This article originally appeared on Nectar Mortgages and has been published here with permission.
When it comes time to buy a home, there’s a lot to learn and a lot of jargon involved in applying for a home loan.
Moreover, anyone who has spent time looking at home loans knows that there is more to them than just the loan term and interest rate.
To make their mortgage products more attractive, lenders include different features with their home loans, each of which comes with its own advantages and disadvantages. Which home loan type and subsequently, which features you end up taking, will depend on your personal circumstances.
So, which home loan features are right for you? Let’s find out
If you’d like to apply for a home loan, our Brokers would be more than happy to help. Get in touch with an expert Whiteroom Finance Broker here.
This is a feature that allows you to put in more money towards paying off your mortgage, in addition to your regular repayments. This allows you to pay your loan off faster and potentially saves you a substantial amount of money over the long term.
Both variable and fixed-rate home loans may offer this feature, though they are more common in variable-rate home loans.
Many fixed-rate home loans that offer this facility have a cap on how much extra you can repay in a year. Some lenders may also charge you for making extra repayments.
This is a transactional account that is connected to your mortgage. It is used to help reduce the interest paid on your loan. Any money kept in this account is used to ‘offset’ the principal amount of your home loan. This means you will be charged less interest.
Here’s an example: Let’s say you have $20,000 in your offset account and the principal amount of your home loan is $800,000. Your lender will subtract the money in your offset account from your mortgage ($800,000-$20,000) and only charge you interest on the remaining principal amount ($780,000).
Many investors and owner occupiers like this facility because they can draw on the amount whenever they want. Remember though, the interest to be paid will be adjusted according to the new principal amount.
If you have taken the extra repayment feature, the redraw facility will usually go along with it. This feature lets you withdraw any extra repayment you might have made, and use it for something else, like renovations, a car upgrade or a new arrival in the family.
Just bear in mind that some lenders may charge you for redrawing.
Split home loan
This option allows you to put a portion of your home loan at a variable-rate and the rest at a fixed-rate, offering you the best of both worlds.
Usually, when you make repayments on a mortgage, you will pay back the principal amount as well as the interest charged. With the interest only feature you just pay back the interest amount, which keeps your repayments lower as well.
This feature is usually used by investors who plan on renting out or selling their properties soon. You should note that with this feature, as you are not paying of your principal loan, you will be extending your loan period and therefore you’ll be paying more in the long term.
Also, you can’t use this feature for an extended period. Most lenders will only allow this feature for five years, but some may extend that period to 10 or 15 years.
This feature allows you to reduce or pause your mortgage repayments for a period of time (usually between three to six months depending on the lender). You would normally only use this feature if you’re experiencing extreme financial difficulty or you are facing a big change in your life, like changing jobs, the arrival of a new baby or any other reason where your income generation is affected.
As this option is usually taken during times of significant financial stress, you shouldn’t use this feature lightly. Consider it a last resort.
Be aware that repayment holiday policies will differ from lender to lender and that some lenders will only offer this feature to borrowers who are ahead of their mortgage repayments. Also, once the repayment holiday period ends, a lender may either extend your loan term or increase your repayment amount.
Home loan portability
Home loan portability means that should you decide to move to a different home, you can transfer your home loan to your new property. This can help you save on the time and costs of refinancing. Bear in mind that you may have to pay a fee to make use of this feature.
Also, this feature is only available when you are selling your property and buying a new one on the same day.
Home loan top-up
This is a feature that may let you borrow more money for something like a car payment or renovations. Lenders may grant you this feature if you have built sufficient equity in your home. You may find this feature tempting as mortgage rates are generally lower than credit card or personal loan rates.
Keep in mind though, that while borrowing more against your home loan is usually cheaper than other forms of debt, there’s no such thing as free money! Utilising this feature will involve renegotiating the terms of your mortgage and increasing your home loan amount, which will also increase the size of your monthly repayments.
Hopefully this article has given you a better idea of what loan features are available. It’s still a good idea to talk to a Whiteroom Finance Mortgage Broker as they can provide valuable insight on which features best match your needs.