Home Loan Features
Whether you are a first home buyer, or your circumstances have changed significantly since the last time you purchased (or refinanced) your home, it helps to know what mortgage features are available to you, and consider which would fit with your long and short term goals.
Types of Loans:
Variable Rate Loans: Variable loans are loans that are subject to interest rate fluctuations, and are affected by various things, including the cash rate set by the Royal Bank of Australia. Whenever your bank increases or decreases interest rates, your repayments will have a corresponding increase or decrease in the interest component of your monthly repayment.
Variable rate loans are generally full featured loans which operate with offset accounts, allow extra repayments and redraw, and can sometimes allow you to take a break from making repayments (repayment holidays).
Fixed Rate Loans: Fixed loans allow you to lock in a specific interest rate over a set period of time, generally between one and five years. This loan is popular among borrowers who want to know precisely how much their repayments will be each month.
There are limited lenders in the market which will allow you to make additional repayments or operate an offset account on a fixed rate loan, so those are some potential downsides to this type of loan if you like those features, but in a market where interest rates are expected to rise, fixed rate loans can provide repayment security for the borrower. The corresponding downside of this of course, is that being locked into a fixed rate loan would prevent you from enjoying interest rate decreases for the period of time that your loan is fixed, and exit fees can be significant.
More information about fixed rate home loans is available here.
Split-rate Loans: Allowing you the benefits of both worlds, a split rate loan has one portion of the loan as a variable rate loan, and the other part as a fixed rate loan. This type of loan therefore gives you the flexibility to employ interest reducing strategies (via extra repayments, or the use of an offset account) on the variable portion of the loan, and it also reduces risk of repayment increases via the fixed portion of the loan.
Interest-only Period Loans: In general terms, a loan repayment due each month/ fortnight will consist of 2 elements. The first being an amount which will come off the principal amount (the amount you borrowed to purchase the property). The second element is the interest charged by the lender for that period on the principal amount outstanding (the amount borrowed less the amount already paid off). An interest only loan is a loan where only the interest is required to be paid each month/ fortnight. There is no requirement to pay anything off of the principal. Terms for these types of loans are generally available for 1- 10 years, depending on the lender, and whether the property is owner-occupied, residential or commercial.
Low-doc Loans: Mortgage lenders will require you to provide evidence of your ability to meet loan repayments, but this can be problematic for some individuals, such as the self-employed. Low-doc loans require less proof-of-income paperwork, and because of this they generally attract a higher interest rate than full- doc loans.
Other features which can give you flexibility & save you money:
Redraw Facility: A redraw facility lets you make additional repayments to reduce your mortgage balance and save on interest. The redraw facility is a common feature of many home loans. It’s not available, though, on construction loans and only some lenders allow it for fixed rate loans.
Depending on your lender, additional payments can be made at no extra cost and redrawn funds can be accessed at any time.
Offset Facility: A mortgage account with 100 percent offset is a fully featured transaction account that sits alongside a home loan. In many ways, it acts just like a regular bank account which allows you the freedom to make deposits and withdrawals anytime you wish. However, along with the usual facilities, like ATM access and direct debit, there’s another significant advantage. Any money sitting in the offset account reduces the amount that the bank calculates interest payments on, which can save you a significant amount of money over the term of your mortgage.
For example, if a borrower has an offset account with a balance of $100,000, and a loan balance of $300,000, they will only be paying interest on $200,000 (ie. the loan balance minus the balance of the offset account).
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