Facts on Residential Loans - Addisons Advisory Group

Facts on Residential Loans

Get expert investment loan advice from Addisons Advisory Group

Interest Only (IO)

You repay only the interest on the principal during the term of the loan; therefore, repayments are lower than with a standard principal and interest loan. At the end of the interest only period - usually one to five years - you have the option of making Principal and Interest repayments over the remaining term of the loan.

Many investors will continue to ‘roll-over’ the interest only period whilst they have other home/personal loans to repay. We would advise you to discuss what is most suitable for your circumstances with your accountant.

Reasons why we like IO loans for investment property:

  • Lowers repayments initially so you have more money to pay down other debts or renovate/improve the property.  
  • Cuts the cost of buying a residential investment property in the short-term, which could allow you to make greater contributions to your principal place of residence.

Things to be aware of:

  • There will be sudden increase in repayments at the end of the Interest Only period and the loan converts to Principal and Interest repayments.

Standard Variable Rate (SVR)

Standard variable rate loans are predominately used for purchasing owner occupied or investment properties where residential property is available as security. This is a flexible loan with a low upfront fee and a competitive variable interest rate. This loan also allows you to benefit from market rates when they are lower. Most banks now offer discounts on their SVR of between 0.5% - 1.00% through their professional packages (depending on the level of borrowing).

Reasons why we like SVR loans for investment property:

  • Repayments fall when official interest rates fall
  • Standard variable loans offer flexibility and additional features, such as the ability to make additional payments, a redraw facility (take out any extra money that you have put in) and low introductory or honeymoon rates
  • Allows careful borrowers to pay off the mortgage quickly by not having any penalty for advance payouts
  • Ongoing lower interest rates under the professional package

Things to be aware of:

  • Repayments rise when official interest rates rise
  • Higher annual fees (if Professional Package is applicable)

Line of Credit (LOC)

Consolidate your finances with an all-in-one account that puts you in control of your equity. By combining your Home Loan, daily spending and savings, the Line of Credit enables you to manage your financial affairs, so you can pay your loan off faster. Also gives the property investor flexibility to take advantage of opportunities as they arise. LOC loans are interest only with the ability to repay or redraw up to the limit or down to $0 at any time.

Reasons why we like LOC loans for investment property:

  • Can use the money you need and pay it back when you can
  • Offers flexibility
  • Able to take advantage of investment opportunities when they arise

Things to be aware of:

  • Possibly reduces equity in your residential property
  • Usually slightly higher interest rates
  • Need to be disciplined to make principal payments regularly
  • Can be very expensive if not disciplined

Fixed Rate (Principal and Interest or Interest Only) loans

A fixed rate loan is a loan that has a fixed interest rate and therefore fixed loan repayments. The time period of these loans can vary, but you can usually “lock in” your repayments for between 1-5 years. Although the fixed rate period may be 3 years, the total length of the loan itself may be 25 or 30 years. At the end of the fixed loan period you can decide whether to fix the loan again for another period of time at the current market rates or convert the loan to a variable interest rate for the remaining time left of the loan.

Reasons why we like Fixed Rate loans for investment property: 

  • Repayments do not rise if the official interest rate rises
  • Provides peace of mind for borrowers concerned about rate rises
  • Allows more precise budgeting

Things to be aware of:

  • Repayments do not fall if rates fall
  • Allows only limited additional payments
  • Penalises early payout of the loan if the fixed rate has fallen

Loan Features to Consider:  

1. Offset account

This is a separate account that is attached to a loan account. The balance of the offset account is deducted from the balance owing on the loan account when calculating the daily interest charge. For example, a borrower with a $300,000 mortgage and $10,000 in an offset account will only be charged interest on $290,000 and not $300,000. Some products do not offer 100% offset, while others may require a minimum balance in the account before the offset applies.

2. Redraw facility

Allows borrowers to access extra payments that have been made. This money can then be used for a variety of purposes including a holiday, furniture, or a car. Some lenders have a minimum redraw amount and may also charge a fee per redraw.

3. Top-up

Allows a borrower to increase the limit on a home loan, using the equity in your property for other needs (e.g. renovations).

4. Additional repayments

These are payments that you make which are above the standard repayment for your loan - for example, a $400,000 loan with a 6% interest rate requires a monthly repayment of $2,399. If you want to pay the loan off quickly and reduce the interest bill, you might make monthly payments of $2,800, which would include an extra repayment of $401.

5. Direct salary credit

Allows your salary to be paid directly into your home loan account. This is an advantage if you are not a disciplined saver.

6. Repayment holiday

This feature offers a complete holiday from repayments or a period of reduced repayments. This can be especially useful during career changes or breaks such as maternity leave.

7. Switch to fixed rate

Allows the borrower to switch from a variable to a fixed rate loan.

8. Loan portability

Allows you to take an existing loan to a different property when you move (saves you on Mortgage Stamp Duty).

Preferred Lending Partners

Please note we have access to other funders if required.

* Please note: Addisons Advisory Group are not financial advisers or accountants, and therefore cannot advise you on the appropriateness of property investment to your overall financial objectives or goals. However If you (or your third party adviser, e.g. accountant financial planner bank etc.) deem property to be appropriate to your financial situation and objectives, then we will ensure that the property options are carefully researched and analysed. Please note that much of our business emanates from direct referrals by our existing clients and professional partners.