When choosing a home loan, a competitive rate is important, but there are so many other features to consider. Getting into the nitty gritty of your home loan could make a big impact and even help you pay off your loan faster.
Here are some of the best home loan features to consider for your mortgage.
Offset accounts.
As the name (kind of) suggests, an offset account can help you ‘counteract’ the interest you pay on your home loan, helping you pay it off faster.
What is an offset account?
A home loan offset account is basically an everyday transaction account, but with special powers. Because it’s linked to your home loan, the money you keep in the offset reduces the interest that accumulates on your loan. The higher the balance, the less interest you pay. Isn’t that interesting?
Let’s pretend you have $300,000 left on your home loan, and $30,000 in your offset. Instead of being charged interest on the full $300,000, you’re only charged on the difference i.e. $270,000. If you grew your offset balance to $50,000 (go you!) you’d only pay interest on $250,000. It's one of the simplest ways to minimise your interest charges, especially if rates increase.
Pros of an offset account.
You can reduce the length of your loan and save on the interest charged as part of your repayments by reducing the loan balance you’re charged interest on. Plus, there’s flexibility with unrestricted access to that offset account money. Most banks now offer the option of having multiple offset accounts, so you can use them for different needs or goals.
Cons of an offset account.
Offset accounts can come with additional fees and higher interest rates, so check them first. Plus, to link your loan to an offset, you’ll have to be on a variable rate. Also, to see a big difference, you’ll need to make big deposits or change the way you currently manage your money, like getting your salary deposited into your offset, for example.
Redraw facility.
Redraw facilities make a lot of sense if you want to get ahead of your loan and weave yourself a safety net made out of money.
What is a redraw facility?
A home loan redraw facility lets you make additional payments on your home loan while giving you access to extra funds if you need or want them. So, if you face an unexpected bill (or a need a much-anticipated holiday), you can ‘redraw’ the added funds to pay for it. And if you don’t? Congrats – you’ve just made extra payments on your home loan, reducing your interest.
Of course, a redraw is designed for occasional use, like accessing an emergency stash of cash from under the mattress. Just remember, you have to put it there to be able to take it back out. And if you do take it out, your home loan balance and interest charges go up again.
Pros of a redraw facility.
Better money management – what’s not to love about rainy day savings or sunny holiday spending when you need it? Plus, you may pay less interest.
Cons of a redraw facility.
A redraw may come with fees and withdrawal restrictions, so always check the conditions before you sign up.
Offset or redraw, which will you choose?
Much like asking whether you’d like barbeque or tomato sauce on your bacon and egg roll, it really depends on your personal preference. Redraw facilities and offset accounts both reduce the interest bill on your loan. The main difference is the amount of flexibility they offer. As an offset account works like a transaction account, you can transfer money in and out of it at any time, access the funds via card or online shopping, you get the gist.
On the flip side, a redraw facility is not a bank account, but a feature attached to your home loan. You’ll only be able to redraw money that is over and above your minimum required repayments. If you’re the kind of person who always has an umbrella at the bottom of their bag just in case, you may find a redraw facility is a good fit for you.
What other features could you consider in a home loan?
There are a few other ways you can make your money and home loan work smarter. If you consider yourself pretty savvy with money, try these on for size.
Make additional repayments.
If you receive a lump sum of cash, whether it’s your tax return, a work bonus, or Christmas present, why not put it towards your mortgage? It never hurts to get Santa involved. Chipping away at the outstanding balance will also reduce the interest that’s charged on your loan.
Consolidate your debt.
If you have other debts like a car loan or HECS debt, you may be able to save some dollars by combining these with your home loan. In the banking biz, we call this debt consolidation. Home loan interest rates are often lower than those on personal loans, so you could potentially pay less interest. Intrigued? You can learn all the ins and outs of debt consolidation here.
Consider fixing your interest rate.
Opting for a fixed interest rate means you can temporarily lock yourself into the same rate for 1 to 5 years, which is perfect for people who don’t like surprises. If that feels a bit too daunting, you could also opt for a split interest loan. If that has piqued your interest, you can get the lowdown on fixed or split home loan options.
Change the frequency of your repayments.
There are 12 months in a year, but 26 fortnights. While we can’t make that make sense, we can make it work in our favour. If you’re currently operating on monthly mortgage repayments, switching to fortnightly could see you paying an extra month’s worth off each year.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.