Lending & Finance

Obtaining funding for requirements

There are times in your life that money may be required to do the things you would like to do. In these situations, you will need to look for ways that you can borrow money.

When a lender provides money to an individual or a business, it is done so on trust that the recipient will repay the money that has been borrowed plus any other amounts as agreed in the loan agreement (such as interest rate). In most cases there is some form of guarantee or security attached for providing a loan or finance.  

Loan arrangements

Loans are normally repaid over a period of time, by periodical instalments, so that it is fully paid on terms agreed between the lender and you as the borrower. 

Lending and financing arrangements generally have three components:
 

• the principal amount borrowed amount, 
• interest and charges to be paid (in addition to the loan amount)
• the terms of the loan, including the period in which it is to be repaid.

Types of Loans

There are a number of different types of loans available in Australia. Selecting a loan appropriate for your needs will depend on your specific circumstances and requirements. 

Different types of loans also have various features that appeal to different borrowers; including how much you are prepared to pay and agree to the terms of the lender. 

Different loans also have different forms of security required by the lender, as outlined below.  
 

• Secured Loans

These loans are backed by an asset (i.e. something you own), which is used as collateral that lender could sell to get their money back if you cannot repay your loan. 

Secured loans require you to pledge specified assets, against money that is being lent to you; which are used as security by the lender. This security may be in the form of assets such as money, bonds, shares or a physical item such as a house, land, a car or equipment.

Examples of secured loans include home loans, construction loans, investment loans and loans to purchase equipment. 
 

• Unsecured Loans

These loans do not require an asset to be used as collateral, as security against money you borrow; which is usually provided by a lender based on factors such as your credit scores or whether you have an established relationship with the lender.  

Unsecured loans can be used for a range of purposes; such as everyday purchases, repairs, buying furniture, home improvements, travel, holidays, personal and business expenses. 

Examples of unsecured loans include credit cards, personal loans, student loans and overdrafts. 
 

• Advantages of Secured loans vs Unsecured Loans

The main advantages of an unsecured is that you don't have to leverage any of your assets to secure a loan and approvals can be completed faster as there are no assets to value. 

The main advantages of a secured loan is that the interest rate is usually much lower than the interest rate on unsecured loans, as the lender has less risk due to the security they hold over the loan, therefore the amount you can borrow through a secured loan can be much higher than an unsecured loans. 

Considerations of Lenders 

Ultimately it is the lender that has the power over whether they will provide you with a lending or financing facility. 

Factors considered by a lender will include things such as the amount they are prepared to lend to you plus their view of the associated risks including your capacity to repay the loan.

Considerations of Borrowers

Ultimately it is up to you as the borrower to determine whether you will accept the terms offered by the lender. 

Factors you will need to consider will include things such as whether the terms are acceptable (including the interest charges applied, the period of the loan repayment and security required. 

Eligibility for a Loan

The criteria applied by lenders can vary based on the type of loan that is being provided to you. 

Factors that could be considered by a lender providing finance to you, include: 
 

• stability of employment or regularity of consistent income 
• previous credit history, including credit score
• age, comparing your earning-years to the period of the loan
• relationship or history with the lender
• debt to income ratio on the asset being purchased 
• ability to meet repayments
• security you are providing as collateral
• deposit or down-payment, to the amount being borrowed.

Home Loan Options to Finance Your Home

One of the most common reasons individuals borrow money is for the purchase of a home (which could be a home for you to live in or a home that you wish to buy to generate income or as an investment). 

If a home loan relates to the purchase of an investment property, there may tax implications in the type of loan that you select, so it would be worthwhile speaking to a tax consultant before deciding which type of home loan would be best suited to your circumstances.  

The type of loans usually available for the purchase of a home are set out in the notes below. 

Principal-&-Interest vs. Interest-Only Home Loans

A principal and interest loan is one where your regular payments cover the interest on the loan as well as reducing the principal amount borrowed. These loans are usually set up so that you will pay it off over a longer period of time (such as 20 to 30 years). 

Interest-only loans are where you agree with the lender to only pay the interest on the loan. With these types of loans the principal is usually paid at the end of the agreed term of the loan arrangement. These agreements will be for a specific amount of time (usually 1 to 5 years) and will usually mean that your repayments are lower which can be helpful during periods of uncertainty in your cashflow. 

A shorter loan term (such as 5 to 10 years) will mean your loan is paid off sooner however your repayments will be higher. An interest-only loan may help you get into your first home or purchase an investment, however it means it may potentially be longer until it is paid off. 

Everyone's circumstances are different and which type of loan is best for you will vary depending on your situation.

Fixed vs. Variable Interest Loans

A fixed home loan means that you lock in a particular interest rate for a specific period of time (usually 1 to 5 years). If you fix your interest rate it means that your repayment amounts will not change and if interest rates do increase you'll gain the benefits of having a low interest rate locked in. You will normally find that if interest rates are expected to rise in the near future, that the lender will factor this in when they set the fixed-interest to be paid.  

A variable home loan is one where your interest rate changes based on the current market interest rates meaning that your actual repayments are subject to change as the interest rate changes. Variable interest rates are usually lower than fixed rates and usually provide a lot more freedom and features (such as the ability to make extra payments or be able to refinance).

A further benefit often available is the ability to get a 'split home loan'. In these situations a portion of the home loan is fixed and a portion variable (such as a 80/20 or 50/50 split). 

Selecting a fixed loan or variable loan will always have trade-offs, so it will be up to you to decide whether certainty of repayments is more important than flexibility.

Offset vs. Redraw

An offset account is like a separate savings account, so any money in this account will be 'offset' to the amount of your home loan so that you are only paying interest on the net balance. 

For example:
 

• If you have a $500,000 loan with a 4% interest rate, your repayments would be $2,388 per month on a 30 year loan;
• If you had the same loan of $500,000 but with $100,000 savings in an offset account, you would only be paying interest on the net balance of $400,000 and therefore your monthly repayments would be $1,910 per month.

Money in an offset account is fully accessible, as it is simply a savings deposit account, which over time can provide you with considerable savings in interest charges. 

In contrast, a redraw facility is not a separate account and instead is considered to be a 'feature' of your home loan. A redraw facility allows you to 'redraw' extra payments you have made towards your home loan, but is usually not as flexible as an offset account.

Reverse Mortgage 

If you are age 60 or over, own your home and need to access money, releasing equity from your home may be an option via a reverse mortgage. Usually the most you can borrow is likely to be 15–20% of the value of your home. 

Depending on your age and policies of the lender, you can usually take the amount you borrow as a:
 

• regular income stream
• line of credit
• lump sum, or
• combination of these

With a reverse mortgage you can stay in your home and not have to make repayments while living there. Interest on the loan (which is likely to be higher than a standard home loan) compounds so it adds to the amount you owe. You will repay the full amount, including interests and charges, when your home is sold.

Before making the decision to apply for a reverse mortgage, you should consider how it will affect:
 

• your eligibility for the Age Pension 
• your ability to afford aged care 
• your ability to pay for future living expenses
• what you leave for others when you die
• if someone lives with you, whether they will be able to stay in your home

There is risk involved and a long-term financial impact on these types of arrangements, so it is important you get independent financial advice before entering into a reverse mortgage arrangement. 

Is it better to pay-down, renegotiate, borrow more or consolidate your loan?

You should speak to a financial adviser to assess whether it is in your best interest to have your home-loan revised to save you money.

The areas to consider when speaking to a lender, to help you to determine your options include:
 

• Renegotiating better loan rates
• Improving your current loan facility
• Paying down your loan faster
• Pausing your home loan repayments

Small Business finance

At some stage most small businesses require lending or finance; whether it be to expand and grow, purchase premises or equipment, as a come-and-go facility to help meet cash flow needs, or be able to obtain tax write-offs on equipment purchases.  

Due to the range of financing requirements of a business, there is therefore a range of loans and financing options available for businesses.

Considerations for a business loan include the:
 

• needs of the business
• length of the loan 
• terms of the loan.

Some of the more common types of business financing are set out below.   

Business loans

The terms of a business loan can vary according to its purpose. Considerations by the lender can include the:
 

• amount borrowed
• terms (including whether it is principal-and-interest or interest-only)
• period that money is required and paid-back
• interest rate and type of interest (eg. (fixed or variable)
• fees and charges
• security provided (or not) 
• history or relationship with the lender

Business loans are often required when your business is new and establishing itself, or in situations where there are expansion plans to grow or change the business model.  

Applications for business loans normally require supporting evidence that your business can meet the payment terms of the loan provided by a lender. This would normally consist of documents such as updated financial statements and tax returns, cashflow forecasts and budgets, plus sound business plan that outlines the purpose of the business loan and your requirements. 

Overdraft facilities 

A business overdraft, or line of credit, is usually attached (or linked) to a business transaction or trading account, which can be accessed when the business is required to spend more than the balance of their trading account.

Overdraft facilities are normally used for short-term financing and operate on approved limits set by the lender. 

The balance of an overdraft can fluctuate with the movement of cash in and out of the account, with interest generally charged on the money used and not on the total limit of the overdraft. 

Overdrafts are usually used to manage a business’ cashflow (for operational expenses such as purchasing stock, paying wages, rent, etc.) until monies are received from customers or from other income streams. Often overdrafts are used to cover the flow of income related to seasonal or trading fluctuations.

Leasing 

Leasing allows your business to buy or use an asset for an agreed period of time; typically used by businesses for assets such as motor vehicles, machinery and equipment. 

With an operating lease the lender will buy an asset at your request and rent it to your business over a fixed period of time. When the lease period ends, you will return the asset back to the lender. In most cases (especially with business vehicles), the agreement will include a Residual Value that is based on the period of the lease and the estimated value of the asset at the end of the contract. At the end of the agreement the asset is usually sold to a third party on behalf of the finance company. If the asset sells for more than the Residual Value, the finance company will refund a percentage of the surplus back to you. If the asset sells for less than the Residual Value, you will be liable to make a further payment to the finance company. Lease payments under an operating lease may be tax deductible.

With a finance lease the lender will buy an asset at your request and allow you to use it in return for regular repayments. A finance lease is a long-term rental agreement with an option to buy the asset at the end of the contract for an agreed sum. When the full repayment is made, you will own the asset. Lease payments under a finance lease are usually not tax deductible however deprecation of the asset over a period may be tax deductible as well as the interest component of the lease payment.

Invoice financing

This type of financing can allow you to obtain quick, short-term funding by allowing you to access the value of unpaid invoices that have been issued to your customers; sometimes referred to as Accounts Receivable Finance.

Typically invoice funding can provide up to 85% of the value of unpaid invoices. Funds are usually provided under these arrangements within 24 hours, which means that you do not need to wait until your customers pay you under your usual payment terms. 

Invoice funding can be for periods of 14 to 90 days, allowing you to manage your cashflow or obtain cash until the invoice amounts are paid by customers. 

With invoice financing, your business will use the invoice value as collateral to obtain financing form the lender.


General Advice Warning
The above information may be regarded as general advice. It may not suit your personal objectives and your individual financial situation has not been taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice provided as part of this information, having regard to your own objectives, financial situation and needs.