What else to consider when navigating the home loan maze
When it comes to choosing a home loan, it’s not always as straightforward as choosing the one with the best interest rate. A question we obviously often get from borrowers is about the different features that can come with a loan – and what the added flexibility might cost.
It’s true that home loans can come with baffling lists of different features, some of which you may not understand, or think you will ever need. So understanding what a particular loan feature could offer you now or in the future can ensure you will choose the most suitable loan for you, saving you money and hassle.
The types of features offered with home loans – just to name a few – can include the ability to make extra repayments, the ability to redraw on your repayments, offset accounts, debit or credit cards attached to your loan, and the ability to make and receive payments online.
While there are some general definitions for the different loan features, each lender could have a slightly different take on a particular feature, or even offer some that no other lender does. It’s best to ask for further details on what loan features a lender offers and what benefits each has, but here is a simple overview of what they can offer you.
Direct salary credit is a feature most lenders allow. It is essentially an arrangement that deposits your salary straight into the loan account, which helps to reduce the amount of interest you pay overall. This can be particularly good if you aren’t a disciplined saver, as it can help you avoid falling behind on your repayments. If you don’t wish to deposit your entire pay into your home loan, you can opt to contribute a certain percentage of your pay to go into different accounts.
Opting for a loan that has redraw facilities and the ability to make extra repayments allows you to transfer additional amounts onto your loan account and redraw upon them, giving you access to cash when you need it. The extra repayments made onto your loan will offset the loan balance and therefore reduce the interest charges that you are subject to. Beware that some lenders charge fees on each redraw. And don’t forget that the reduced interest charges you were enjoying by overpaying will disappear when you redraw the money, because your loan balance will go up.
Very similar to the concept of enabling you to make extra repayments and redraw upon them is having a savings account that is connected to your loan. This is called an offset account. This works the same way – the amount of deposited is effectively taken off your outstanding loan balance, and then interest is calculated based on the new sum. But the difference is that you have a separate account for the savings. While some people find it useful to have a separate account for your additional repayments, many believe it is superfluous and often costly.
Whether your loan has an offset account or has the ability for you to make additional repayments into and redraw from the loan account itself, either way the more you pay in, the less interest you’ll pay.
Some loan accounts are fully ‘transactional’ and provide you with a debit card and/or credit card. This can enable you to combine your mortgage and savings into one account.
While your salary and cash deposits will go towards your loan to reduce the amount of interest you pay, you can access the money left over after your monthly repayment to use for your monthly expenses.
Be aware that discipline may be needed to effectively manage an all in one account, and that a higher interest rate may apply. However, when used properly, loans with this feature can be tax effective and offer flexibility which others may not.
While most loans have standard monthly repayments, some loans offer the option of increasing the frequency of these repayments to fortnightly or weekly. On some home loans, the weekly repayment amount is determined by dividing the monthly repayment by four, even though most months have more than four weeks in them (or similarly for fortnightly repayments, dividing the monthly repayments by two).
What this means is that the repayment amount is calculated as though you are making 48 repayments per year (12 months multiplied by four repayments per month), even though you will in fact be making 52 repayments. Either way, the interest is calculated daily, so don’t be alarmed into thinking you are paying more interest, as this isn’t the case. What it does mean though, is that you’ll be paying off your loan sooner (as you are making nearly an extra month’s repayment each year), and so you’ll find that a 30-year loan would be repaid in about 26 years!
Choosing to increase your repayment frequency also reduces the overall interest you pay on your loan, as you are reducing the loan balance at more regular intervals than simply once per month.
Weekly and fortnightly repayments are also helpful for those who are paid weekly or fortnightly, and are a useful way to help you manage your budget.
One repayment option for those who feel they need to ease slowly into paying off a mortgage is interest only repayments. This feature allows you to pay off only the interest portion for a set period, which is usually only a relatively short amount of time (up to five years). While this will make your repayments smaller for now, you may end up paying more overall and increase your loan period. Many opt for interest only repayments for tax purposes on an investment.
Portability is a useful feature if you think you may move houses before the end of your loan period, as it enables you to take the same loan with you when you sell your home and buy another. This saves you hassle and various other fees but could have different charges attached to it.
Considering the costs and benefits of the features offered by various loan options can ensure you get the best value from your home loan. Talk to your lender about which features are best suited to you and your lifestyle.
Will Keall, iMortgage’s general manager, has a wealth of marketing and business development experience gained in Australia and the United Kingdom. These include high level roles in a range of sectors such as financial services, insurance, travel and tourism, motoring and professional services.
Will played a pivotal role in the successful establishment of iMortgage. His dedication and passion for the mortgage industry have won Will the utmost respect as an integral part of the iMortgage brand.
A self confessed “numbers and brand geek”, Will calls himself a conservative investor with a long-term philosophy. He also believes it’s important to “love where you live.”
Will is a cricket and football tragic, who also enjoys running.