What type of loan features are right for you?

With so many lenders, types of loans and loan features to pick from, it can be hard to know what’s right for you.

When making such a big decision that can have long lasting implications on your financial success, it’s important to understand what options are available and what they could mean for you.

We’ve outlined some of the key features in this article to help equip you with the knowledge necessary to make the best choice. 

Types of features available

The interest rate may be the key factor most of us look at when choosing a mortgage and lender, but loan features are just as important. There are many available and they may be baffling to begin with, but you must give them due consideration. Some features will come free, or standard with your loan, others will incur a fee, either in the form of an increased interest rate, monthly or yearly fees, or a per transaction cost.

The most common of these features are discussed in more detail below.

Offset account

An offset account is an account that sits side-by-side with your home loan and lets you put any savings to work to reduce your loan interest charge.

The balance in the offset is deducted from the loan principal when interest is calculated. In the end you pay less interest, as more of each repayment goes to reducing the loan balance. Some lenders will allow you to have multiple offset accounts (an account each for a wife and husband). Offset accounts usually come with packaged loans, which means they will incur a yearly or monthly fee and sometimes come with a higher interest rate. This is because, if managed properly, offset accounts can save you a significant amount of money over the life of the loan, so the lender will need to compensate.

Think carefully about how you use an offset account, as if they have minimal funds in them, you will pay more in additional interest and fees, than you would with a standard non-packaged home loan. I can help you run different scenarios to assist in understanding the benefits.

Redraw facility

Most standard variable home loans come with a redraw facility. This allows you to access any extra repayments you’ve made to your home loan. This may come in handy if you’re short of cash in an emergency, or you want to take a holiday, but it will put you behind in terms of interest savings. Some lenders will charge a fee for accessing your redraw, and may have minimum amounts you can take out.

Payment frequency

It’s worthwhile to check how often you can make repayments on your loan. Most loans are quoted with monthly repayments, just to make it easy to compare. However, making fortnightly payments are also an option and could fit better if your pay is fortnightly as well. Instead of paying monthly, try paying half your regular repayment each fortnight. There are 26 fortnights in a year, so you’ll end up paying an extra month’s repayment without feeling the pinch.

Let’s say for instance, your monthly repayments are $2,000. Over 12 months you’ll pay $24,000 off your home loan. But if you pay $1,000 each fortnight, you’ll have repaid $26,000. It’s an easy way to knock an extra $2,000 off your loan. This will reduce your interest and the life of the loan. It can also be redrawn if needed.

Extra and/or lump sum payments

It’s worthwhile checking to see if your lender allows additional and/or lump sum payments.

Reducing your mortgage as quickly as possible is one of the best financial decisions you can make. Even small extra repayments can have a big impact over time. That’s because additional payments come straight off your loan balance, or the principal. This lowers the interest component of next month’s repayment, so more of that payment reduces your loan balance. It’s a simple way to swing the loan pendulum in your favour.

The other way to reduce your mortgage is to make lump sum payments.

Almost all of us receive lump sums of cash at some stage – usually a work bonus or annual tax refund. Put this money to work by depositing it into your home loan. It will come straight o􀇛 the principal, letting you see the good progress you’re making. You can always access this money via a redraw should you need it down the track.That was a brief overview of the different loan features.  As to which one is right for you, well, that depends on your goals and your individual circumstances.

If you want to get started with your pre-approval, you can complete our 5 minute form here: https://bit.ly/43VqyrH
Call on: 0418 552 938
Email at: peter.jefferson@mortgagechoice.com.au, or
Book a time to chat: https://bit.ly/43WsXma

If you’re a first home buyer, I’ve also created a useful guide to help you understand other key aspects of buying your first home.