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.

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?

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.

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.

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.

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 you should check 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.

Interest only 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.)

Interest only loans keep your repayments down for the interest only period, allowing you to invest your money in other areas.

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.

Want more information about your home loan options? Read our Money Buddy Guide to Home Loan Types.