The world of mortgages is abundant with various features that aim to assist borrowers in managing their loans and paying them off quicker than the traditional 30-year term. However, most Australians have limited knowledge about these features and struggle to determine which would benefit their specific needs.
Here are five types of home loan features that you might come across:
Offset Accounts
An offset account is a type of savings account that is linked to your home loan. The balance in your offset account is used to offset the interest charged on your mortgage, which means you will only be charged interest on the remaining balance.
For instance, let’s say you have a home loan of $200,000 and $50,000 in your offset account. Instead of paying interest on the entire $200,000, you will only be charged interest on the remaining $150,000. This can lead to significant interest savings over time, mainly if you maintain a high balance in your offset account.
Redraw Facilities
A home loan redraw facility allows you to access any additional repayments you have made on top of the minimum loan repayment. For example, if you have been making extra repayments of $200 per month after a year, you can redraw $2,400.
This gives you a flexible option to access your funds when needed.
Redrawing your home loan can be a great way to keep funds on standby or save for a holiday or car in your loan account rather than in your savings account.
Extra Repayments
With the extra repayment feature, you can pay more than your minimum monthly loan repayment. For example, if your minimum repayment is $2,000, but you pay $3,000 per month, you have made an extra repayment of $1,000.
You can make extra repayments regularly by adjusting the direct debit amount from your bank account. Or, you can make irregular extra repayments by transferring funds whenever available. This is a great way to pay off your loan faster and reduce the interest charges.
Home Loan Portability
A loan portability is a feature that allows you to transfer your existing home loan to a new property, usually when you sell your current home and purchase a new one. This can save you the hassle and cost of applying for a new home loan.
To use loan portability, settlements for both the sale of your current property and the purchase of your new property must occur on the same day. This feature can give you greater flexibility when moving house and save you time and money.
Interest-Only Repayments
An interest-only period allows you to pay only monthly interest due without reducing the principal loan amount. This can be beneficial as it keeps your repayments low, but it means you won’t progress in paying off the loan unless you make additional repayments.
Typically, interest-only periods last for up to 5 years, although some lenders may offer periods of up to 10 or even 15 years.
There are plenty more home loan features that banks and lenders are offering. Having a clearly defined purpose for the loan proceeds helps the lender evaluate the risk associated with the loan and determine the appropriate terms.
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