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:
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.
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.
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.