While basic, no-frills home loans are still available in Australia, mortgages with loan features are becoming increasingly common. These features are designed to help you save money and make repaying your mortgage more convenient.
In this article, we will look at seven different types of home loan features that you might come across.
Offset accounts are one of the most popular home loan features in Australia. An offset account is like a savings account linked to your home loan. You can deposit your savings into the account, and the balance offsets how much interest you pay on your mortgage. For instance, if you owe $200,000 on your home loan and have $50,000 in your offset account, you’ll only pay interest on $150,000 of your home loan.
This can lead to significant interest savings over time, especially if you maintain a high balance in the account. However, you may have to pay an initial opening fee and ongoing fees for an offset account. So, before opening one, it’s essential to do the math and figure out if your interest savings will outweigh the costs of having an offset account.
A redraw facility allows you to withdraw any additional repayments you’ve made on your home loan. For example, if you’ve made $20,000 worth of extra repayments, you can withdraw this amount (but not any more).
Since most lenders charge a fee to withdraw from a redraw facility, it’s smart to take out money from your redraw in larger amounts and for more significant expenses. Also, keep in mind that when you withdraw money, you increase the amount you owe on your home loan.
Extra repayments help pay down your loan faster and reduce the amount of interest you’ll pay over the loan’s life. So, think carefully before withdrawing from your redraw facility.
Not every borrower can make extra repayments without consequences. If you have a fixed-rate home loan, your lender may not allow you to make additional repayments or might place a limit on the amount you can make.
If you want to make extra repayments, talk to your lender first to learn about their policy. If you make too many extra repayments on a fixed-rate loan, you may be charged break fees for violating the loan’s terms and conditions.
However, if you can make extra repayments, it’s worth considering. The faster you pay off your home loan, the less interest you’ll pay over your loan term, and you’ll be out of debt sooner. So, the next time you have some extra cash (e.g. from a tax refund, gift, sale of an investment, inheritance), consider putting it towards your home loan.
Home loan portability
Home loan portability is a useful loan feature that allows you to keep the same home loan while selling and moving houses at the same time.
Dealing with your home loan when buying and selling can be complicated, so home loan portability can make things more convenient for you.
However, home loan portability isn’t for every situation as there can be obstacles that prevent you from being approved for the feature. For instance, many lenders require that the values of the properties you are intending to sell and purchase are of equal value, or that the new property must be of higher value. You’ll also need your sale and purchase settlement dates to align. When selling and buying a new home, it’s often a good opportunity to review your home loan and see if it’s still right for you. So, home loan portability won’t always be the best solution.
Home loans can be repaid in two ways: principal and interest repayments, and interest-only home loan repayments. Principal and interest repayments involve paying down both the loan amount and the accruing interest, while interest-only repayments only cover the interest. Borrowers are usually restricted to a certain period of time for interest-only repayments, after which they must sell or start paying the principal. These types of loans are more suitable for property investors rather than owner-occupiers, as it can be a smart investment strategy for experts. However, it is advisable to consult with a financial adviser or mortgage broker before opting for an interest-only repayment plan.
Split rate loans
If you’re a borrower or prospective home buyer, you’re likely familiar with fixed and variable interest rates. But did you know about split rate loans? This type of home loan allows you to split your mortgage so that one portion is charged interest at a fixed rate, while the remaining portion is charged interest at a variable rate.
With a split rate loan, you can get the best of both worlds – the stability of a fixed rate and the flexibility of a variable rate. It’s important to note that you can customize the split rate to fit your needs – for instance, you could have 60% of your loan charged interest at a fixed rate and 40% at a variable rate.
While less of a home loan feature and more of an occasional bonus, cashback deals can be an incentive to refinance your mortgage. To stand out in a competitive market, lenders are offering cashback deals ranging from $2,000 to $4,000. However, it’s important to note that not all lenders offer cashback deals, and they are often limited-time offers.
While cashback deals may seem like an attractive feature, it’s important not to choose a lender or loan product based solely on the cashback offer. Your should consider the overall home loan and whether it meets your needs.
If you want to explore home loans that are tailored to your financial situation, it’s always good to start by chatting to your local Broker Kit Broker. Book an appointment today to learn more about your home loan and refinancing options.