Confused by the endless options for home loans? It can be tough to know which features are must-haves and which are just extra bells and whistles. In this blog post, we’ll break down the different home loan features and help you decide which ones are essential for your financial situation and which ones you can skip. By the end, you’ll have a better understanding of what to look for when applying for a home loan and how to make smart mortgage decisions.
Table of Contents
Extra Repayments: A Feature Worth Considering
Extra repayments is a feature offered by some home loans that allows you to pay more towards your mortgage each month or make one-off lump sum payments.
These extra payments go towards reducing the principal amount of your loan, which can save you money in the long run by reducing the total amount of interest you pay.
Some home loans may have restrictions on the amount of extra repayments you can make, or they may charge fees for making extra repayments.
Do you need it?
The ability to make extra repayments is a pretty handy feature, and it can save you a lot of money. For example, paying an extra $200 per month on a home loan of $500,000 with a 5% p.a. interest rate could save you nearly $80,000 and help you pay off your loan 4 years and three months faster.Â
You’ll need to be careful if you have a fixed rate loan, however. Many fixed rate loans don’t allow extra repayments. If they do, these loans often have a limit on how much extra you can repay per year, and if you pay off the loan before your fixed rate expires, you’ll also need to pay break cost fees.Â
A Redraw Facility Can Be a Convenient Feature
A redraw facility is a feature offered by some home loans that allows you to access extra payments that you have made on your mortgage.
For example, if you have made extra repayments on your home loan and have built up a surplus of funds, you may be able to “redraw” these funds in the future.
This can be useful if you need access to cash for unexpected expenses or emergencies.
It’s important to note that some home loans may have restrictions on how much you can redraw or may charge fees for using the redraw facility.Â
Do you need it?
Using a redraw facility is a great way to reduce your interest repayments while having funds on standby for emergencies or to save for a holiday or car.
Your home loan interest rate will be higher than any interest you could earn with a term deposit or savings account, so in effect, you’re “earning” more interest by making extra repayments compared to using a traditional savings account.
Be aware that you may need to pay a fee for loan redraw with some lenders, and redraw is not often available with fixed rate loans.Â
An Offset Account Can Save You Money on Interest
An offset account is a type of transaction account that is linked to your home loan. The balance of your offset account is taken into account when calculating the interest on your mortgage.
Essentially, the funds in your offset account “offset” the amount of interest you pay on your home loan. For example, if you have a mortgage of $300,000 and a balance of $50,000 in your offset account, you will only be charged interest on $250,000.
Similar to a redraw facility, this can save you a significant amount of money on your home loan over time.
Do you need it?
Offset accounts are a great feature, and they offer a lot more flexibility compared to a redraw facility.Â
If you’re using a redraw, you’ll need to jump through a few extra hoops to access your money.Â
With an offset account, the money is there whenever you need it – it’s a normal transaction account.Â
The downside of an offset account compared to a redraw facility is the cost. You’ll need to be on a professional package for an offset account, which typically costs $400 per year.
Assuming an interest rate of 4%, you would need to have $10,000 in your offset account to justify the cost of the professional package compared to a basic loan with a redraw facility.Â
Split Rate Home Loans: A Combination of Fixed and Variable Rates
A split rate home loan is a mortgage where part of the loan has a fixed interest rate, and part of the loan has a variable interest rate.
This type of home loan can be a useful option for borrowers who want the security of a fixed rate but also want the flexibility of a variable rate.
With a split rate home loan, you can lock in a portion of your mortgage at a fixed rate, which can provide peace of mind if interest rates are expected to rise.
At the same time, the portion of your loan with a variable rate allows you to take advantage of any potential interest rate decreases. You’ll also be able to make unlimited extra repayments on the variable portion of the loan, which is helpful if you’re expecting to be able to pay off your loan quickly.
It’s important to note that split rate home loans can be more complex than traditional fixed or variable rate loans and may have additional fees or restrictions.
Do you need it?
There are a couple of situations where a split rate home loan comes in handy:
- If you’re concerned about interest rates rising and you’d like some security in your repayments, but you still want an offset account or redraw.
- If fixed rates are lower than variable rates like we saw during the pandemic, and you’re expecting to make extra repayments.
- If you’re concerned about interest rates rising and you’d like some security in your repayments, but you still want an offset account or redraw.
Outside of these scenarios, you typically don’t need a split rate home loan. Due to the complicated nature of these loans, we recommend speaking with a mortgage broker to see if this type of loan is suitable for you.
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Interest Only Home Loans: Low Monthly Payments, but Higher Long-Term Costs
An interest only home loan is a type of mortgage where the borrower only pays the interest on the loan for a specified period of time, rather than paying down the principal as well.
This means that the borrower is not making any progress towards paying off the loan itself, only towards paying the interest on the loan.
Interest only home loans can be a useful option for borrowers who want to keep their monthly mortgage payments low, at least initially.
However, it’s important to note that interest only loans can be more expensive in the long run, as the borrower will still be responsible for paying off the full loan amount at the end of the interest only period.
Additionally, some lenders may require borrowers to have a higher level of equity in the property when taking out an interest only home loan.
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Do you need it?
Interest only loans are popular with investors, as they can claim the interest charged on their home loan as a tax deduction. The reduced repayments also help with cash flow to support the costs of the investment property.Â
Some first home buyers also opt for an interest only loan for a short period to help with the cost of home ownership in the first couple of years.Â
Flexible Repayment Options: Choose Your Payment Cycle
Most home loans allow borrowers to choose their repayment cycle, typically between weekly, fortnightly, or monthly payments.
This can be a useful feature for borrowers who want to align their mortgage payments with their income cycle or who want to make progress on paying off their loan faster.
For example, making fortnightly payments instead of monthly payments can result in one extra payment per year, which can help reduce the total amount of interest paid on the loan.Â
Do you need it?
If your home loan allows it, we definitely recommend changing your repayment cycle to weekly or fortnightly repayments.Â
It might not seem like much, but one extra repayment per year can save you thousands of dollars over the lifetime of your loan.Â
Repayment Holidays: A Temporary Break from Mortgage Payments
A repayment holiday is a feature offered by some home loans that allows borrowers to temporarily stop making mortgage payments.
This can be a useful option for borrowers who may be experiencing financial hardship or who may need to take time off work for a period of time.
It’s important to note that taking a repayment holiday does not mean that your loan is forgiven or that you do not have to pay back the missed payments at a later date.
Instead, the missed payments will typically be added to the end of your loan term, which can result in paying more in total interest over the life of the loan.Â
Do you need it?
The additional costs associated with a repayment holiday mean that you should only take advantage of this feature if you really need it.Â
If you can maintain your repayments even while your household has a reduced income, we recommend doing so.Â
Line of Credit Home Loans: Borrow Funds as Needed
A line of credit home loan is a type of mortgage that allows borrowers to access funds up to a certain credit limit.
This can be a useful option for borrowers who want the flexibility to borrow funds as needed, rather than borrowing a set amount upfront.
With a line of credit home loan, borrowers can make drawdowns on the loan as needed and only pay interest on the funds that are actually used. It’s important to note that line of credit home loans may have higher interest rates than traditional home loans and may also have fees for setting up and maintaining the line of credit.
Additionally, it’s important to make sure that you have a plan in place for repaying the borrowed funds and that you are confident that you will be able to make the required repayments.Â
Do you need it?
Line of credit home loans are complicated and typically not needed by most homebuyers. We recommend talking to a mortgage broker to see if a line of credit is a suitable option for you.
Loan Portability: Take Your Mortgage with You When You Move
Loan portability is a feature offered by some home loans that allows borrowers to take their mortgage with them when they move to a new property.
This can be a useful option for borrowers who are planning to upgrade to a new home within a certain time frame and want to avoid the hassle and cost of switching home loans.
With loan portability, the borrower can simply take their existing home loan and apply it to the new property, rather than having to reapply for a new mortgage.Â
Do you need it?
Loan portability is nice to have, but not essential. In most cases, settlement for both homes (the one you are selling and the one you are buying) will need to occur on the same day. This isn’t always possible.
This is a feature that is good to take advantage of if everything lines up correctly, but otherwise not necessary.
Professional package discounts: loans with benefits
A professional package is a loan feature where you pay one annual fee in return for a range of benefits and discounts from your lender.
Despite the name, you don’t need to be a professional to get this package. Typically these are available for loans over $250,000, and we almost always use them for higher loan amounts.
Here’s what you can get with a professional package:
- Waived application fee
- Waived monthly loan fee
- Waived valuation fee
- Interest rate discountsÂ
- Waived annual fee for a credit card with rewards
- Discounted insurance products
- Special service from your lender.
Do you need it?
If you are borrowing over $250,000 and you can take advantage of the discounts and additional features, then we recommend getting a professional package.Â
However, the additional fee of around $400 means that sometimes you’re better off with a basic loan. This is something that your mortgage broker will discuss with you to make sure that you’re getting the best possible deal.
How to get a loan with all the features you need
As you can see, there are lots of different options when you’re looking at getting a home loan. Some features are extremely useful, while others add no value and will cost you extra money.Â
The best thing you can do is speak with an Expert Mortgage Broker to discuss your situation and options.
Call us on 1300 088 065 or complete a free assessment to speak with one of our expert mortgage brokers.
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