What determines the loan terms that I get?
When a lender offers you a rate, there are several factors which determine what rate you get:
Product Margin Rate: This is the margin rate applied to a specific loan product and is determined by the bank’s risk team. It is the reason why different loan types have different rates (i.e. secured, unsecured, mortgages, asset finance etc.)
The Lenders cost to acquire funds: This is the lender’s cost to source the funds where they in turn, offer these funds to clients. An example is the RBA rate being the cost of funds for the Big 4 banks to acquire money and which in turn, trickles down to other lenders in the market via Warehouse Funding. (i.e. non-banks may source their funds from the Big 4 at a higher cost then the RBA, which is reflective in the rates offered by the non-bank lender)
Customer Risk Margin Rate: This is the margin rate applied based on the risk level of a client. Items that may effect this include the amount of lending based on the security available and the strength of the client overall such as how many times their income can cover the proposed debt etc.
Line Fees: This is the cost for the lender to keep your funds in reserve and are more applicable for facilities such as Overdrafts.
Ultimately, when a lender offers you a loan, they are buying your risk, which is reflected by the rate you are offered.
Interest Only VS Principal and Interest
Interest Only terms are generally geared towards investment properties. When a lender assess your loan to offer Interest Only terms, loan affordability must be met for the remaining P&I term. An example is that if you attain a 30 year loan term with a 5 year IO period, loan affordability must be met based on a 25 year P&I term barring niche products such as commercial Lease Document Loans.
When attaining a residential mortgage, the standard maximum loan term is 30 years. Your loan term may be reduced based on:
Preservation Age of Lending: The age where a lender expects a client to retire is at the age of 75. Should a loan term exceed the client reaching the age of 75, either a shorter loan term is offered subject to loan affordability, or an ‘Exit Strategy’ is required on how a client will clear the debt when they reach the age of 75. Examples include sale of assets, superannuation balances etc.
Security offered: While more applicable for commercial loans due to the more diverse property types in this segment, this is also reflected in personal debt. Examples include car loans generally being written over a maximum 7 years in line with depreciation etc.
At Loan Central Hub, we are experts in matching lender products tailored to your financial situation, allowing you to get the best loan product in the market for your financial requirements efficiently. Through our expertise, we are able to ensure that you navigate finance with confidence. We understand that finance can be a daunting concept and we are here to help you throughout your finance journey.
