Home Loan Features Explained

You only need to merely look at the idea of buying a home to discover the huge selection of loans on the market. They come in all shapes and sizes, with features of every variety. So, with all this choice available, how do you select a loan that suits your needs? There is much more to think about than just finding the lowest interest rate. With a wide the variety of home loan features available you can utilise selected ones to help you save in different ways. It is therefore important to have an idea of what each feature and facility entail to avoid missing out on a loan feature you may want in your next loan. Let’s look at some loan features below, to work out what they really mean and if one (or some) of them may fit your situation and outlook.

Offset account

An offset account is likely the most common home loan features people opt for. It is linked to your home loan. The balance of this account will offset the balance of your home loan. Your lender calculates and charges interest based on the difference between the amount owing on your home loan and the balance of your offset account i.e. the net loan balance.

For example, if the balance of you home loan if $356,500 and you have $56,500 in your offset account, then you pay interest on $300,000 not $356,500.

If you have a sizeable amount of money in your offset account from day one, it may help you save a considerable amount of interest over the life of your loan. Lenders often offer 100% offset accounts as a feature on standard variable home loans.

The key benefits of using an offset account are:

• you can withdraw your funds when you want.
• interest is calculated daily, so when you have any fund available, say you fortnightly pay, if the funds are there for more than one day at any point in time you will benefit from the offset impact of your home loan.
• You can achieve a higher interest ‘return’ on your savings. What this means is that interest rates are generally higher on home loans than in savings accounts. So, whilst you may not be gaining 2% interest in a term deposit, you are saving 4.5% on interest charged on your home loan with the same funds.
• Reducing your tax bill. Using the example above, any money that you earn in interest in a savings account is taxable income. But if you put in your offset account and it reduces the interest you pay on your home loan, no tax is payable, so you are effectively reducing your tax bill.

Offset accounts often have higher fees and minimum balances so it is important to discuss with your broker to ensure the cost benefit is in your favour and can help save you money in the long run.

Home Loan Feature – Redraw facility

Another common home loan feature is a redraw facility. Redraw facilities let you access extra principal repayments you’ve made on your loan. A redraw facility works by allowing you to make extra repayments and these “additional” paid funds can be available to you at a later date. Different lenders will have differing rules on the frequency and amounts your can withdraw in a year. There also may be a fee associated with making a withdrawal.

For example, if your monthly repayments on your home loan are $2,300 and your pay $2,500 per month, adding an additional $2,400 in one year, then this additional $2,400 may be available for you to withdraw later.

A redraw facility is similar to an offset account, but its main difference is that it doesn’t give you the flexibility to access your money in the same way. For some people this is a benefit as it can help reduce the temptation to spend, for others it is too restrictive when they have planned expenditures for the money.

Like an offset account maintaining an available redraw balance can help reduce interest on your home loan.

Discuss with your mortgage broker if an offset account or redraw facility suits your needs.

Additional repayments

When you are looking for your next home loan, the option to make additional repayments could be a handy feature to look out for. Additional repayments are just payments that you pay on top of the standard repayment for your loan. If you had a $500,000 loan with a 5.27% interest rate requires a monthly repayment of $2,767, you could choose to pay off the loan faster and cut out some of your interest. Perhaps you could choose to pay instead a repayment of $3000 which includes your extra repayment of $233. This is a handy feature if you are willing to make the most of it and pay off your loan faster than the usual term.

All in one loan account

An all-in-one loan account is what it sounds like: All your bank accounts joined together. That is your savings, cheque, and mortgage account. Your main mortgage account receives your salary and any other deposits, with extra money in your account reducing the principal amount and interest. Any money that is left over the minimum due each month, you can access.

The advantage of an all-in-one loan account is the ease in having all your accounts joined together. It usually comes with a credit card and a lot of borrowers who have these accounts do not usually need to have another bank account, as direct debits and withdrawals can also be done through this account. So to sum it up, it is a flexible way to have a home loan, and if you are clever about it, you may even save on interest and make a few tax savings along the way. One thing worth noting though, is that the interest rate is often higher than other loan products, and you also need to know yourself enough to work out if you have the discipline to have access to your money that is left over the minimum due amount. When you need new tires or the pipes are leaking, it can be quite tempting to take some of your money back out of your equity simply because you can. This may create bad habits of tapping into your mortgage. It is worth sitting with your mortgage broker to work out what your situation and priorities are.

Home Loan Feature – Professional Package

A professional package is usually only a loan feature reserved for larger home loan amounts when the bigger the amount, the higher your chances are of additional interest rate discounts. There is also potential to access discounts on other banking products in a feature like this, and if that is something that you think would help you then, wonderful, but if the extra discounts on other products are not really needed, then they may just be useless extras. When considering a professional package, it is better to sit down with your mortgage broker to work out if this is a feature that you can access with your loan amount.

Switch to fixed rate

A loan feature where you can switch to fixed rate, allows the borrower to switch from a variable to a fixed rate loan. Each type of loan offers benefits, so you can work out which suits your individual situation and how you think interest rates will behave moving forward. With this feature, if you were to have a variable rate home loan and think a fixed rate is a better fit, this can often be switched over the phone of even through internet banking.

Home Loan Feature –  Direct salary credit

A direct salary credit, or payroll credit is an automated payment to your home loan that gets take out of your pay. You can organise it with your employer by giving them your account number and repayment amount. A direct salary credit is usually a good backup in case a repayment is not made on time. It is essentially another option to ensure the lender gets their repayment on time and in a sufficient amount. There would also be a bank account given as another option for a loan repayment if the direct salary credit was not in use for whatever reason. Even if you are the most organised person you know, slip ups happen. Having payments automated essentially takes one job off your list, which is especially helpful if you have a big list. Some may not like this feature as they may feel like the control is taken out of their hands, with less flexibility. Speak to your mortgage broker to see whether this is a feature that would help or hinder you.

Top-up

Topping up your home loan is basically increasing the amount of your home loan to borrow more money for other things. Roughly speaking, the more equity that is available on your property, the more you can top up (increase) your loan by. This can be a better way to borrow than by using a credit card or taking out a personal loan and it takes a lot of the effort out too. It is important to remember though that it is still just taking on more debt, meaning bigger mortgage repayments and potentially more interest over the life of the loan. Depending on your situation and goals, a top up on your loan could be an effective way to take care of home renovations, or even to consolidate other debt. Though you are not taking on an extra loan, you are still adding more debt to your life, so topping up should not be done in haste and will also be subject to lender approval, usually based on how well you are currently doing paying off the home loan that you want to increase.

A good mortgage broker will be able to take you through all the loan products available to you, highlighting the features and analysing which of these would be useful to your unique situation. Your mortgage broker will sit and get to know you, find out what fits, and then proceed to show you your options for securing a loan that suits you. It is worth making the most of a good mortgage broker, for their wealth of knowledge and time and experience, that may be what you need to take hold of that opportunity to buy your property of choice. For mortgage advice on your next loan, get in contact with Watson Mortgages and let us find you a competitive rate 0240381623.

Disclaimer: The information provided in this fact sheet is not legal, taxation or financial planning advice. It has been prepared without considering your specific needs, objectives and personal financial situation. Before acting on this information, we recommend that you consider carefully if it is appropriate for your needs, objectives and personal financial situation. All loan products are subject to lender criteria and approval. Fees, terms and conditions apply. Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Licensing Statement: Watson Mortgages Pty Ltd Credit Representative 525053 is authorised under Australian Credit Licence 389328.