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HOME LOAN FEATURES
Loan features should be considered in the context of your life over at least the next 5 years. It sounds like a long time to a lot of people, but when you consider why, it all makes sense:
- Is the loan for an investment or a private home?
- Is your objective to pay off the loan as quick as possible?
- Are you disciplined and good at sticking to a budget?
- How much margin do you have on your monthly spending (to account for, say, an interest-rate rise)?
- Are you likely to get any kind of incremental bonus or financial windfalls in the future?
- Are you planning on having a baby or increasing your family dependency in the next five years?
- How will your family situation affect your income and expenditure?
Most people know the answer to these questions and if you don’t, you can act on what you know right now, and often that is enough. The answers to these questions give you guidance to decide the level of flexibility you need with a home loan without paying for features you don’t need. The most common loan features are outlined here.
Additional Repayments
If you are likely to have extra cash at any time, make sure your home loan has additional repayment features that allow you to use that cash to reduce the outstanding principal and interest. Don’t leave dollars sitting in a savings account when every dollar you pay off your home loan is working twice as hard as a dollar saved in the bank, If you are concerned about being be able to access the extra funds you pay into your loan, don’t be. Most standard variable loans allow you to take back those extra payments via redraw facilities if needed.
Construction Loans
While a construction loan is really a standard home loan, not all the features available on the product you choose will be available during the construction phase. Two examples of this are redraw and payment frequency. During construction, you cannot use redraw, and interest is typically paid monthly on an interest-only basis. When the house is complete, all features of the loan become available.
Offset Accounts
An offset account is simply a separate (savings) account. Look for lenders who offer 100% offset. Be aware that some lenders require a minimum balance to be in your account before the offset applies. Your offset account balance is subtracted from the outstanding home loan principal when calculating daily interest charges. For example, if you have a $300,000 mortgage and $20,000 in your offset savings account, you will only be charged interest on $280,000 even though your “loan balance” is $300,000. Form a taxation perspective, interest paid to your account is taxable, but the same interest used to offset home loan interest is not, so you effectively save tax and reduce your home loan at the same time.
Portable loan
A portable home loan allows you to take an existing loan to another property without having to refinance, i.e. pay out the old loan and take out a new one. This can save application and legal fees.
Redraw facility
A redraw facility allows you to access additional repayments you have made. The money can be used for pretty much whatever you like without having to explain or apply for it. Many lenders have many a minimum redraw amount and a fee every time you use it.
Repayment Holiday
Many lenders now offer either full or partial repayment “holidays” for periods of time. They can be useful if, for instance, you find yourself taking time off work in a career change or building a family.
Salary Credit (Direct)
This feature allows you to pay your salary directly into your home loan account. With interest calculated daily, this effectively reduces the principal amount owing for the time your salary is in the amount, thereby reducing the amount of interest paid.
Switching (to fixed rate)
Switching allows you to switch from a variable to a fixed rate. This can be a good option if, for instance, you are not sure what rates are going to do.
Top up
This feature allows you to increase the limit on your home loan only when you have enough equity in your property.
COMPARISON RATE SCHEDULE
Features often cost money. So, when looking at a loan, there are two interest rates to consider: the interest you are paying, and the comparison rate. Comparison rates take into account a number of things, including loan establishment fees, account fees, and interest rates over the term of the loan. Anyone advertising a specific loan product cost is now required by law to show comparison rates to help consumers understand the real cost of a loan. For example: It might therefore mean an advertised interest rate, at 7.80%, comes up on the comparison rate schedule at 8.10%. This is helpful but don’t rely solely on comparison rates when choosing a loan as, while they take into account many standards fees and interest rates, they don’t consider significant fees such as, early repayment fees and ongoing redraw fees, nor do they consider the use of features and how suitable the loan is for you.