Loan Repayment Options
There are many different ways to repay your home loan. Lenders who bid on your Fundit loan auction can structure a loan to suit you with one or a mix of the following options:
Regular minimum repayments
If you need certainty and affordability in your regular loan repayments you can opt for a fixed rate loan where the repayments are the same each month. You're able to include the loan repayment in your personal budget and you'll know exactly what the monthly payment will be. This might suit a younger couple with a set income and regular expenses, who need to know exactly what the loan repayments will be each month.
Lump sum repayments
If you want to make lump sum repayments you could opt for a floating rate loan. This acts more like a secured overdraft where you can deposit larger sums of money either on a regular basis or periodically as savings or spare cash become available. This is good if you receive bonuses from work or have a high disposable income. On a floating rate loan there is normally no penalty for lump sum repayments.
With fixed rate loans, lenders often allow you to make small adjustments to your repayments, such as repaying up to 5% of the loan principal in any 12 month period. By increasing your regular repayments by even a small amount, you can greatly reduce the term of the loan and the total amount of interest you pay.
If you create a buffer between your loan limit and your loan balance you may be able to take an interest payment holiday. To create this buffer on a standard reducing loan you must have made extra lump sum repayments early in the mortgage period.
Instead of paying your regular monthly repayments the lender capitalises missed payments (of principal and interest) during the ‘holiday' back into the loan using up some or all of the buffer.
The duration of the repayment holiday will be calculated by the lender as the buffer amount divided by the regular payment amount. For example, say your loan limit is $100,000 and through lump sum repayments you have a loan balance of $95,000 - your buffer is $5000. If your regular monthly repayment amount is $1000 you may be able to request a repayment holiday of up to five months, but it would be sensible to retain some of the buffer in case you need that flexibility down the track.
If you have created a buffer between your loan limit and loan balance you can redraw on an ad hoc basis funds that have been repaid, as long as they don't exceed the loan limit. You will need to be on a floating rate to be able to do this as fixed interest rate loans don't offer the ability to redraw. Any additional repayment made on a fixed interest rate loan stays committed to the loan account and cannot be redrawn.
There are many reasons why you may wish to redraw funds but remember that any extra funds that are redrawn have not reduced the loan principal.
Interest only periods
These are often used by people who want to reduce the amount of their regular loan repayment to the absolute minimum by removing the need to pay principal. The amount of the principal that you owe at the end of the loan term will be the same as at the start and this is the amount that must be repaid to, or refinanced with, the lender.
This may suit someone entering into a short-term project like the purchase, renovation and sale of an investment property who is expecting to repay all the principal in a single payment when they sell the property. Or someone who is building with a view to moving into the house when it's completed and who is paying rent elsewhere while the house is built. Their costs will be high so they won't want to be repaying principal during the initial loan period.
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