Mortgage Loan Guide

Mortgage loans can be split into 3 basic types:

Full Doc

Means that you can provide the lender with documentation regarding your income that gives the lender a degree of certainty about your income.

Means that you cannot supply the lender with sufficiently documented information regarding your income.
Also called self certified loans, as you usually declare that your income is sufficient.

Means that your credit history is impaired.

The interest rate charged can change over the life of the mortgage. They can either be principal and interest loans (P&I) or interest only loans (IO).
With a P&I loan each loan repayment not only pays the interest due, but also some of the principal, so that at the end of the life of the loan, it is fully paid off.
With an IO loan, you only pay the interest, so the loan amount does not reduce. If a variable rate loan is IO, the IO period is usually limited to a number of years.

The interest rate cannot be changed for the amount of time it has been fixed for.
At the end of this fixed period, you will need to decide whether to have a new fixed rate or a variable rate.
Fixed rate loans can be P&I or IO, but are typically P&I.

Sometimes called line of credit or equity loans, these are variable rate loans where a borrowing limit is set by the lender.
You only need to make repayments so that the loan remains below the limit.
If you do not make repayments over and above the interest due, the loan amount will not reduce.
They are almost always IO loans and can usually be used like a bank account.

Lenders market a variety of products each with their own particular characteristics, which may or may not be important to you.

We have given what we consider the main features of each product.

If the code (i.e. Split, LVR, IO, Prepay, Redraw, Offset) does not appear it means that either they are not available or the lender has not supplied details.

Line of credit loans do not have Prepay, Redraw and Offset as these are assumed, given the revolving nature of the product.

They are:

Means you can combine one product with another from the same provider, important especially if you want to mix fixed and floating rate products

Stands for interest only. If a number is given (e.g. IO 5 yrs) that means that 5 years is the longest that you can have an IO period. Where IO does not appear, it means the product does not allow IO.

This means that you can pay over and above the scheduled amount due. Variable interest rate products normally allow you to do this. Fixed rate products either do not allow this or restrict prepayments (e.g. $20,000 per annum).

This means that, if you have prepaid over and above what you were scheduled to, you can redraw those prepayments. Variable interest rate products normally allow you to do this. Fixed rate products either do not allow this or restrict redraws.

Some products allow the interest you earn on a linked account to be credited against the interest due on the mortgage loan. With a mortgage loan that allows prepays and redraws, you can achieve the same (or better) effect by using the funds to reduce your mortgage.

Lenders also market products that have low “introductory” rates that revert to another rate once the introductory period is over. Be careful to understand what the future rate may be.

Lenders have different ways of working out how much they will lend you.

It is a combination of the value of the property and how much income you have.

Lenders' marketing material will sometimes state that they will lend to a certain "LVR" percentage.

LVR stands for “loan to value ratio”. Multiplying either (depending on the lender) the valuation or purchase price of a property by the percetage wil give the most the lender will loan against the security of the property. LVRs of 95% and 100% were common before the "financail crisis", but are less so now. Most lenders are more comfortable with an LVR of 80% to 90%.

In any case, above a certain LVR, most lenders will require you pay loan mortgage insurance (LMI) as an upfront amount, which is usually added to the loan amount. For full doc loans (i.e. where you supply evidence of your income), LMI is usually required for LVRs above 80%. For low doc loans (i.e. where you self certify your income), LMI is usually required above 60%.

About the other factor that determines possible mortgage size, how much you earn, lenders are less transparent.

Fees

There are a multitude of fees that can be charged, either at the start (e.g. settlement fees, security fees, application fees etc) or ongoing (account fees, redraw fees, switch fees).

These should be evaluated in the light of your particular circumstances and the interest rate charged (e.g. a $10 monthly account fee is equivalent to 0.05% on a $240,000 loan).

Other Features