Mark Bristow* finds there are many things to know about mortgage loans than their rate of interest.
Many of us get hung up on interest rates when comparing different home loans.
But as any savvy mortgage broker will tell you, there’s much more to a home loan than its rate.
To find a home loan that may be right for you, you need to compare the unique features and benefits of different options.
Extra repayments
Imagine that after a good couple of months, you have some extra savings in your bank account. You may have gotten a bonus at work, or a tax refund.
If you put this money onto your home loan, you’d pay off a bit more of your principal. This can reduce your future interest charges and bring you one step closer to an early exit from your loan.
But not every home loan lets you make extra repayments.
Some lenders lock borrowers into fixed repayment schedules. This tends to be more common in fixed-rate mortgages.
Redraw facility
Let’s say you’ve been adding your extra savings onto your mortgage for a few months.
You’ve been shrinking your interest charges and are on track to exit your mortgage early. So far, so good.
Fast-forward a couple more months, and extra bills and expenses are piling up. You could use your extra savings to balance your budget, but they’re all tied up in your mortgage!
To help avoid situations like these, look for a home loan with a Redraw Facility.
This lets you pull extra home loan payments back out of your mortgage when you need money back in your pocket.
Keep in mind there may be terms and conditions around making redraws. Some lenders limit the number of redraws you can make per year, or how much money you can redraw each time. You may also need to pay redraw fees.
Offset account
An Offset Account is a savings or transaction account, separate to your home loan.
Your bank will include money in this account when calculating mortgage interest charges.
For example, imagine you owe $500,000 on your mortgage, and have $100,000 in your offset account. Your bank will charge interest as if you only owed $400,000.
With enough cash in your offset account, you may save a lot in interest charges on your home loan. And because it’s still a bank account, you can transfer or withdraw this money if you need it.
Keep in mind that home loans with offset accounts may cost more than those that don’t.
To work out if an offset account may work for you, use a mortgage calculator to find how much you’d save on interest in a year.
If the amount you’ll likely save is more than what you’ll pay in annual fees, you may come out ahead.
Line of Credit
Been paying your mortgage for a few years? What if you now want to renovate, invest in shares, or start a business?
You could refinance your mortgage and borrow more money.
But extending your mortgage could mean your loan takes longer to pay off. This could cost you more in interest charges over the long term.
Another option is a Line of Credit home loan.
This works much like a credit card, except it has a much higher credit limit.
This limit is often based on your equity – the property’s current value, minus what you still owe on your mortgage.
You can borrow any amount up to this limit, and only pay interest on what you borrow.
* This article first appeared at www.lifehacker.com.au
