loan portability allows the borrower the option of using an existing loan facility for different property purchases. It enables the borrower to maintain the same loan facility but change the security for the loan.
Normally the borrower will not have to be re-assessed for the loan facility.
The new security property will still have to adequately secure the loan facility in accordance with the lending institution’s policy.