While comparing home loans, there’s much to look at beyond the headline rate advertised by the lender. Needless to say, the interest rate matters, and a slight difference can save you thousands over the years. Even so, the home loan with the lowest advertised rate might not be the best deal for everyone. That’s why it’s recommended to compare home loans with different options and features to find one that’s most likely to match your requirements. You can also opt for home loan features that help you build some flexibility into your loan or pay it off sooner. However, some of these options could cost you more, so it’s a good idea to chat with a broker to make sure they’re worth it before you commit.
Here’s a round-up of some common home loan features that you might want to consider.
- Extra repayments
Making extra payments toward your loan could help you pay off the debt faster and save money in interest charges over the life of the loan. Consider this example.. Imagine you have taken out a $500,000 home loan for 30 years, with an interest rate of 2.3 per cent per annum. Five years into the loan, you decide to take some small steps to pay off your loan early. At this stage, even if you only choose to pay an extra $100 on top of your minimum monthly repayments, you would save $9,775, and pay off your loan 1 year and 7 months earlier.
Many home loan providers allow you to make fee-free extra repayments on variable rate home loans. That doesn’t mean you cannot access the feature with a fixed rate mortgage, but there might be a fee or restrictions regarding the number or value of extra repayments you’re allowed per year.
Depending on your credit provider, you may be allowed to make several lump sum payments over and above your minimum repayment amount. You could also choose to pay a little extra each month to consistently reduce your debt over time.
- A redraw facility
Extra repayments and a redraw facility often go hand-in-hand. Once you’ve made additional repayments on your home loan, you may use a redraw facility to ‘withdraw’ some of these funds if you need them urgently. For instance, you may choose to redraw the additional funds to pay for a home renovation or an urgent repair.
However, it’s worth remembering that redrawing the additional money you paid towards your home loan will increase your outstanding balance (and the interest charged on it) once again. Your lender might also charge you a predetermined fee for redrawing any money from the loan, or place restrictions around how much or how often you can redraw. Still, in some cases, you might find it cheaper to dip into your additional loan repayments than taking out a personal loan with a high interest rate. It’s usually best to crunch the numbers to pick the most suitable option for your situation.
- A 100 per cent offset account
If you don’t want to lock your savings into your home loan, you may want to consider a 100 per cent offset account to help reduce the interest on your home loan, while still keeping your savings accessible.
An offset account is similar to a regular bank account in many respects. You can have your salary deposited into the offset account, use it for paying bills, and even ask for an ATM card to withdraw funds. However, unlike an everyday bank account that might pay you some interest on your deposits, an offset account doesn’t pay you any interest. Instead, the balance in your offset account is deducted from your outstanding loan balance, and you’re only charged interest on the difference. So, if you owe $300,000 on your home loan but you’ve got $50,000 sitting in your offset account, you’ll only be charged interest on the difference of $250,000.
While it’s true that an offset account can help you save money in interest charges, most lenders will charge you a fee for this facility or increase your interest rate slightly. It might only be worth paying for the feature if you’re going to have a decent sum of money deposited in the account at all times.
- Repayment holiday
The average term of a home loan is 25-30 years, but a lot can change over three decades, including your personal and financial circumstances. A repayment holiday can give you a much-needed breather by allowing you to skip your home loan repayments for a few months. If you find yourself unable to make your repayments due to an emergency or personal situation, having this feature available can make a real difference. For instance, you might want to use this feature while you’re on maternity leave or taking a sabbatical from work to upskill. Or, if you’re out of your job for a few months due to an illness, a repayment holiday could help you manage your expenses better.
You may also consider purchasing mortgage protection insurance to cover your repayments for a longer duration in times of crisis.
- Home loan portability
It’s possible that you might outgrow your new home before you’ve finished paying off the mortgage on it. You may have welcomed a new family member, decided to move to a new suburb, or simply require more space for the family. While there could be many reasons for switching your home, closing your existing mortgage and applying for a new one could see you jumping through several hoops that you might want to avoid.
A home loan portability feature frees you from the struggle of applying for a new loan each time you shift, by allowing you to transfer your current mortgage to a new property. Instead of applying for a new home loan, loan porting lets you switch the property on which your mortgage is secured while allowing you to continue with the same interest rate and features.
The main benefit of this feature is the time and cost savings in avoiding closing one loan and setting up another. However, you’ll still need to pay for a property valuation (for both your existing and new homes), and a small loan transfer fee might apply. You’ll also pay for Lenders Mortgage Insurance (LMI) if you’re borrowing more than 80 per cent of the property’s value, even if you paid it before at the time of applying for the original mortgage.
Overall, it’s worth noting that while additional features might make it easier to manage your mortgage, it’s important to weigh up if they are worth the cost you’re going to pay. When comparing your options, consider your lifestyle and goals, only selecting features you’re really going to need and use. Choosing a home loan with all the bells and whistles is likely to cost you more than a low interest vanilla home loan. It could help to speak with a mortgage broker to understand what features are better suited to your requirements while ensuring a competitive rate on your home loan.
