Do you know your offset option from your redraw facility? Home loans come with so many features that it can be confusing to get your head around what you will need and what you can live without, particularly if you are a first home buyer.
Here is a checklist to some of the most common home loan features to help you decide what best suits your needs. But as always when it comes to financial matters, it is important to do your homework and compare the different types of loans available.
Variable versus fixed interest rate
This is one of the first decisions you have to make when applying for a home loan. Variable rates can change at any time, which changes the size of your repayments. If the rate increases so do your repayments, but if the rate drops you pay less in repayments. A fixed rate secures the same rate for a fixed period of time up to five years – and your repayments stay the same for that period. You can also combine the benefits of both fixed and variable by splitting your loan between the two.
A 100 percent offset account is a savings account linked to your home loan. The money in the savings account “offsets” the balance of the loan and saves you money on the interest. For example, if you have $20,000 in your offset account and owe $300,000 on your home loan, you only pay interest on $280,000.
The ability to make extra repayments on your home loan in addition to the minimum required can help you pay off your mortgage faster by saving on interest. In general, home loans with variable interest rates allow you to make as many additional repayments as you like at no cost, whereas fixed rate loans often charge a fee and may also limit the number of extra repayments you can make.
If you make additional payments on your home loan and are ahead of your repayments, a redraw facility allows you to withdraw that money and spend it on other things: a holiday, home improvements or to pay off a credit card debt. However, keep in mind that some lenders will charge a fee per redraw.
Some home loans allow you to take a break from repayments, which may be helpful if you are changing jobs or go on maternity leave.
This feature allows you to take the same loan with you if you sell and buy another home. It can save you hassle and money on set-up fees for a new loan, but may also carry a fee to use this feature.