Every time you make a home loan comparison, you are probably focused on the lowest interest rate, but there are many features of a home loan that are extremely beneficial. Each lender claims to have the lowest rates and the best features, but what are you really paying for? What features should you consider, and what features should you avoid? Let’s find out.
Variable or fixed rate?
It’s worth starting at the two basic types of home loans available; variable or fixed rate. The rate refers to the interest rate in which your repayments are calculated. If you borrow $100000 at %3, you can divide this annual percent by 12, and get a monthly repayment amount of $250. Pretty straight forward.
A fixed-rate home loan is exactly what it sounds like, a loan taken out at a fixed interest rate for a fixed term. A fixed interest rate is good for people on a strict budget or those who want to know an exact repayment amount that doesn’t change. A variable rate loan is calculated by the cash rate set by the Reserve Bank of Australia. A variable rate home loan usually works out cheaper than a fixed rate but is riskier as interest rates could rise during the length of your loan, meaning higher repayments.
Early bird pays less interest.
Now that you have chosen a fixed or variable rate loan, we can have a closer look at some of the features that make some home loans better than others. A fantastic money-saving feature is the ability to make early/extra repayments. Some home loans will not allow you to make more than the agreed payment, while some will only allow a capped amount of extra repayment per year. The ability to make extra repayments will lower your annual amount of interest paid and will help you pay off your loan quicker.
The amount of money borrowed in a home loan is called the ‘principle’ it is this amount that interest is applied to, and determines how much you repay. The quicker you decrease the amount owing, the less there is to apply interest too. The ability to make extra repayments can save you thousands, if not tens of thousands a year on interest, now that’s a feature worth having.
Ok, so being able to put extra money into your home loan is a very good thing, but some home loans allow you to withdraw money from it. While taking money out of a loan that you have paid in with interest seems silly, it can prove life-saving if you need emergency cash. Owning a home comes with its own set of financial responsibilities, some of which can be very costly.
If something breaks in your house, having the option to withdraw emergency funds is of great benefit. Perhaps your car needs an update, or you just want to go to Bali for a month, being able to withdraw money at a low-interest rate is a feature that can give you peace of mind.
Off set account.
Another great money-saving feature is the offset account. An offset account rewards those with a solid saving habit and can save tens of thousands in mortgage repayments. An offset account is essentially a savings account that is used to offset the amount borrowed from your home loan. Some lenders offer this facility; others do not, but if you have a substantial savings account, it’s well worth seeking this option out. Having the principal offset by a sum of money that isn’t tied up in your mortgage gives your money more flexibility and can save you from dipping into your mortgage if you need emergency funds.
Say no to lengthy loans.
It’s best to choose the shortest loan you can afford. Yes, the repayments get significantly higher the shorter your loan becomes, but you are paying less interest and more of your principal. The less time you spend paying interest the better!
While comparing mortgages, you may come across the option to use a mortgage broker. This is an article about features of a home loan, but it’s worth mentioning these professionals as some people swear by them. A mortgage broker acts as a middle man between you and a lender, hopefully getting you the best rate and features for your money.
If you are going to use a mortgage broker, know that these people work for commission and get paid regardless of whether the product they sell you is the best for your needs. Don’t be afraid to take your time and shop around for a broker; a trustworthy broker can save you tens of thousands.
Again, not strictly a feature of a home loan, but being realistic is one of the best ways to get the product you need. An offset account seems like a win-win for everyone, but if you aren’t going to have significant savings in the offset account, is it worth paying for the feature?
Being realistic about what features you need is just as important as the features themselves, and if you haven’t had a chance to write up a realistic budget and financial plan, now is the time to do so. A tight budget will help you save quicker, and is easy to follow on paper. Again, be realistic, if you aren’t the type to stick to a rigid budget, that’s fine, don’t fool yourself and pay for features you won’t use like extra repayments.
There is no shortage of home loans available, and there is going to be one that fits you better than the others. Finding a home loan with the right features is easy once you know what you want, be realistic. Are you a strong saver? An offset account is a feature worth having. Are you prone to flights of fancy? A redraw facility gives you access to a low-interest line of credit.
It’s easy to get lost in the bottom line when searching for a good home loan. The lowest repayment rates are the obvious prize, but with a little planning and research, a savvy lendee can use features like early repayments to cut down the amount of interest paid. Paying off your loan quickly and cheaply, now that’s a worthy feature.