Looking beyond the rate, other home loan features to get excited about

Looking beyond the rate, other home loan features to get excited about

Many of us get hung up on interest rates when comparing different home loans. It’s easy to understand why – “the lower the rate, the better the loan” is a very simple formula to understand.

Taking this train of thought further down the track is the Comparison Rate, which combines a home loan’s interest rate with its standard fees and charges, giving you a closer indication of a loan’s overall cost.

But as many a savvy mortgage broker or financial adviser will tell you, there’s much more to a home loan than its interest or comparison rate. Sure, interest is the biggest cost associated with most home loans, so nobody wants to pay too much, but there are other home loan features that can make a massive difference to your finances under the right circumstances.

Here are just a few of them:

Extra repayments

Some lenders lock their borrowers into pre-set payment plans, where they’re required to pay back the scheduled amount of loan principal and interest – no more, no less. These payment plans tend to be especially common for home loans with fixed interest rates.  

While this arrangement allows lenders to enjoy a steady and consistent income stream, it isn’t always ideal for borrowers, who may sometimes have some extra money available to add onto their loan, which can pay off a bit more of their loan principal and shrink their interest charges in the future.

If your long-term financial plan involves paying off your home loan ahead of schedule by slowly but surely dropping a bit extra onto the loan each month, make sure your mortgage includes the option to make extra repayments.

Redraw facility

Let’s say that financially speaking, you’ve had a good couple of months. Not too many bills, plus some unexpected windfalls means you have a small stockpile of savings sitting in your bank account. If you were to put this money onto your home loan, you’d pay off a bit more of your principal, thus making one small step towards paying your loan off ahead of schedule and saving on interest charges. So far, so good.

Fast-forward a couple more months. They haven’t been the best – extra bills and unexpected expenses have left your household budget coming up short. You find yourself in real need of those extra savings you recently had available, but because you paid them onto your home loan, you’ll need to look elsewhere for financial relief. 

If you’d like to avoid this kind of unfortunate situation, it’s worth looking for a home loan that includes a Redraw Facility, which offers you access to your extra home loan repayments, allowing you to withdraw them from your loan when you need them back in your pocket. You’ll still need to keep up to date with your loan’s repayment schedule, and will only be able to redraw your loan’s surplus funds, but a redraw facility remains a handy addition to a home loan that can prove very valuable in the right circumstances.

Offset account 

As we’ve established, reducing interest charges on your home loan is a Good Thing. So is flexible and convenient access to your money when you need it most.

Another feature that can help you to enjoy both benefits is an offset account – a savings or transaction account that’s linked to your loan, so that any money you pay into it is accounted for when calculating your loan’s interest charges.

For example, if you owe $500,000 on your mortgage, but have $100,000 in your offset account, you’ll be charged interest on your home loan as if you only owed $400,000. Some home loans have partial offset accounts, which only count a percentage of the account’s savings when calculating your loan’s interest. For example, $100,000 in a 50% partial offset account in the previous example would only effectively contribute $50,000 towards your home loan, meaning for a $500,000 loan, you’d be charged interest as if you owed $450,000.

Otherwise, offset accounts typically work a lot like other bank accounts, allowing you to deposit, withdraw or transfer money as required. It’s usually worth trying to keep a minimum balance available in your offset account to make the most of its benefits. For example, if you keep enough money in your offset account that your interest savings will effectively cover you home loan’s annual fee, you’re already ahead of the pack.

Line of Credit

Once you’ve been paying a mortgage for a few years, you’ll have likely built up a fair amount of equity in your property, especially if rising house prices have increased your property’s overall value.

So, what if you wanted to put some of this equity to work for you? What if you wanted to pay for renovations to your property, invest in shares, or start a business? While it is possible to refinance a home loan and borrow some extra money, this does mean paying more in interest over time.

One alternative option is a Line of Credit home loan – effectively functioning as a home loan combined with a credit card with a MUCH higher limit than usual, typically based on your level of equity in your property. You can borrow any amount up to this limit, and only pay interest on what you borrow, which can prove useful in the right circumstances, such as if you’re not quite certain how much finance you’ll need to cover your new venture.

Home loans for refinancing:

 

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Learn more about home loans

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

How does an offset account work?

An offset account functions as a transaction account that is linked to your home loan. The balance of this account is offset daily against the loan amount and reduces the amount of principal that you pay interest on.

By using an offset account it’s possible to reduce the length of your loan and the total amount of interest payed by thousands of dollars. 

Example: If you have a mortgage of $500,000 but holding an offset account with $50,000, you will only pay interest on $450,000 rather then $500,000.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

How can I pay off my home loan faster?

The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.

Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

What are extra repayments?

Additional payments to your home loan above the minimum monthly instalments, which can help to reduce the loan’s term and remaining payable interest.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.