Money Buddy guide to home loan features
Looking for a suitable home loan can be confusing, especially if you don't understand what features are available and what these options actually mean.
This article explains what redraw facilities, offset accounts, extra repayments and interest only payment options mean, and how they can influence your home loan decision.
What Does Redraw On A Loan Mean?
A redraw facility allows you to make extra payments on your home loan and then access this money again when you need it. By paying off a greater amount of the loan you save money, as no interest is charged on the amount already repaid, and with a redraw facility you have the security of knowing you can access the money if need be.
However, in making use of this feature it is important to look at the fine print. For example, does your bank charge you for redrawing - is there a fee for each redraw and/or a redraw facility activation fee? Is there a minimum redraw amount? Is there an additional monthly or annual fee?
A redraw facility can be a useful way of helping you reduce the interest on your loan, but how useful it is will be determined by the specific plan that the lender offers.
What Is An Offset Account?
An offset account is, simply, a savings account that is connected to your home loan. The money you place in this account counts towards your mortgage, and therefore reduces the amount of interest that you have to pay. The offset account also functions like a normal savings account, with the money being accessible by ATM and EFTPOS.
Let’s say for example you had a home loan balance of $300,000 and an offset account balance of $10,000. When your daily interest is calculated, the lender will offset your loan balance with your offset account balance, meaning that they would only calculate interest on $290,000.
What Does 100% Interest Offset Mean?
A 100% offset account means that the same interest is earned in the savings account as is paid in the mortgage account, whereas a partial offset account means that a lower interest is earned than is paid. So, a 100% offset account is usually a better deal, although many banks will offer them only with certain loans.
For a more detailed explanation of offset accounts on home loans, read our offset account guide.
An offset account is often more flexible than redraw facilities, but the same questions should be considered - what additional fees apply, and will my individual savings ability offset them?
Can You Make Extra Repayments?
If you make more than the required mortgage repayment then the amount of money your interest is calculated on will decrease, and thus your loan will cost less in the long term. This feature is extremely useful if you expect to be earning excess money at any point during the loan.
Before deciding on a home loan it may be worth checking whether extra repayments are allowed and whether you are charged extra fees for making them. If you expect to be making extra repayments you should look for a loan with minimal repayments fees. To see how much of a difference this will make, check out our extra repayments calculator.
Can You Make Interest Only Payments?
An interest only loan means you are only required to pay back the interest accrued on your loan, rather than paying both the interest and the principal (that is, the amount you borrowed.) At the end of the loan - or the end of the interest only period - you are then expected to start paying back the principal (or pay it back in full depending on the loan.) For more information, read our guide to interest only home loans .
Interest only loans keep your repayments down for the interest only period, allowing you to invest your money in other areas. Use our interest only calculator to see what your repayments could look like with an interest only loan.
Can You Make Extra Repayments On An Interest Only Loan?
Most banks allow you to make extra repayments off your principal loan amount while you are making interest only payments. You can also be allowed to make extra interest only payments, it all depends on the terms and conditions of the particular home loan. Check with the financial instiution for full details, including any additional fees or charges.
Choosing your home loan
It's important to have some grasp of what home loan features are available and which features you need before deciding on a home loan. Make sure you know exactly what fees and charges are associated with any features you intend to use, and assess the savings you could make against the associated costs. You can use our site to compare a selection of home loans to help you decide what suits you.
All information on our site is general in nature. Talk to a financial planner before making a decision, to help ensure you don't get caught with the wrong loan. Understanding the concepts discussed in this article will help you be able to talk to your financial advisor, and question why they have made their product sugestions.
Want more general information about home loan options? Read our Money Buddy Guide to Home Loan Types.