Frequently Asked Questions
Should I get a Line of Credit or an Offset Account and what is the difference between them?
Answer: There is no difference with the end result between the two types of accounts, if operated correctly.
However, caution needs to be exercised with a Line of Credit account as it can easily get out of hand as no minimum monthly repayment is required, as long as the debit limit is not fully drawn. Where as, with an offset account the minimum repayment will come from the offset account to the loan. This way at least you are maintaining regular payments.
How Does the Bank get their money to pay into the loan?
Answer: Banks prefer to arrange an automatic direct debit from an account prior to settling on the loan. The exception is a line of credit account, where you are required to make deposits, however these can also be arranged automatically if required. This is organised when your mortgage documents are signed as part of this paperwork.
What purchasing costs have to be paid up front that cannot be covered by the loan?
Answer: All purchasing costs can ultimately be covered by your loan. However, you will need to pay, prior to obtaining loan funds, Fees for Pest and Building Inspection and some solicitors costs and possibly Government Transfer Duty. These can then be reimbursed to you when the loan is settled and funds are released.
What is the difference between Interest Only and Principal and Interest Loans?
Answer: With Interest Only loans you are in control of the repayment amount. You only pay interest on the amount drawn down, so the more money you can pay into the loan then your repayments reduce accordingly. Most Property Investors like this type of loan for their investment properties because it easy for the Tax Office to see genuine tax deductible transactions.
Principal and Interest is a set and forget type of loan. In the early stages of repaying the loan the lender takes a higher percentage of interest in the repayments and less on the principal. This means that the lender gets their interest repayments earlier. It is not until about half way through the loan term that large chunks of principal are deduced. However increasing the frequency or loan repayment amount can still save thousands of dollars of interest paid because you pay the loan off earlier.