Home Loan Features: How Do You Choose What’s Right For You?
Are you looking to buy a house and need a mortgage? Have you heard the terms redraw, offset account and portability and wondering if you need any of them? Please read on to find out about loan features and to avoid costly features you do not need. But more importantly, get your head around some of the lingo/jargon that sits inside the home loan space so you are much better informed.
When looking for a lender to give you a mortgage, it can sometimes feel overwhelming researching options and all the different loan features. Here’s a breakdown of the different types of home loan features you might come across.
Redraw facility
This feature allows you to withdraw any extra payments you have made. If you build up your payments more than the minimum loan repayment amount, you can build up a redraw and access it when needed. Many homeowners use it as a savings safety net that is largely out of mind unless you need it. If you don’t use it, the extra amount paid off your loan brings down your interest, too.
Additional repayments
Not all loans allow you to make additional repayments! This feature can help you save money on the interest you will pay over the term of your loan when you have the cash available to boost your mortgage repayments.
Portability
This feature allows you to keep your loan when you sell your property, even if you purchase another. If you plan on moving around a lot and buying and selling your properties as you move, this can be a beneficial feature. It does come with some restrictions concerning property values and settlement dates that we can discuss more with you if it’s a feature you would like to have on your loan.
Mortgage offset account
A 100% offset account is like a saving account that is connected to your loan account. The amount of money in that account is offset against your loan balance, reducing your interest. If you have a mortgage of $500,000 and you have $10,000 saved in your offset account, you only pay interest on $490,000. It can be a very effective way to repay your home loan faster and also has other potential tax saving benefits if you were looking to build wealth through property. By setting this account up the right way – it can provide more flexibility and choice around future purchases in a more effective way.
Partial offset loan
This feature has the same principle as the 100% offset account, however it is likely to be at a reduced percentage ie: 40%. This means the cash you put into the account will only offset 40% of the interest charged against the home loan in this example.
What are other terms and costs to consider for a mortgage?
Although the following are not features you can choose to leave off your loan, they are important factors to be aware of and consider alongside a loan’s features to determine if it is the right product for you.
Loan term
This means how long you have to pay off your loan and it determines how much interest you will pay during the life of your mortgage. If you can afford to pay your loan off faster you can save a substantial amount of interest, but you will need to be able to make those additional repayments on your mortgage.
Additional repayments fees
Some loans have a fee if you make a lump sum payment.
Break cost (or Economic Repayment Cost)
These are usually charged when you exit a fixed interest rate loan before the end of the fixed period.
Combination loan fee
If you take out a combination loan of fixed and variable interest rates, some lenders do not charge a fee (especially if on a package) with others charging up to $600.
Deferred establishment fee
This is a fixed amount you can be charged if you exit a loan within a certain period of loan establishment, usually three to five years. Does not often appear these days, as they were abolished over 10 years ago. However, some loans outside of NCCP regulatory protection can have this in the fine print.
Direct debit fee
If your loan repayment is automatically transferred from an institution different to your mortgage lender, you may be charged a direct debit fee that can add as much as $3.50 to each repayment you make off your loan.
Late payment fee
If you miss a loan repayment by its due date, some lenders charge a late fee, ranging from a flat fee to a higher interest rate applied on the outstanding amount.
Mortgage discharge fee
When you repay your loan, all lenders charge a transfer that covers the lender’s legal and administrative costs in order to transfer the ownership of the property to you or to a new lender..
How can a mortgage broker help you find the right home loan with the right features?
If you’re not quite sure how home loan features work, you could end up paying costly fees for features you do not need. The best way to understand and choose loan features is by talking to an experienced broker. Mortgage Brokers are mortgage experts with access to a range of lenders and are legally required to work in your best interests.
For more information or a no obligation chat on how we can help you – feel free to Call us on 07 3889 9719 or contact us today.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
