Types of bank loans

With an array of bank loans from different lending institutions, how are you meant to be sure that you are picking the right loan with the best features for your needs? Here is a brief description of some of the loans that are available;

Fixed Loans

This type of loan, as the title suggests has a fixed rate of interest, say 1, 2, 3 or 5 years. They are however limited in allowing extra repayments that may be paid; in fact some institutions will not allow any extra payments to be made at all. A fixed loan can either be both Principal and interest or Interest only. Interest only is often used for investment properties. People who borrow this type of loan from financial institutions should be aware that if they decide to pay out the loan before its term, there may be extra penalties.

No Frills Loans / Basic Loan

This type of loan normally has a lower interest rate and some financial institutions will usually charge a monthly account keeping fee. No frills loan is suitable to borrowers who are simply chasing a lower interest rate and who may not have a surplus income. The downside of these discount loans is less flexibility and fewer features.

Offset Account

Traditionally, this is a savings account where the amount of savings offsets the interest on your home loan. For example, if you have a $150,000 mortgage and $50,000 in your savings 100% offset account, interest is calculated on only $100,000 while those savings are held. This type of loan suits borrowers who have surplus income. An offset account can help reduce your tax by offsetting taxable income from deposit accounts against interest paid in after-tax dollars on mortgage repayments.

Equity Loans

This is a variable-rate loan that will allow borrowers to access the equity in their homes. This is an extremely convenient and flexible loan option. In some cases, a borrower’s salary can be credited to this account to save interest. This account can be accessed through a borrower’s ATM card. Equity loans require the borrower to have a disciplined approach to money management but can be a very effective way to save.

Portability

Portability allows you to take your loan from home to home without having to refinance. This saves application and legal fees, but the loan amount usually has to be the same or lower than the one for your current property.

Redraw

This is a loan feature more than a loan product. A redraw facility is simply being able to redraw the surplus loan repayments you have made. The redraw facility often includes a minimum amount and a transaction fee.