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Are you unsure about the features of home loans? You’re not the only one!
There are many choices. It can be difficult to see which features will save you money and which loan product could cost you more later.
In this guide, we will explain the most common features of a home loan. This will help you understand which features are best for your personal objectives and financial situation.
By the end, you will learn what to look for. This will help you make better decisions when you apply for a new home loan.
Extra Repayments: Fast-Track Your Home Loan
Some home loans allow you to make extra payments along with your regular monthly ones. These additional repayments lower your loan’s principal amount. This means you will pay less interest during the loan term.
Extra repayments can be a great way to save money on interest over the lifetime of your loan and pay off your home loan faster. For example, paying an extra $200 each month on a $500,000 loan with a 5% interest rate could save you nearly $80,000 over the life of your loan.
Some loans do not allow you to make extra repayments. This often happens with fixed-rate loans. Some lenders may also limit how much extra you can pay each year. They might also charge fees if you pay off your loan early. However, some loans do let you make unlimited additional repayments. It is important to read the terms carefully.
Read more: Home Loan Extra Repayment Calculator
Redraw Facility: Access Extra Funds When You Need Them
A redraw facility lets you use any extra money you have paid. This can be helpful if you face an emergency or need to pay for large expenses later.
This feature is very important. It helps you save money on interest. You can still get to your money when you need it. By lowering your loan amount, you can earn more interest than if you just keep your cash in a regular savings account.
- Fixed-rate loans often do not allow this option.
- Some lenders may charge a fee if you wish to get money back.
Offset Account: Lower Your Interest, Keep Your Flexibility
An offset account is a kind of transaction account connected to your home loan. The money in this account helps lower the interest you pay on your mortgage. For instance, if your loan is $300,000 and you have $50,000 in your offset account, you will pay interest only on $250,000.
Offset accounts can help you save on interest. You can access your money whenever you need it. Unlike savings accounts that earn taxed interest, offset accounts allow you to save on interest without any tax charges. This is useful, especially if you have to pay a lot in taxes.
Do you need it?
Offset accounts are a great feature, and they offer a lot more flexibility compared to a redraw facility.
If you’re using a redraw, you’ll need to jump through a few extra hoops to access your money.
With an offset account, the money is there whenever you need it – it’s a normal transaction account.
The downside of an offset account compared to a redraw facility is the cost. You’ll need to be on a professional package for an offset account, which typically costs $400 per year.
Assuming an interest rate of 4%, you would need to have $10,000 in your offset account to justify the cost of the professional package compared to a basic loan with a redraw facility.
Read more: What is an Offset Account?
Offset Accounts vs. Redraw Facilities vs. High-Interest Savings Accounts: Which Is Better?
Have you looked into whether it’s better to keep your money in an offset account, a redraw facility, or a high-interest savings account? Each choice can affect your savings and interest differently.
Offset Accounts
- How it works: Your offset account balance lowers the amount of your loan when calculating interest.
- Benefits: The money you save on interest is tax-free. You can easily access your funds.
- Considerations: There might be higher fees, like a $400 package fee. A large balance is needed to get the best benefits.
Redraw Facilities
- How it works: You make extra repayments on your loan. If you need cash, you can withdraw that money.
- Benefits: This reduces your loan amount. It can also decrease the interest you pay in the long run.
- Considerations: There could be limits on how much you can access. This might include fees or minimum amounts you can take out. This option may be less flexible than offset accounts.
High-Interest Savings Accounts
- How it works: You put money in an account that gives a high interest rate.
- Benefits: This account is different from your loan. It may provide better interest rates.
- Considerations: The interest you earn will be taxed. After paying taxes, you may save less on your loan than if you use an offset account.
Tax Implications
- High-Interest Savings Account: If you earn 6% interest and pay 32.5% in tax, you need to pay tax on your interest. This leave you with about 4%. People who pay higher taxes will get even less.
- Offset Account: The interest you save by paying off your mortgage is not counted as income. This means you do not have to pay tax on it. If your mortgage rate is 6%, you get a 6% return without any tax.
High-interest savings accounts might seem appealing because they offer good rates. However, the tax on the interest you earn can lower the total money you get back. On the other hand, offset accounts can help you save on interest without tax. This choice could be better, especially for those in higher tax categories.
Which Option Is Better?
- Pick an Offset Account if: You want quick access to your money and want to save on interest without worrying about taxes.
- Pick a Redraw Facility if: You want to pay off your loan faster and can deal with having less cash available.
- Pick a High-Interest Savings Account if: You want to keep your savings separate from your mortgage and are okay with paying taxes on them.
Split Rate Home Loans: Get the Best of Both Worlds
A split rate loan home loan allows you to separate your loan into two parts. One part has a fixed interest rate. This means your payments stay the same. The other part has a variable rate, which offers you more flexibility. With this setup, you get the security of consistent payments. You can also make extra repayments on the variable part.
A split rate might be a good choice if you are concerned about interest rate changes but still want to make extra payments. It provides security and also offers some flexibility.
These loans are often hard to understand. They generally come with added fees and rules. However, they can be helpful if you think interest rates will change a lot. They may also help you reduce your risk.
Interest Only Home Loans: Lower Payments, But at a Cost
Interest-only loans let you pay just the interest for a specific time. This means your monthly repayments are lower.
This choice matters a lot. It can give you extra money to spend, mainly for investment properties. Investors can also deduct the interest on their taxes.
In the long term, you will pay more interest. This happens because you are not lowering the main amount of the loan, and you are just paying the interest. This option works well for investors or people who need extra cash for a short time.
Flexible Repayment Options: Match Your Payments to Your Budget
Most standard home loans allow you to decide how often you want to make payments. You can pay every week, every two weeks, or once a month. If you pick to pay every two weeks, you might make one extra payment by the end of the year. This can help lower the total interest you need to pay.
Paying your loan every week or every two weeks can save you money in the long run. It is easy and does not require much effort. When you match your payment schedule with your income, it helps you handle your payments better.
Repayment Holidays: A Short-Term Break for When You Need It
Some lenders allow you to stop making repayments. This break gives you a chance to pause your mortgage payments for a little while if you are facing money issues.
This choice is very important. It can help you find space when times are tough. For example, it could support you if you lose your job or need some time off from work.
- Be careful.
- If you miss a payment, it will go onto your loan balance.
- This means you will owe more interest later.
- Only use this option if you truly need to.
Line of Credit Home Loans: Borrow as You Go
A line of credit home loan allows you to borrow money up to a certain limit when you need it. It works like a credit card. You will only pay interest on the amount of money you have taken out.
This feature can help you with your renovations or other projects. You might need money bit by bit over time for these tasks.
A line of credit can have higher interest rates and fees. It is suitable for people who handle their money carefully. It is also good for those who get ready for big, unexpected costs.
Loan Portability: Keep Your Loan When You Move
Loan portability lets you transfer your current home loan to a new house. This option is great if you are moving to a better home. It helps you skip the trouble of applying for a new loan.
This feature is important. It helps you sell your home and buy a new one at the same time. It lets you avoid refinancing.
- Both properties need to close on the same day.
- This can be difficult to set up.
Professional Package Discounts: Get More for Your Money
A professional package costs about $400 each year. With this package, you receive several benefits. You won’t need to pay application fees. You also get lower interest rates and no annual fees for your credit card.
They help with loans that are more than $250,000. They can save you money by reducing fees and interest rates. You can choose from a range of products for extra convenience.
How to Choose the Right Loan Features for You
Home loans come with several features. However, not all features will be right for you. Some, like offset accounts and redraw facilities, provide great flexibility. Others, such as professional packages and line of credit loans, are helpful in certain situations.
Key Considerations:
- Personal Objectives: Think about what you want from your home loan. Do you want to pay it off quickly? Or do you need some flexibility? Maybe you want lower starting payments?
- Comparison Rate: Always look at the comparison rate. This rate shows you the interest rate and most fees. It helps you see the real cost of your loan.
- Variable Interest Rate vs. Fixed Rate Loan: Decide if you like the clear pricing of a fixed rate or the chance to save with a variable interest rate.
- Lenders Mortgage Insurance (LMI): If your deposit is under 20%, you might need to pay for LMI. Think about how this could add to your total costs.
- Rate Lock: If you pick a fixed-rate loan, consider a rate lock. This keeps your interest rate the same from when you apply until your loan settles.
The best way to find what works for you is to talk to a mortgage broker. A good broker will create a plan just for you based on your needs. They can share general information. They will also help you understand the relevant product disclosure statement and the target market determination for different loans.
As you can see, there are lots of different options when you’re looking at getting a home loan. Some features are extremely useful, while others add no value and will cost you extra money.
The best thing you can do is speak with an Expert Mortgage Broker to discuss your situation and options.
Call us on 1300 088 065 or complete a free assessment to speak with one of our expert mortgage brokers.
Frequently Asked Questions (FAQs)
What is the difference between an offset account, a redraw facility, and a high-interest savings account?
Offset Account: A separate transaction account linked to your home loan. The balance reduces your loan principal for interest calculations. Interest saved is tax-free, and funds are easily accessible.
Redraw Facility: Allows you to withdraw extra repayments you’ve made on your loan. Reduces your loan principal but may have restrictions on access and fees.
High-Interest Savings Account: An account that offers higher interest rates on your deposits. Interest earned is taxable income, reducing your net return.
Which option is more tax-efficient: an offset account or a high-interest savings account?
An offset account is more tax-efficient because the interest saved is not considered income and is therefore tax-free. In contrast, interest earned from a high-interest savings account is taxable, which can significantly reduce your net return.
Can I have both an offset account and make extra repayments on my home loan?
Yes, many variable-rate home loans allow you to have an offset account and make extra repayments. This combination can maximize your interest savings by reducing your loan balance through extra payments while also lowering the interest charged via the offset account balance.
Are offset accounts worth the annual fees associated with professional packages?
Offset accounts often come with professional packages that have annual fees (around $400). They’re worth it if the interest savings from your offset balance exceed the annual fee. Generally, maintaining a higher balance in your offset account makes the fee worthwhile due to the significant interest savings.
How do tax implications differ between savings accounts and offset accounts?
Interest earned in a savings account is considered taxable income, reducing your net return after taxes. For example, a 6% interest rate might net you around 4% after tax if you’re in the 32.5% tax bracket. In contrast, the interest saved using an offset account isn’t considered income, so it’s not taxed, effectively giving you a 6% tax-free return.
Do fixed-rate home loans offer offset accounts or allow extra repayments?
Fixed-rate home loans often have restrictions. Many don’t offer offset accounts or limit them to partial offsets. They may also restrict extra repayments or charge penalties for early repayment. It’s essential to check the loan terms if these features are important to you.
How does making fortnightly repayments save more on interest compared to monthly repayments?
By switching from monthly to fortnightly repayments, you make the equivalent of one extra monthly payment each year (52 weeks ÷ 2 = 26 fortnightly payments). This extra payment reduces your principal faster, leading to substantial interest savings over the loan term.
What is loan portability, and when should I consider it?
Loan portability allows you to transfer your existing home loan to a new property when you move. It’s useful if you want to avoid the costs and hassle of establishing a new loan. However, both property settlements usually need to occur on the same day, which can be challenging.
Are interest-only loans a good option for first-home buyers?
Interest-only loans typically benefit investors seeking lower initial payments and potential tax deductions. For first-home buyers, paying only the interest doesn’t build equity in the home and results in higher interest costs over time. It’s generally advisable for owner-occupiers to opt for principal and interest repayments to build equity.
How does an offset account help me pay off my loan faster without increasing repayments?
By reducing the loan balance on which interest is calculated, more of your regular repayment goes towards paying down the principal rather than interest. This accelerates loan repayment without the need to increase your repayment amount.
Can I switch my loan features after my mortgage is already set up?
Yes, you can often switch or add features like an offset account or change repayment frequencies. However, this may involve refinancing or modifying your loan, which could incur fees. It’s best to discuss options with your lender or mortgage broker.
What are the potential downsides of a line of credit home loan?
While a line of credit offers flexibility to access funds as needed, it often comes with higher interest rates and fees. Without disciplined repayment habits, it’s easy to accrue more debt, which can lead to financial strain.
Do I save more interest by making extra repayments or by keeping funds in an offset account?
Both strategies reduce the interest paid over the loan term. Extra repayments permanently reduce your loan balance, while funds in an offset account reduce the interest charged on your loan while remaining accessible. If you might need access to the funds, an offset account offers flexibility; if not, extra repayments can be more effective in reducing interest long-term.
How do professional package discounts benefit me besides offering an offset account?
Professional packages may include interest rate discounts on your loan, waived or reduced fees (application, valuation, monthly account fees), and additional perks like discounted insurance products or waived credit card fees. These benefits can result in significant savings over the life of your loan.
What should I consider when deciding between variable and fixed interest rates?
Variable rates offer flexibility with features like extra repayments and offset accounts but can fluctuate with market rates. Fixed rates provide repayment certainty but often limit additional features and have penalties for early repayment. Consider your financial situation, market forecasts, and need for flexibility when choosing.
Is it possible to have multiple offset accounts linked to one home loan?
Yes, some lenders allow multiple offset accounts linked to a single home loan. This can help you manage your finances by separating funds (e.g., bills, savings, emergency funds) while still benefiting from offsetting your loan balance.
Will using an offset account affect my eligibility for tax deductions on an investment property loan?
Using an offset account for an investment loan reduces the interest payable, which in turn reduces the amount you can claim as a tax deduction. While you save on interest, your tax deductions decrease. It’s important to consult a tax professional to understand the net benefit.
What happens to the money in my offset account if I sell my property?
If you sell your property and pay off the loan, the funds in your offset account remain yours. However, if the offset account is linked to home loan portability with the same lender, they may use the funds to reduce any outstanding loan balance. It’s advisable to transfer your funds before settlement or discuss options with your lender.
Can I use my offset account as a regular transaction account?
Yes, an offset account functions like a regular transaction account. You can deposit your salary, pay bills, and make everyday purchases while simultaneously reducing the interest on your home loan.
Are there any limitations on the amount I can keep in an offset account?
Generally, there are no limitations on the amount you can hold in an offset account. However, the maximum benefit is achieved when your offset balance equals your loan balance, effectively reducing your interest payable to zero.
Glossary of Key Terms
- Additional Repayments: These are payments that go beyond your regular loan payment. They help reduce the total amount you owe faster.
- Fixed Rate Loan: This type of loan has a fixed interest rate for a certain time.
- Variable Interest Rate: This interest rate may change over the loan term depending on market conditions.
- Comparison Rate: This rate combines the interest rate and most fees. It helps you see how much the loan will cost you in total.
- Lenders Mortgage Insurance (LMI): This insurance protects the lender if you can’t pay back the loan. You usually need it if your down payment is less than 20%.
- Rate Lock: This feature lets you secure an interest rate for your loan application for a certain period.
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