Owner occupied home loans

About Owner Occupied Home Loans

If you’re buying a home to live in, an owner occupied home loan allows you to borrow the amount you need to purchase an existing home, build a new property or renovate an existing one.

Home ownership is the Great Australian Dream and it’s a big business, with owner occupier loans accounting for the majority of home loan commitments each month according to the Australian Bureau of Statistics (ABS).

What is an owner occupied home?

As the name implies, an owner occupied home is one you purchase with the intention of living in it. Owner occupied home loans generally have lower interest rates than investment loans because owner occupiers are seen as a safer bet than an investor. An owner occupied home loan may also have certain terms and conditions that restrict you from renting out the property for a period of time.

Owner occupier home loan interest rates

The interest rates on owner occupier home loans are generally cheaper than interest rates on investment home loans. That’s because owner occupier borrowers are generally seen as being less risky than an investor.

Interest rates on owner occupier home loans are currently at record lows, with most below 3% p.a.

Owner occupier home loan fees

If you’re not careful, fees on an owner occupier home loan can sting you. These fees include:

• Upfront fees
• Ongoing fees
• Exit/break fees

Owner occupier home loan features

Owner occupier home loans come with a range of features such as an offset account, redraw or line of credit facility , and the ability to make extra repayments.

Home loans that come with these features are generally more expensive than home loans that don’t offer these. However, most of these features are designed to help you pay your home loan off sooner, which could save you money in the long run.

Redraw facility

A redraw facility is a home-loan feature that provides an opportunity for you to access the additional payments you have already made to your loan. Think of it like saving for a rainy day — you make extra repayments and the amount you amass by doing so will be accessible to you whenever you need it.

The redraw facility feature is useful for budget-conscious owner-occupiers who might be planning to save for a renovation, a property investment, or any other big purchases.

For instance, let us assume that your monthly repayment is $1,500. Instead of paying just that, you shell out an extra $300 every month. In a year, you will have made $3,600 worth of extra repayments. Should you consistently make extra repayments for the next four more years, you will be able to accumulate $18,000 in your redraw facility that you will be able to access to for a certain fee.

Take note that lenders have different rules on redraw facilities. Some may only allow a certain number of withdrawals per year while others might charge extra for excessive withdrawals. It is best to clarify the terms of your home loan first before sealing the deal.

Getting a mortgage product with redraw facility is for owner-occupiers who want to save on their loan. A redraw facility will not only help you save a certain amount in interest and reduce the term of your loan; it can also provide you a way to save for whatever comes your way in the future.

Offset account

An offset account is often confused with the redraw facility feature. While both let you access a pool of funds you made on top of your home-loan repayments, they work quite differently from each other.

If you have a savings account, then you can easily understand how an offset account works. An offset account allows you to create a high-interest savings account that is linked to your home loan.

The great thing about an offset account is that the amount of money you save in it is accounted daily against your loan balance. This means that you will not be paying interest on the entirety of your home loan, but only on a particular portion not covered by your offset account.

Let us say you still have a balance of $435,000 on your 4.9% home loan. Fortunately, you have an offset account with $35,000 worth of funds in it. In this case, your lender will only charge the 4.9% interest rate on the remaining $400,000. The difference may seem small, but you can save significantly over time if you maintain your offset account and regularly put extra funds in it.

The big difference between an offset account and a redraw facility is the accessibility of the funds. Since an offset account is like your regular savings account, then you can withdraw your funds whenever you need them without charges.

Another significant distinction is that the funds you pooled into your offset account are not considered extra repayments. Unlike a redraw facility, an offset account will not really help you settle your mortgage early. It can only lessen the interest you pay on your loan.

Sticking to your lender when you know there are other competitive mortgage products out there is a mortal sin if you want to save on your home loan. If you are not happy with your current lender or with your home-loan product, then it is recommended that you do some shopping around for better deals. However, be sure that your current lender does not charge excessive termination fees, as this could only make you regret switching.