The information below is designed to highlight some of the potential benefits, risks, impacts and costs associated with some borrowing options. It is not an exhaustive list.
Financing Options does not provide legal, financial nor taxation advice and therefore recommends that you seek independent advice from suitably experienced and qualified practitioners regarding these borrowing options in relation to your specific circumstances prior to acting on any information contained herein.
ASIC’s Moneysmart website provides information about borrowing which can be found at https://moneysmart.gov.au/home-loans and https://moneysmart.gov.au/home-loans/choosing-a-home-loan
Variable Interest Rate
Potential Benefits
You can usually make unlimited additional repayments, have access to Redraw (subject to bank approval), have access to 100% Offset from most lenders with specific variable rate products, be able to fully repay the loan without restriction nor penalty and (for some variable products) be able to split and/or switch the loan into multiple portions with the same or different interest rate &/or repayment types.
Potential Risks
Interest rates will increase at some point and it is very difficult to predict by how much and when. It can be harder to budget for the future as you can’t be sure how interest rates might move.
Potential Impacts
Adverse impact on cash flow if the interest rate increases.
Potential Cost
Your repayments may increase if the interest rate increases. The amount will depend on how much the variable interest rate increases by.
Fixed Interest Rate
Potential Benefits
Can make budgeting easier as you know what your repayments will be for the duration of the fixed rate period.
Fewer loan features could cost you less in fees.
Potential Risks
Interest rates can decrease at some point and it is very difficult to predict by how much and when. You won’t get the benefit if interest rates decrease.
Most lenders limit how much extra you can pay during the fixed term without breaching the terms of the fixed rate loan and possibly incurring a penalty known as an Early Repayment Adjustment (ERA) as a result.
Most lenders do not provide 100% Offset on loans with a fixed interest rate. A small number of lenders do offer it though.
Potential Impacts
You could incur an ERA if you need or want to pay more that is allowed, try to change the loan and/or fully repay it prior to expiry of the fixed term.
Potential Cost
The amount of Early Repayment Adjustment is unascertainable
Interest-Only Repayments
Potential Benefits
Lower repayments during the Interest-Only period could help reduce your outgoing cash which could be used to pay off more expensive debts or to build a contingency buffer.
May be useful for short term loans such as bridging finance.
If you’re an investor, there may be potential tax benefits. Please check with your Tax Adviser first.
Potential Risks
The interest rate could be higher than on a loan with Principal & Interest repayments, meaning that you pay more interest.
You pay nothing off the principal during the Interest-Only period so the amount borrowed doesn’t reduce.
Your repayments will increase after the Interest-Only period, which may be less affordable as the period remaining to fully repay the debt is shorter than if you had paid Principal & Interest from commencement of the loan.
If your property doesn’t increase in value during the Interest-Only period, you won’t build up any equity. This can put you at risk if there’s a market downturn or your circumstances change and you want/need to sell.
Inability to extend the Interest-Only period if the lender’s credit requirements, your personal circumstances and/or the property value have changed by the time you seek an extension.
Potential Impacts
Adverse impact on cash flow at the end of the Interest-Only period.
Negative equity if your property decreases in value.
Potential Costs
Additional interest paid over the life of the loan because of the higher interest rate associated with Interest-Only repayments and the loan balance has remained higher throughout the Interest-Only period than it would have been if you had made Principal & Interest repayments.
High Loan-to-Value Ratio (LVR)
Potential Benefits
Ability to purchase a property and stop paying rent earlier than if you had to save a 20% deposit.
Ability to maximise potential tax deductions if the borrowings are for investment purposes (please seek advice from your Tax Accountant regarding your individual circumstances).
Potential Risks
Should the property decrease in value, you could end up with negative equity.
Mortgage Insurers also need to assess/approve your application meaning that whilst the lender might be comfortable with the proposal, the Mortgage Insurer might not approve the application.
Potential Impacts
Positive impact on your cash position initially as you need to contribute less, leaving a bigger contingency buffer.
Negative impact over the longer term as you may incur a hefty Mortgage Insurance premium and/or pay more interest because of the larger amount borrowed.
Potential Cost
You may have to pay Lenders Mortgage Insurance / Low Deposit Fee / Risk Fee, which protects the lender, not you. The amount payable could be significant.
Capitalising the Lenders Mortgage Insurance Premium / Low Deposit Fee (i.e. adding it to the amount borrowed) means that you will pay interest on this fee over the term of the loan.
Some lenders charge higher interest rates for loans with high LVRs.
Low Documentation / Alternative Documentation Loan
Potential Benefits
Potentially easier way to prove your income, particularly for self-employed borrowers who have not yet completed and lodged their tax returns.
Potential Risks
Lenders can charge a higher interest rate and/or additional fees for loans involving reduced income documentation. They sometimes require a larger deposit.
Potential Impacts
You might have to contribute a larger deposit than if you established a loan with full income documentation. You might pay more in fees and/or interest.
Potential Cost
You may end up paying more due to the higher interest rate and/or fees.
Being a Co-Borrower
Potential Benefits
Potential ability to borrow more than you could if borrowing by yourself.
Potential Risks
Each person is responsible for the whole loan, not just your share (joint and several liability), so if one or more of the other borrowers doesn’t/don’t pay, you are still responsible for the full amount.
Potential Impacts
You might have to make the full loan repayments if the other borrower/s won’t or can’t.
If you and/or the other borrower/s won’t or can’t repay the loan, you could lose your property.
Potential Cost
Unascertainable
Being a Guarantor
Potential Benefits
Ability to help a family member borrow funds with a smaller deposit than normally required or to access equity in a property you jointly own.
Potential Risks
You are legally responsible for repaying the loan if the borrower/s can’t or won’t.
Potential Impacts
If the borrower/s can’t or won’t repay the loan and you’re not able to repay it, you could lose your property.
Potential Cost
Unascertainable
Loan Term
Potential Benefits
A longer loan term requires lower minimum repayments (than a shorter loan term) which could reduce pressure on cash flow, particularly during a period of reduced income or higher expenses (e.g maternity leave).
As interest on home loans is calculated daily, a shorter loan term usually reduces the overall amount of interest paid over the loan term, building equity in the property faster.
An option may be to take a longer loan term but make higher repayments to repay it ahead of schedule (say if it was a variable rate loan). If you’re ahead of schedule in repayments, this could potentially allow you to pause your repayments during a period of low cash flow or pay less for a short period or use redraw (if available) to help with cash flow. These are usually subject to approval by the lender.
Potential Risks
Taking a shorter loan term with higher repayments can make it harder to meet your commitments during a period of reduced income or higher expenses, which could result in falling behind (in arrears) and potentially breaching the terms of the mortgage.
Taking a longer loan term and only paying the minimum will incur more interest than if you had taken a shorter loan term or made extra/higher repayments.
Potential Impacts
Potential financial hardship if you can’t meet your repayments.
Potential Cost
A shorter loan term (for example, 20 years) means higher repayments but you’ll pay less in interest.
A longer loan term (for example, 30 years) means lower repayments but you’ll pay more in interest.
Only Considering a Specific or Client-Preferred Lender
Potential Benefits
Convenience. Reduced costs (e.g. Titles Office Mortgage Registration fees) if the lender already holds a mortgage over your property.
Potential Risks
Other lenders may have better suited products, lower interest rates and/or fees, a more accommodating credit policy or more convenient ways of banking such as more branches, fee free ATMs, better electronic banking facilities (e.g. App) or simply faster application processing times.
Some lenders have access to more historical banking information such as minor over-drawings, if you already bank with them, that can hinder your ability to obtain approval for a loan whereas the lender may not have (nor ask for) this historical information from new clients making it easier for new clients to obtain approval.
Potential Impacts
Additional costs incurred as the specific lender may charge more than some others.
More difficult or longer approval process due to the additional historical information they hold, which could impact your ability to meet finance approval and/or settlement deadlines if purchasing a property.
Whilst one would expect to incur additional costs to change lenders, from time to time some lenders offer cash payments/incentives which usually cover (possibly exceed) the costs associated with changing lenders.
Potential Cost
Unascertainable