06 Nov Do you understand your mortgage?
Knowing what your home loan offers will give you more options when you need them. Here are some common home loan features explained to help you make informed decisions.
There’s more to a home loan than immediately meets the eye. Chances are your loan and lender are more flexible than you think. Just by knowing what you can and can’t do will help you if you want to reduce the life of your loan, save some money on interest or ease the financial pressure at a key stage of your life.
Offset accounts put your savings to work and help in reducing the overall interest cost on your home loan.
The way offset accounts work is that you only pay intereset on the difference between the full loan amount and savings which are placed against the loan amount. This reduces the amount on which interest is calculated. For instance, on a $100,000 loan with $50,000 in offset savings, interest would only be calculated on $50,000 – the difference.
The money in the offset account earns the same interest as the home loan so in effect ‘offsets’ the interest cost on the home loan. What this means is that by placing funds into an offset account and making the minimum repayment or more on your home loan, you’re going to bite into the principal amount owing sooner and reduce the term of the loan.
Redraw works in a similar fashion to an offset account but in this instance you’re actually making repayments against the home loan above the minimum repayment. The extra repayments can then be withdrawn from the loan account at a later date.
For instance, if your minimum repayment was $2000 a month but you pay $2500 a month, at the end of 12 months you’d have $6000 available in redraw. You would have reduced the principal amount owing by $6000 and would only be paying interest on the reduced amount until you used the redraw facility.
Top-up facilities allow you to borrow further funds up to the amount you originally borrowed. It is different to a redraw facility which works on extra repayments you’ve made. With top-up you take a further advance on the loan.
This is, in general, a more efficient way of obtaining funds for renovations, debt consolidation, holidays etc.
Sometimes the original loan you took out with your lender no longer suits your needs, even though it did in the early years.A classic example of this is a borrower who initially took out a basic variable loan but now need a fully featured home loan.
There’s no need to refinance the existing loan to a new lender. Most lenders allow existing borrowers to switch between products for a nominal fee. The switching options will depend on the products but, for example, on a variable home loan most institutions will allow you to switch to a discount variable or fixed product.
Do you already have a loan that you’re happy with but you want to move to another property? If your answer is yes, there’s no need to pay out your existing loan and apply for a new one because portability can assist you in this circumstance.
Portability allows the loan security to be moved from one asset to another. For instance, if you were to purchase a new property you’d be able to transfer your existing loan over to a new property without having to obtain a new loan.
Split facilities allow borrowers to split their total loan across two or more products. Split facilities are used for differing reasons with the two main ones being:
- to distribute the loan across various properties when secured by the one loan, and
- to spread interest rate ‘risk’.
The most common split is designating certain percentages of the loan to fixed and variable interest rate products.
Expected or unexpected events, such as the impending arrival of a baby come up in life. At such time a mortgage repayment relief may be needed.
In certain circumstances or if you are ahead in your repayments, most institutions will permit some form of repayment holiday. The best course of action, if needed, would be to contact your lender and ask what options you have available to you