Home Loan Features
Ever felt lost with all the confusing terms, abbreviations and acronyms in “home loan world”? Here are some home loan features explained to help navigate “home loan world” a little easier!
Variable Interest Rate
This type of interest rate fluctuates with the market. For example, you might start at a rate of 5.5% but then market rate goes up by 0.25% and your lender might change your rate to 5.75%. Market rates might then go down by 0.5% so your rate might go down to 5.25%.
Key points for variable interest rates:
Allows you to take advantage of interest rate drops when they happen
Allows flexibility – lots of variable rate loan products allow you to make unlimited additional repayments and allow offset accounts to be linked
Some basic “no frills” loan products have minimal fees and offer variable rates that are very competitive in the market
Be aware, it can cost you more in the long term if market interest rates keep going up
Fixed Interest Rate
This type of interest rate is set at a certain rate for a certain period of time. For example, 5.5% fixed for 2 years will mean 5.5% is your interest rate for that whole two year period regardless of what the market does.
Major pro for having fixed interest rates:
Your repayments are set for the fixed term, regardless of what the market rate does. So if your loan repayment is $1,500 at 5.5% fixed for two years, your repayments will be $1,500 for the full two years regardless of whether market rates go up or down
Check with your specific loan but there can be some cons:
There can be additional set up costs for fixed loans
Often you are unable to utilise redraw features or link offset accounts to fixed loans
If you have to break the fixed term, say you sell the house during the fixed term, you can be up for a break fee for the loan
There can also be limits to the amount of additional repayments you can make without penalty
Split Rate Loans
A split rate loan means you have your loan split into portions with each portion having different terms. Some of your loan might be at a variable rate and some at a fixed rate. Maybe you have some Principal and Interest and some Interest Only.
For example, your home loan is $450,000. You decide to split this loan into a $150,000 portion at a variable interest rate and a $300,000 potion at a fixed rate.
This split loan allows you flexibility to have the best of both worlds. You can have some at a set repayment to allow for certainty and budgeting (fixed rate portion) and some at a variable rate to take advantage of decreasing rates (variable will fluctuate with the market).
How you split the loan will depend on your personal circumstances (do you have some life changes coming up so a large fixed loan would provide repayment certainty?) or it might depend on what the market is doing at the time (rates going up or going down?). Also fees and charges for these loans will depend on your specific lender so make sure you check this out before making any decisions.
Offset Account
This is a savings transaction account that is linked to your home loan. You do not get paid interest on this account. However whatever balance you have in this offset account, this same balance is NOT charged interest on your home loan.
For example, your offset account has a balance of $5,000 and you owe $250,000 on your loan. With a full offset account, you would only be paying interest on $245,000 of your loan.
Some lenders charge a fee for an offset account and some have higher interest rates for offset package loans so you need to make sure your savings are enough to justify the costs.
Redraw
This is a home loan feature that allows you to access any additional repayments you make on your loan.
For example, your monthly repayment is $2,500 and you pay $3,000 each month. $500 per month is considered redraw because it is additional to the required repayment. Your loan balance is lower so you pay less interest but you can still access the redraw balance later if you need it. Check the specific T&Cs of your lender offset accounts.
Some people use redraw instead of an offset account as the fees can be less… sometimes there are no fees at all. The interest rate can also be lower than an offset package for some lenders. Check your specific lender redraw and offset costs.
Disclaimer – The information provided in this Blog article is of a general nature and is not advice. Please speak to your lender or mortgage broker to get advice specific to your personal circumstances.
Source – Fully Accredited Mortgage Broker with 7+ years of experience in brokering and over 20 years working with budgets, analytics and financial numbers!