When choosing a home loan, it’s important to remember that not all loans are created equal. There are a range of features and part of deciding on the best home loan for you is figuring out what will best suit your needs now and into the future.
All of the banking jargon can be overwhelming, so we’ve explained some of the key features to help you make an informed decision:
- Offset Accounts
Essentially, this allows you to use your savings to reduce the interest on your loan. You link a transaction account to your home loan, and the balance is offset against the amount owing on the home loan so you are only charged interest on that lesser amount. For example, if you borrowed $200,000 and the balance of the nominated offset account is $20,000, interest will be calculated on $180,000. Keep in mind, offset is not usually available during fixed rate periods and interest is not separately earned on the savings account.
- Redraw facility
Available with most home loans, redraw allows you to withdraw from any additional repayments (over and above the minimum required) you make. This means you can make extra repayments to reduce the interest payable on the loan, whilst allowing future access to these funds if the need arises. Note: some banks will charge for redraw so it’s important to check fees and charges and aim for a redraw facility that won’t cost you.
- Introductory rates
You may see introductory or ‘honeymoon’ interest rates from time to time. These rates are usually lower and are only available for a specified period. While attractive, make sure you keep an eye on any fees or interest rate changes once this period is over to ensure your loan is still competitive and meets your needs.
- Fixed rate break costs
There is usually a limit on the value of extra repayments you can make towards your loan during a fixed interest rate period. If you plan to make additional repayments with a fixed rate, investigate the extra repayments limit and any charges associated with exceeding this limit, to avoid any costly surprises as these can vary dramatically across different lenders.
- Repayment holidays
Life happens, and unexpected costs or reduced income can affect your ability to afford payments on your home loan. Some banks may offer a break and allow you to stop making repayments for a short period of time. An example might be a Family Repayment Pause between 3 and 6 months if the borrower goes on maternity or paternity leave, and doesn’t have funds available through their redraw facility.
- Home loan packages
Packages can include discounted rates and access to other benefits like a waived annual credit card fee. There may be an annual fee associated with these packages so make sure you enquire about the fees and charges associated with the package, so that the cost does not exceed the benefit.
- Interest only repayments
In some cases, you can choose to only pay the interest charged on your loan, instead of the principal and interest, however, interest only loans are not available to all borrowers. This type of loan will reduce the amount of your repayments during the interest only term, but the principal balance (what you borrowed) remains the same and is still owing when the interest only term is over.
This option is often of particular interest to property investors, as the interest cost may be tax deductible against any income generated from the property. Interest only options can usually be applied to variable and fixed interest rate loans.