Did you know that banks offer you various features to help you manage your mortgage better?
You may have heard of redraw, offset accounts and a line of credit but what do these bells and whistles actually mean and are they right for you?
Here’s a breakdown of four mortgage features that can help make paying off home loan less of a drag and even allow you to pay off it off a lot faster.
Pay off your loan faster by making extra repayments
This feature allows you to make additional repayments on top of your minimum monthly repayments.
For example, if you’re required to make a minimum monthly repayment of $2,500 and you realise after the settlement that you can actually afford $3,000 a month, you can make an additional $500 repayment without incurring a break cost.
A break cost is normally charged on a fixed rate loan when you make extra repayments in excess of the maximum repayment limit. This limit varies from lender to lender – it can be as little as $5,000 per annum or $30,000 over the fixed term.
By having the option to make unlimited additional home loan repayments, you can pay off your mortgage sooner and reduce the amount you’ll pay in interest.
The good news is that most lenders offer this feature for free.
Redraw funds from your home loan when you need to
A redraw facility is an extension of the extra repayments feature and allows you to withdraw the additional repayments that you’ve made on the loan if you need them.
For example, you may need to cover the costs of emergency car repair or to fix your washing machine.
This can be a good option for you if you’re the sole income earner.
You can set a fixed repayment on your mortgage every month out of your salary and manage your household expenses without worrying about the repayments.
Not all redraw facilities are the same though so you’ve got to keep an eye out for the following conditions:
- Number of free redraws per year: This is the number of times you can withdraw additional loan repayments without any charge.
- Fee per redraw: Some lenders may charge you as much as $50 every time you withdraw once you’ve used up your free redraws for the year.
- Minimum redraw amount: The minimum redraw amount is the smallest amount you can withdraw. This can vary from $500 to $5,000.
Reduce interest with a 100% offset account
An offset account is almost the same as a normal savings account. The only difference between the two is that instead of earning interest from the money you have in a savings account, you save interest on your home loan depending on how much money you have in your offset.
To explain, if you had a $700,000 home loan and you had $20,000 in your offset account then you would only pay interest on $680,000.
The other benefit of an offset account is that the interest you pay on a home loan is typically greater than the interest you earn on a savings account.
For example, if you earn 2.00% per annum on $200,000 worth of savings, then you’ll earn $4,000 annually.
However, if you’re charged 3.00% per annum on a $200,000 mortgage, then you’ll pay $6,000 in interest.
By having an offset account with $200,000 at the same 3.00% interest rate, you wouldn’t earn $4,000 but you would save $6,000 in interest.
So although you’re not earning $4,000 in interest from a savings account, you still save $2,000 by having those savings in an offset account!
If you’re on a good salary and good with managing your spending, you can also use an offset account with a credit card to effectively manage your expenses.
A common strategy is to direct debit your salary into the offset account and use the credit card for your monthly expenses.
You should aim to make the monthly credit card payments within the interest free period to maximise your savings.
Manage your fluctuating income with a line of credit
A line of credit facility is similar to having a big chequebook. The lender allows you to use funds from a reserve of money in your home loan for any purpose that you need.
With a line of credit of $100,000, you can use all of it at once or as little as $10,000 to pay a minor credit debt. The good news is that you would only need to pay interest on the amount that you used.
If you are self-employed and your income fluctuates regularly, then this can be a great option for you!
It should be noted that a line of credit usually has a higher interest rate and a monthly fee attached to it. Typically, the fee can range from $120 to $350 per year.
Are you actually better off getting these additional features?
Signing up for these extra features largely depends on your financial situation and what you’re trying to achieve with the home loan.
If you’re planning on selling the property within a few years of the purchase then you’re probably better off going for a basic loan without any flexible features.
Let’s assume you’re paying an extra 1.5% in interest for a professional loan to get all of the flexible features mentioned above.
If you make the minimum monthly repayments on a $100,000 home loan over 25 years, you’ll end up paying $29,000 more than what you would’ve paid for a basic loan without any of these features.
The question really comes down to whether you will actually benefit from having these extra features.
If you want help in finding the most suitable features for your loan, you can call us on 1300 889 743 or fill in our free assessment form.
One of the main roles of our mortgage brokers is to help you set up a home loan which provides you with the most benefit.