Whether you’re a first home buyer or a refinancer, choosing a mortgage with features can help you to unlock your home loan’s potential.
Oftentimes, first home buyers can find themselves gravitating towards “no-frills” home loan options. This helps to keep repayment costs down in those early years of having a mortgage.
Home loans with greater features typically come at a higher cost, through ongoing fees or higher interest rates. However, borrowers may find that a home loan that offers helpful features, such as an offset account or redraw facility, can often be worth the extra dollars.
In fact, some leading, low rate lenders, like Reduce Home Loans, are able to provide home loans with features, while still offering competitive interest rates.
Here are some of the features available with Reduce Home Loan mortgages, and how they can help borrowers use a home loan’s capabilities to their advantage.
1. Split Rates
A helpful feature for more indecisive borrowers, or those looking to best hedge their bets, is the ability to split home loan interest rates between variable and fixed. This can be particularly helpful during economic downturns, when borrowers may feel uncertainty about how the Reserve Bank of Australia’s cash rate may impact variable home loan rates.
The ability to fix a portion of your home loan offers borrowers the best of both worlds for their repayments. For example, on a $400,000 home loan, a borrower may fix $150,000 worth of the loan, and have the remaining $250,000 on a variable rate. If home loan rates drop, then their mortgage repayments will partially reduce too. However, if rates rise, their repayments won’t increase as much as if the whole loan was charged a variable rate.
2. Offset Account
An offset account can be a helpful way for a borrower to reduce their mortgage repayments and potentially shave years off their loan length. It is a linked savings or transaction account that is connected to your home loan. You are able to deposit money into it like a regular savings or transaction account; however, the account balance is “offset” against your home loan balance.
What this means is that a lender will view your home loan balance as minus whatever total is in your offset, so you are charged less interest on your repayments. For example, a borrower with a $400,000 home loan may have $30,000 saved in their offset account. This means their repayments won’t be for a $400,000 home loan, but a $370,000 home loan, reducing their monthly repayments.
3. Extra Repayments
A home loan that allows you to make extra repayments without being charged a fee can significantly reduce your overall repayments. Chipping away at your principal means you will pay less interest overall and reduce the years you’re repaying your home loan.
Not all home loans allow borrowers to make extra repayments on their mortgage. After all, a lender earns more money if you’re paying off your home loan for longer, than if you reduce your principal with additional payments. When looking for your first, or next, home loan, consider looking for options that allow you to make extra repayments.
4. Redraw Facility
A redraw facility allows homeowners to ‘draw down’ on any extra repayments they’ve made on their home loan. For example, if you pay an extra $100 a month, that’s an extra $1,200 you can access in a year. Any extra repayments will also reduce the amount of interest you pay on your home loan. This essentially means the repayments earn the same interest rate charged on your home loan – without paying tax on interest earned if your funds were in a savings account.
A redraw facility is similar to an offset account in this way, but there is a key difference. While you can access your funds easily with an offset account through a debit card or ATM withdrawals, accessing redraw facility funds is harder. You may be able to access the full balance minus one months’ mortgage repayment amount, or there may be a cap on the amount and frequency you can withdraw funds. This can be a good thing for those who struggle with dipping into their savings.
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