Researching home loans can be like trying to learn a foreign language – with the added pressure that you’re making a financial decision that will impact you for years to come. With so many different home loan terms out there, it’s hard to be sure you’re making the right choice if you only have a vague idea of what everything means.
If you’re struggling to tell your LVR from your LMI, don’t worry – Bluestone is here to help! We’ve put together an in-depth list of home loan terms and features so you can compare with confidence and find the right loan for you.
Cash out is a form of refinancing where you draw against the equity in your home to get another loan. This loan is paid to you in cash.
When you apply for cash out, your lender may ask you to prove how you are going to spend the money. Commonly, borrowers use cash out funds to invest in other things like shares, to pay off other debts or to cover the cost of things like renovations.
Bluestone offers a cash out option of up to $500,000 for eligible borrowers on Prime with enough equity in their home. This lets you refinance your existing home loan and take part of your refinancing in cash for your personal use.
Cash out can be a way to consolidate debts and pay for one-off purchases, but it’s important to take care that you are still able to meet your repayments, especially as they will be higher once you have added more to your home loan.
Fixed rate vs. variable rate
It’s important to understand the difference between a fixed rate and a variable rate when shopping around for a home loan.
A fixed rate is when the loan will have a guaranteed interest rate for a set period of time, which could be anything between one and ten years. While your interest rate is fixed, your repayments will also stay the same, which is useful for budgeting and managing your money. The potential downsides to a fixed-rate loan are:
- If the variable interest rates drop, your payments will remain the same.
- You may incur a penalty if you pay off your loan early.
- There could be limits on making extra repayments to save on interest.
With a variable-rate loan, the amount of interest paid throughout the loan fluctuates depending on the funding costs of your lender. There are a number of different factors that influence the interest rate on your home loan and you could find yourself facing higher repayments if your interest rate rises.
On the plus side, a variable-rate loan can offer more financial flexibility than a fixed rate, often featuring more flexible repayment terms. With some variable-rate loans, you can make additional repayments and access them through a redraw facility. You may also be able to access other features like an offset account.
Full doc vs alt doc
When you apply for a home loan, you need to provide supporting documents to prove your income. If you’re in traditional full-time employment and have been for a while, this is usually fairly straightforward. However, if you’re self-employed, it may be harder to verify your income.
Different types of loans require different documentation – this also varies between lenders.
- Full doc – for most lenders this is two years of tax returns plus a notice of assessment for self-employed customers.
- Alt doc – this term is often used interchangeably with low doc, but they both mean the same. Alt doc is an alternative way to prove your income if you’re self-employed. With an alt doc loan you can usually prove your income through bank statements, business activity statements, or an accountant’s letter.
While most banks will only lend to people who can provide full documentation, other lenders like Bluestone are willing to lend to borrowers who can provide alternative documentation. This makes it easier for self-employed borrowers who may otherwise find it difficult to get finance.
An interest-only period is a set period of time where you only pay the interest on your loan. While you’ll pay less for this time period, you’re not repaying any of the principal (the amount you’ve borrowed). This means your loan amount won’t reduce and you’ll continue to be charged interest, so you’ll end up paying more over the life of your loan.
An interest-only home loan can be a good option in some circumstances, for example for property investors who may be able to claim higher tax deductions or for those looking for a short term loan they’re planning to pay off quickly, like a bridging loan. The downside is that when your interest-only term is over, you’ll have less time to pay off your principal amount, so your repayments will be higher. It’s a good idea to think long-term – will the benefits of your interest-only loan outweigh the additional costs down the road?
Lender mortgage insurance (LMI)
Lender mortgage insurance (LMI) protects the lender in the event that you can’t repay your loan and your property doesn’t have enough value to cover the remaining balance and any costs. This kind of insurance is often required when you have less than 20% of the deposit upfront. LMI is usually charged as a one-off fee that’s added to your home loan.
The conditions around LMI vary between different lenders. For example, at Bluestone, we don’t require lender mortgage insurance on our loans. This can help you save money by avoiding a large expense at the start of your loan (except in the case where a risk fee is required).
Line of credit
A line of credit is a way to get access to a pre-approved amount of credit on your home loan without the need to apply for a new loan. You can withdraw this at any time, for any reason and you will only pay interest on what you use.
Line of credit loans are interest only and you can choose to repay the interest in your regular monthly payments or allow the interest to be added to your loan balance (up to the approved amount of your line of credit), a process known as capitalisation.
A home loan with a line of credit can be an option for those who want to have extra funds available to cover seasonal income fluctuations, one-off purchases or investment opportunities. At Bluestone we offer eligible Prime borrowers the option to draw up to $500,000 over the life of their loan.
Loan to value ratio (LVR)
Loan to value ratio (LVR) is the percentage of the total value of the property that you are borrowing. LVR is important to know about because it can influence the type of home loan you can get as well as the rate you’ll pay.
Different lenders have different LVR limits. Some set their limits at 80%, others as high as 95%. The higher the LVR, the smaller the deposit you need, but with a higher LVR you’ll need to borrow a larger amount, so you will end up paying more interest over the life of your loan.
With many lenders, if your LVR is higher than 80% you will need to pay LMI, because you’re considered more of a risk. LMI can add up to thousands of dollars, so many borrowers choose to wait until they have at least a 20% deposit, or find a lender that doesn’t charge LMI – like Bluestone.
An offset account is like a regular bank account that’s linked to your home loan. When interest is calculated, the balance of this account is offset against the amount you owe on your home loan, resulting in a lower interest charge. When you have an offset account you can have your salary and savings paid directly into it and reduce the amount of interest you pay on your home loan.
Many borrowers choose to use an offset account to store their savings, instead of a savings account. This is largely due to the fact that the interest you pay on your home loan is often higher than the interest you receive by using a savings account.
Pre-approval (sometimes called conditional approval) is where a lender agrees to give you a home loan before you make a formal application. This means you can search for a property with a clear idea of your budget and a degree of confidence that you will be able to fund your purchase.
Pre-approval doesn’t mean you are guaranteed to get a home loan no matter what. If your circumstances change, or if there are any changes to government regulations between getting pre-approval and applying for your home loan, your application could still be declined.
A redraw facility gives you the option to withdraw any extra principal repayments that you have paid towards your home loan. Having money in your redraw can be useful if you hit extra expenses. The amount in your redraw facility also reduces your interest, so you can potentially save money over the life of your loan.
Before deciding if a redraw facility is right for you, it may be worth considering if there are other ways you could use your surplus funds to generate better returns or suit your needs.
A risk fee is a one-off fee that’s designed to protect the lender if you are considered a higher risk customer. This may be the case if you have a history of bad credit, or you don’t have enough documentation to prove your income.
A risk fee is different from LMI in that it’s a fee charged by the lender, not a separate insurance premium. The risk fee is usually added to your home loan balance, so you don’t have to worry about paying it upfront, but your loan repayments will be higher.
At Bluestone, we don’t charge a risk fee on our Prime loans, but we do for our Near Prime, Specialist and Specialist+ loans.