While you can still find basic, no-frills home loans, mortgages with loan features are increasingly common. These features are typically designed to help you save money and make repaying your mortgage more convenient.
In this article, we’ll look at 7 different types of home loan features that you might come across.
1. Offset accounts
One of the most popular home loan features is an offset account. An offset account is like a transactional savings account connected to your home loan. You add your savings into the account and the balance offsets how much interest you are charged on your mortgage.
For example, if you have $200,000 left to pay on your home loan and $50,000 in your offset account, you’ll only pay interest on $150,000 of your home loan.
This can lead to massive interest savings over the years, especially if you maintain a high balance in the account. But you can freely spend money from your offset account as desired.
Offset accounts typically aren’t free – you may need to pay an initial opening fee as well as ongoing fees.
Before you open one, it’s important to do the maths and figure out if your interest savings will outweigh the costs of having an offset account. It’s not really worth having an offset account if you aren’t going to use it or benefit from it.
2. Redraw facilities
If you’ve made extra repayments on your home loan, a redraw facility pools these additional funds. You’ll be able to withdraw these additional funds, but not any funds that make up your minimum repayment amount.
For example, if you’ve made $20,000 worth of extra repayments, you’ll be able to withdraw this amount (but not any more).
Since most lenders will charge a fee to withdraw from a redraw facility, it’s smart to take money from your redraw in larger amounts and for specific bigger expenses. Also bear in mind that when withdrawing money, you are increasing the amount you owe on your home loan.
Extra repayments pay down your loan faster and reduce how much interest you’ll pay over the life of your loan, so think carefully before withdrawing from your redraw facility.
3. Extra repayments
Speaking of extra repayments, not every borrower is able to make them without consequences. If you have a fixed rate home loan, your lender may not permit you to make additional repayments or instead might place a limit on the amount you can make.
If you want to make extra repayments, speak to your lender first to find out what their policy is.
If you make too many extra repayments on a fixed rate loan, you may be charged break fees for being in violation of the terms and conditions of your loan.
However, if you are able to make extra repayments – they’re worth considering. The faster you pay off your home loan, the less interest you’ll pay over your loan term. Plus, you’ll be out of debt sooner.
So, the next time you have some extra cash (e.g. from a tax refund, gift, sale of an investment, inheritance), consider putting it towards your home loan.
4. Home loan portability
Home loan portability is a useful loan feature that helps you keep the same home loan while selling and moving houses at the same time.
Dealing with your home loan when buying and selling can be complicated, so home loan portability can make things more convenient for you.
Home loan portability isn’t for every situation as there can be obstacles that prevent you from being approved for the feature. For example, many lenders stipulate that the values of the properties you are intending to sell and purchase should be of equal value or that the new property must be of a higher value.
You’ll also need your sale and purchase settlement dates to align. When selling and buying a new home, it’s often a good opportunity to review your home loan and see if it’s still right for you. So, home loan portability won't always be the best solution.
5. Interest only repayments
There are two ways to make home loan repayments:
Principal and interest repayments
Interest only home loan repayments.
With principal and interest repayments, you pay down the principal (the loan amount) as well as the interest that accrues on top of the loan.
If you have an interest only home loan, you only pay off the interest as it accrues and don’t make any payments towards the principal.
Borrowers are typically restricted to a certain period of time in which they can make interest only repayments. After this time, they’ll have to sell or start paying the principal as well.
Interest only loans are more likely to suit property investors, rather than owner occupiers.
For expert investors, interest only repayments can potentially be a smart property investment strategy.
For example, if you buy a property that is likely to rise in value quickly, you’ll be able to keep your expenses low with interest only repayments and then (hopefully) sell the property for a profit before the interest only period expires.
It’s a good idea to speak to a financial adviser or mortgage broker before pursuing an interest only repayment plan.
6. Split rate loans
Most borrowers and prospective buyers will be familiar with variable and fixed interest rates. But did you know that you can split your home loan so that one portion is charged interest at a fixed rate, while the rest is charged interest at a variable rate?
This is called a split rate home loan and can be a good option for borrowers looking to get the benefits of both a fixed rate and variable rate.
You don’t need to split the loan down the middle, you could have 60% of your loan fixed and 40% variable, for example.
7. Cashback deals
While less of a home loan feature and more of an occasional bonus, cashback deals can be an incentive to refinance your mortgage.
Typically, a refinance cashback deal is when a lender offers a certain amount of money for borrowers who choose to refinance with them. In a competitive home loan market, lenders are trying to stand out.
While the cashback amount varies between lenders, you can typically get between $2,000 and $4,000 back. Not all lenders offer cashback deals and they are often limited time offers.
Although it may be enticing to get some cashback when refinancing, don’t let a cashback deal be the only reason you choose a particular lender or loan product. Consider the home loan as a whole and think about whether it meets your needs.
If you’d like to find out more about home loans that could suit your personal and financial circumstances, your local Aussie Broker is here to help. Book in an appointment today to learn more about your home loan and refinancing options.