Home loan features in a nutshell
When you begin your home loan search, the headline rate isn’t the only thing you should consider, as there are many home loan features that could save you big bucks and provide you with great flexibility down the track.
In this guide, we’ll run you through some of the options to put on your home loan shopping list to ensure you nab the right mortgage for you.
Let’s kick off our home loan features list by talking about one of the most popular options – a fee free extra repayments facility. If a home loan comes with this option it means you can make additional payments on your mortgage on top of your regular repayments, in order to bring down the principal and pay less interest.
The following scenario is a good example of how much you could potentially save by making extra repayments: Sam has a home loan of $700,000 with a 5% interest rate over a term of 25 years. If he decides to make an extra repayment of $500 a month, he would save $115,151 in interest and wipe 4 years and 9 months off the life of his home loan.
The great thing is an extra repayments facility can be found with both fixed and variable rate home loans. However, be mindful if you are refinancing your loan to a fixed rate near the end of your home loan term and try to repay the loan early you could incur a high break cost fee.
After you’ve made extra repayments on your home loan, a redraw facility allows you to dip into the payments you’ve made. Often homeowners choose to redraw for expenses that arise sometime down the line after taking out the home loan e.g home renovation, new arrival to the family or car upgrade. While a redraw facility comes hand in hand with an extra repayments facility, it is generally only available with variable rate loans.
It’s important to remember that redrawing will negate the hard work you’ve made through extra repayments and there may be a limit on the amount you can redraw. However, it’s often a more thrifty option than taking out a personal loan, as the fee for redrawing is likely to be far lower than paying interest on a personal loan that can often reach over 10%.
An alternative option to putting extra cash you have towards extra repayments is keeping it in an offset account attached to your mortgage. Any money in the account is offset against the home loan principal, meaning you’ll pay less in interest.
Back to our example of Sam with a $700,000 home loan. If he has an 100% offset account with a $30,000 balance, he will only be charged interest on $670,000.
It’s called an offset “account” for a reason, as just like your bank account you can set up your salary to be deposited into the offset account, make online transactions, pay bills, and you’ll also receive a debit card from the provider for everyday purchases.
The reason many homeowners and investors opt for an offset account over using an extra repayments facility is because you can draw on that balance whenever you want without paying a fee. Keep in mind, just like a redraw facility offset accounts are usually only available with variable rate loans.
Split rate option
As mentioned when you take out a home loan you can choose between a fixed rate which is locked in for a set period of usually 1-7 years or a variable rate that changes with the market, but did you know you can have the best of both worlds?
A split rate loan is when you fix a portion of your home loan, which will give you some security if rates rise, while the remainder will remain variable allowing you to take advantage of flexible features like an offset account or redraw facility.
When you take out a home loan, you will be paying back the principal (the balance owing on the loan) and the interest charged by the bank for providing you with the loan. An option available is to only repay the interest for an introductory period of usually up to 7 years.
So for instance Sam’s repayments on a $700,000 home loan will be $4,092 if he repays both the principal and interest. However, if he takes the interest only route, his repayments will drop down to $2,917 for the interest only period.
Interest only home loans are popular with first home buyers, as it brings down the ongoing repayment amount making it easier to budget and investors as they may be able to claim the interest charged on their home loan come tax time.
In Australia, the standard repayment cycle is monthly. So if you forget to check this and get paid on a weekly cycle, you’ll need to budget diligently each month to ensure you have the money available when your monthly home loan repayment swings round. But if you’re smart and choose a home loan with repayment flexibility (e.g weekly, fortnightly or monthly repayments) you can set up your repayments to match your pay day.
Even if you do get paid monthly it could be a wise idea to set up your repayments over a fortnightly cycle as this will ultimately mean you’ll pay off more over a year.
Example time: There are 26 fortnights in a year, so if your fortnightly repayments are $1,000 this will mean you will have paid off $26,000 at the end of the year. By comparison a monthly repayment schedule of $2,000 will mean you will have only paid back $24,000 over a year.
Paying a mortgage for a 25-30 year period can be a massive money drain and as with all things in life sometimes a little break can be a much needed relief. Generally, repayment holidays are available for a short timeframe from a month up to 6 months and some lenders require you to have made some extra repayments on your home loan to be eligible for a repayment holiday.
You might decide to take a holiday from your repayments in periods of transition AKA you’re changing jobs or are on maternity leave. Alternatively, an unexpected illness or injury may occur, resulting in you needing to take a break from work.
Mozo tip: While a repayment holiday is a good feature to have, it’s only a short term solution. So consider taking out mortgage protection insurance which will cover your repayments for a longer period, with some policies providing cover for up to 30 months.
Home loan portability
If you need to move houses down the track, paying everything from the break cost fee (if you’re signed up to a fixed rate loan) to the upfront application fee can be a pricey affair. But if your home loan comes with the flexible feature of home loan portability this will mean you can avoid these hefty costs by staying with the same mortgage.
So while the security, as in the property, will be moved from your old home to your new one, you will remain with the same home loan product.
Home loan top up
Once you’ve built up a considerable amount of equity in your home, if your mortgage comes with a home loan top up feature you can ask your lender to borrow more money. Just like the redraw facility, you can use the top up feature to pay for things like revamping the house or purchasing a new car. When approving you for a top up amount your lender will not only look at the amount of equity you hold in your home, but your income as well.
This will mean you’ll avoid taking out a separate personal loan and enjoy the lower interest rate of a home loan. When you apply for a home loan top up you’ll be able to renegotiate the term of your loan but word of caution, increasing your home loan will only hike up the amount of interest and fees you pay. You may also be charged an additional monthly service fee by the lender for providing you with a top up and be charged a top up establishment fee.
Another thing to keep in mind is if you’re still within the fixed rate period you may not be eligible for a home loan top up.
Line of credit facility
A line of credit is similar to a home loan top up, as the amount of equity you hold in your home will determine how much you can borrow. The cap on line of credit loans is usually 80% of the property value.
Line of credit loans works just like an overdraft account as a revolving loan facility that once setup you can access whenever you want in one go or stage by stage. Generally, you’ll be charged a higher interest rate and fees for the facility.
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