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Buying a home is probably one of life’s most important milestones, so getting the right home loan tailored to your specific needs and circumstances is essential.
When it comes to home loans, there are many factors to consider besides interest rates. Choosing the right home loan could not only provide flexibility as your financial situation changes but could also save you some money down the track.
Here is an explanatory guide to some of the more common home loan features and, importantly, how they work.
A redraw facility allows you to dip into any extra funds you have put towards your home loan, providing you are ahead of your repayments.
While drawing on these funds will reduce the benefit of your additional repayments, a redraw facility can be a useful source of additional capital when your circumstances change – for example renovating your home, buying a new car or welcoming a new family member.
However, keep in mind that some lenders have a minimum redraw amount and you may also be charged a fee for withdrawing from your home loan.
An offset account is a transaction account linked to your home loan. Offset accounts are a popular feature for many homeowners, as they provide easy access to funds while, at the same time, reducing the interest charged on your home loan.
You can make withdrawals or deposits as with any other bank account, but any funds you hold offset the interest on your mortgage. For example, if you have a $500,000 home loan and $50,000 in your offset account, you will only pay interest on the remaining $450,000.This could also help you pay off your home loan sooner.
Generally speaking, this feature is only available on variable rate home loans, however some lenders will allow partial interest offset during a fixed rate period.
Throughout the life of your loan, you may find you have some excess savings, an unexpected lump sum or additional income that can be used to pay down your home loan.
If you are looking for a variable rate home loan, there usually won’t be a limit to how much you can pay in extra repayments. Some fixed rate loans, however, have limits on how much you can repay, either on an annual basis or over the life of the loan
Interest only loans
Rather than opting for the traditional ‘principal and interest’ type loan, where your monthly repayments help to pay down the balance of your loan, some lenders offer the option to pay interest only for a fixed period, usually a maximum of five years.
During this period your repayments will be lower and after the term is over, you can choose to refinance, make a lump sum payment or begin paying off the principal of the loan.
Interest only loans can be useful for property investors who can claim the interest as a tax deduction, or buyers who are planning on holding their property for just a few years before selling.
However it is important to note that there are risks to this approach. The repayment amount on interest only loans can tempt you to spend more than you can afford, or if the property market is falling you could be left with a property that is worth less than you paid when the time comes to sell.
Split home loans
Deciding whether to choose a variable or fixed home loan can be difficult, so split mortgages can potentially offer the best of both worlds.
Split home loans allow you to portion your mortgage into a variable component and a fixed component with different rates of interest.
Fixing a portion of your loan is especially beneficial when interest rates are rising, as it can protect you from the impact of future rate hikes. Having a variable component can also be useful as it allows you to make additional repayments, as well as potentially accessing benefits such as redraw or offset accounts.
There are also many other features you can access as part of your home loan, including bundling your mortgage with credit cards, insurance and bank accounts. The key is to find what works best for you and your own financial circumstances.
For professional advice on all of these features, speak to your mortgage broker.