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Understanding which home loan features are right for you

Loans are by no means ‘one size fits all.’ Different loan types suit different age groups, different living situations and even different attitudes to money.

A common trap some home-owners fall into is to consider a mortgage ‘set and forget’. You did your research, shopped around, found the right option and now you’re reluctant to revisit the process - even if your personal circumstances have dramatically changed.

Before you start shopping around for a new loan, or an upgrade to your old loan, it’s worth knowing a little bit about the options available. The three most common differentiators are variable rates, fixed rates and split rate loans:

  • A variable rate loan offers greater flexibility than a fixed rate loan and will appeal to you if you don’t want an interest rate to be locked in for a set term.

  • A fixed rate loan is right for you if you need greater peace of mind, as you will have the certainty of knowing what your repayments will be during the fixed rate term. You can choose different terms on a fixed rate loan – often between 1 to 5 years, depending on what suits you.

  • Split rate loans are loans with a variable portion and a fixed portion. They offer both the flexibility of a variable rate and the certainty of repayments offered by a fixed rate. Like with a variable rate loan, you will have the flexibility to make additional repayments at no cost to the variable rate portion.  

Other features include a Redraw facility and the Offset feature.

  • the Redraw feature allows you to take any additional repayments that you made, over and above your minimum repayments, back out when you need it. You can essentially use your loan like a savings account. While the funds are sitting on your loan it reduces the interest charged to your loan, saving you money and allowing you to pay your loan off faster, then when you need the funds you can take them back out. Redraw comes with most variable rate loans these days and it is usually fee free when redraw requests are made online. Some lenders might charge a small fee per redraw request.

  • An Offset account is a normal savings or transaction account that can be used to reduce the interest payable on your loan. For example, if you have a loan balance of $300,000 and you have $20,000 in your offset account, you only pay interest on $280,000. Some lenders will allow more than one offset account, which means you might be able to have the combined balance of all your accounts offset the interest on your loan. Lenders normally charge a higher interest rate on loans that include the offset feature as well as annual or monthly fees, so you need to do your sums to see if this feature really saves you money or if the Redraw feature might be better for your situation. For a more in depth look at the difference between Offset and Redraw read our blog article here.

You could also consider purchasing a white-label loan. White-label loans are increasingly popular – but for those unfamiliar with the term it can be confusing. A white-label loan is essentially a home-branded loan, much like the home-branded products you see in the supermarket aisles. Like these products, white-label loans aim to deliver many of the same great features as bank-branded home loans, but for a lower cost to the customer.

You can access different types of white-label loans – whether variable, fixed or split. White-label products are known for being high quality, low-cost and flexible. They are particularly suitable for home-buyers looking for a simple, straightforward product as through white-label you can have access to the loan-features you need, (like redraw, debit card access and a customer care facility), and you don’t have to pay for bells and whistles you won’t use.

If you’re not sure which of these options sounds right for you, mortgage brokers can provide real value to customers who need a helping hand to make this important decision. We have access to a myriad of loans from a range of different lenders, and can guide you with our expertise and experience when it comes to structuring loans to maximise your benefits given your particular situation.

This article provides general information only and may not reflect the publisher’s opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher’s prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.



 

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