Understanding the Different Types of Home Loan Features

Choosing the right home loan is more than securing a competitive interest rate. The features included in your loan can significantly impact your repayments, financial flexibility, and the overall cost of your mortgage. Understanding these home loan features can help you select a loan that aligns with your financial goals and lifestyle.

Ready to learn more about your mortgage? Let’s break down some of the most common home loan features and how to use them to your advantage.

Offset Accounts

An offset account is a transaction account linked to your mortgage. It can provide you with more flexibility and potential savings as it means that instead of being charged interest on the entire loan balance, interest is charged on the loan balance minus the amount in your offset account. For example, if you have a mortgage of $400,000 and an offset account with $50,000, you’ll only pay interest on $350,000.

Benefits:

• An offset account reduces the amount of interest paid over the life of the loan.
• It can help you pay off your loan faster and achieve financial freedom.
• Provides easy access to your money when needed.

Considerations:

• Some lenders charge fees for offset accounts.
• Partial offsets may not provide full interest savings.
• Higher interest rates may apply compared to basic loans.

Redraw Facilities

A redraw facility allows you to access any extra repayments you’ve made on your home loan. If you’ve paid more than the minimum required amount, you can withdraw those additional funds when needed.

Benefits:

• Helps reduce interest paid while giving you access to extra funds.
• Can act as a financial safety net in emergencies.
• It may help you to pay off your home loan sooner.

Considerations:

• Some lenders set limits on how much you can redraw.
• Fees may apply for accessing funds.
• Not always available on fixed-rate loans.

Fixed vs. Variable Interest Rates

When choosing a home loan, you must decide between a fixed or variable interest rate. Each option has its advantages depending on your financial situation.

Fixed Interest Rate

Having a fixed rate on your home loan means that the interest rate on your mortgage doesn’t change for an agreed-upon period (usually one to five years), no matter what happens with interest rates. At the end of the fixed term period, your interest rate typically rolls over to a variable rate unless you discuss it beforehand with your broker. 

Prematurely breaking out of a fixed-rate agreement may expose you to costs such as break fees. 

Variable Interest Rate

A variable home loan rate is much less dependable because your mortgage repayments can change. If interest rates fall, your mortgage repayments will decrease. However, your mortgage repayments will rise if the Reserve Bank increases interest rates. Variable rates can be challenging to budget for as the repayment amount is inconsistent. 

Split Loans

A split rate mortgage combines elements of the fixed rate and variable options. For example, you can have 80 per cent of your home loan at a fixed rate, while the remaining 20 per cent is at an interest rate that varies with the market. Typically, borrowers opt for a fixed rate loan if they are uncertain if interest rates are expected to increase or decrease and are willing to take a chance. Alternatively, they would fix their home loan but keep a small portion variable to take advantage of an offset account linked to their variable loan split.

Benefits:

• Offers a mix of repayment stability and flexibility.
• Allows you to make extra repayments on the variable portion.

Considerations:

• Can be more complex to manage.
• May have additional fees compared to a single loan type.

Extra Repayments

Making extra repayments on your home loan can significantly reduce the interest paid and help you pay off your mortgage faster.

Benefits:

• Reduces overall loan costs.
• Helps build financial security.

Considerations:

• Fixed loans may limit extra repayment amounts.
• Some lenders charge fees for additional payments.

Interest-Only Loans

With an interest-only loan, you only pay interest for a set period (e.g., five years) before switching to principal and interest repayments. An interest-only loan enables you to enter the market and build capital growth while still having access to extra cash flow.

Benefits:

• Lower initial repayments.
• Useful for investors looking to maximise tax benefits.

Considerations:

• Higher long-term costs as the principal remains unchanged during the interest-only period.
• Payments increase significantly once the interest-only period ends.

Loan Portability

Home loan portability is a feature of some mortgages and lets you keep your current home loan - even when you sell your property and buy a new one. 

Portable home loans do this by simply swapping the property that secures the loan rather than the loan itself. 

Even though fees apply, a portable loan can often be cheaper than ending your current loan and refinancing with a new one. It can also help you cut down on the time and stress associated with going through the home loan application process all over again when you buy a new home.

Benefits:

• Saves time and costs associated with refinancing.
• Retains your existing loan features and interest rate.

Considerations:

• Subject to lender approval and eligibility criteria.
• May not be available on all loans.

Honeymoon (Introductory) Rates

Honeymoon rates offer a lower interest rate for an initial period (e.g., 12 months) before reverting to the standard rate.

Benefits:

• Reduces repayments in the early stages of the loan.
• It can be useful for first-home buyers who are adjusting to mortgage costs.

Considerations:

• The standard rate after the honeymoon period may be higher than other available loans.
• It may come with restrictions on additional repayments.

Offset vs. Redraw: Which Is Better?

Both offset accounts and redraw facilities help reduce interest payments but serve different purposes.

• Offset Account: This is best for those who want instant access to their funds while saving on interest.
• Redraw Facility: This is better suited for those who want to make extra repayments but still have access to funds if needed.

How can the team at Inovayt help with my home loan?

Understanding home loan features can help you make the most of your mortgage and reduce overall costs. Whether you need flexibility, stability, or interest savings, there’s a feature to suit your needs.

If you’re unsure which loan features are right for you, speak to the team at Inovayt. Our experts can guide you through your options and help you find a home loan tailored to your financial goals.