Residential Finance
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Further Reading
Basic Variable
Rate Products
Typically a low featured lending product which may have limitations
on the number of repayment options and may not facilitate
direct credit of salaries into the loan account. The benefit
of this type of product is that they usually offer the lowest
available interest rates.
Featured
Variable Rate Products
These variable rate products will usually have a range of features and may not place restrictions on how the loan can be transacted. There may be a premium interest rate that will apply in comparison to the Basic Variable Rate product.
Fixed Rate Products
Financiers offer products where the interest rate charged on the loan is fixed for a period between one and fifteen (15) years. There are typically a number of restrictions that apply to the transacting of these loan types. At the expiration of this term, the loan can be rolled over into another fixed term or it will otherwise default to a featured variable rate loan.
All-in-One/Offset Account Loan Products
These types of products combine a home loan account with traditional savings or other deposit accounts. Typically, they allow the direct payment of a salary into either the actual loan account or a linked savings account with the effect being that all proceeds are offset against the principal balance of the loan. The benefit is to potentially reduce the amount of interest charged on the loan on a daily basis. There are many subtle variations in these products available in the market.
Line of Credit
This is effectively an 'overdraft' facility where a financier will extend a credit facility of up to 75-85% of the valuation of the property offered as security. It is typically an interest only repayment facility, however some financiers will want to see a regular principal and interest repayment stream. A cheque facility is usually attached to the loan that allows the borrower to instantly access an amount up to the facility limit. The premium in interest rate charged on this facility may be offset by the interest savings made. Applicants for this product are often required to have a higher annual gross income, than average applicants.
Reverse
Mortgage Products
This is typically only available to retirees who are Asset
Rich and Income Poor. It allows them access a limited amount
of equity in their property (usually no more than 30-40%).
The borrower's interest capitalises into the remaining Equity
in their property – effectively helping to fund their retirement.
When all borrowing parties are deceased, the lender will sell
the property and distribute any remaining equity to their
estate. Generally the borrower and their estate is protected
against the situation where the amount owed exceeds the property
value.
Commercial
Finance Product Types Explained
There are a number of considerations that need to be made when entering into a commercial debt structure. These include the length or term of the borrowing, the purpose and the relative risk that the new debt structure will impose on the cash flow of the business. Included below is a listing and description of the more common types of facilities:
Overdraft Facility
Typically a more short-term type facility to meet business working capital requirements. It is a flexible facility type with no set term or repayment arrangements. Servicing is interest only with a variable interest rate charging interest daily on the balance of funds used.
Term Loans/Fully Drawn Advance
Typically a longer-term facility for capital expenditure or project development but can also be part of a balanced working capital strategy. Servicing structure can be either interest only or principal and interest with a fixed or variable interest rate. The term of the facility may range from less than a year to more than ten years. The split between servicing structure will often be contingent upon the risk profile of the borrower. For a higher risk borrowing a lender may want to set a higher proportion of amortising (principal & interest) repayment structure.
Commercial Bill Facility
Typically a short-term facility for large borrowing amounts. A Bill is linked to the market cash rates and the borrower's commitment is to pay the face value of the bill at the end of the term. It is common for the facility to be renewed for a number of years at the lender's discretion. They are typically a variable interest rate but can be arranged at fixed or capped interest rates.
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