Home loan features explained

A mortgage offset account is a home loan feature designed to help homeowners pay less interest using their day-to-day funds. It functions as a regular transaction account and can be used as an everyday bank account if desired.

The balance of the account is then offset (hence the name) against your home loan balance, meaning you pay interest based on your home loan balance minus the balance of your offset account.

Different lenders and different products will offer varying types of offset accounts, with some only using a partial offset (e.g. a 50% offset, which would use half of your offset account’s balance for interest calculations), whereas some will use a 100% offset, meaning the full balance is used.

An offset account may come with a monthly or annual fee attached, so you may want to crunch the numbers and determine whether it’d save you more on interest than you’d be paying in fees for using it.

Redraw facilities are a type of home loan feature which offer borrowers the ability to ‘redraw’ additional repayments they’ve made towards their home loan. This can be beneficial in the event of an unexpected bill or cost, or if you’re otherwise in need of cash.

However, it’s worth noting that redrawing your additional home loan repayments will increase the amount you owe on your home loan, and subsequently see you pay a higher interest amount on a regular basis.

Redraw facilities are typically free to have (even if actually making a redraw may incur a small fee), so you may decide it’s a feature worth having around, even if you don’t plan on using it too often.

A common feature on many home loans, repayment flexibility is the ability to choose how often you make home loan repayments. Your options will typically be to make weekly, fortnightly or monthly repayments, and your choice could affect how much interest you pay over the life of your home loan.

This is because making more frequently repayments (i.e. either weekly or fortnightly repayments) helps you fit more repayments into a calendar year, relatively speaking. More specifically, you’ll repay more over a 12-month period by making 26 fortnightly repayments or 56 weekly repayments than you would by making 12 monthly repayments over the same period of time.

This is because 12 monthly repayments are equal to about 24 fortnightly repayments, or about 48 weekly repayments. So, by opting for a higher repayment frequency, you’ll likely pay your home loan down faster, and pay less overall home loan interest to boot.

That being said, if you decide that monthly repayments are best suited to your personal financial situation, there’s nothing wrong with choosing less frequent repayments.

Borrowers on variable rate home loans (and some fixed rate home loans) may have the option of making extra home loan repayments. This will further reduce the balance of your home loan, and subsequently reduce the interest component of your repayments, making them smaller over time.

Variable rate home loans typically allow for unlimited additional repayments, whereas fixed rate loans may either:

• Not allow you to make additional repayments
• Impose an annual limit on the amount you can make in extra repayments, with a penalty for borrowers who exceed that limit
• Impose a per-repayment fee on making additional repayments.

With that in mind, you may want to think about the likelihood of you wanting to make additional home loan repayments when it comes to deciding between a fixed or variable rate home loan.

Some lenders may allow you to switch from principal and interest repayments to interest-only repayments. However, it’s worth noting that your lender may require a justification for why you’d like to make the switch, and that interest-only periods are, much like fixed rate periods, typically limited to a five-year maximum.

Keep in mind that while interest-only repayments will be smaller than your regular principal and interest repayments, they won’t make any progress on paying down your home loan principal – you’ll just be keeping your interest costs paid.

So, while switching to interest-only repayments could be a valuable option to have, it’s important you understand the potential drawbacks of this type of home loan repayment.

Some lenders may offer borrowers the option of taking a ‘repayment holiday’, which means you’re temporarily relieved of having to make your regular home loan repayments. It can be a useful option to have in the event of financial difficulty or if your income is otherwise affected.

However, not all repayment holidays are created equal. Lenders may offer differing maximum repayment holiday periods; for example, one may offer up to 6 months whereas another may offer up to 12 months.

Additionally, lenders will accommodate a repayment holiday in different ways – some will extend the term of your loan by the length of your repayment holiday, whereas some will temporarily increase the size of your ongoing repayment amount to avoid extending your loan.

This feature may be less broadly advertised than more common features like an offset account, so if it’s something you’d value in a home loan, you may want to enquire with the relevant lender to see if they offer repayment holidays.

In all fairness, you’d be hard-pressed to find a lender that doesn’t offer internet banking – these days, some home loan providers are exclusively online! That being said, it’s important to note the modern-day importance of internet banking and the value it provides as a service.

You’re unlikely to have to search this feature out but keep it in mind in case you’re applying with smaller or non-traditional lenders, as some of them may not offer an internet banking service.

Some home loan products will come with the option to ‘package’ the loan with other home loan features and financial products offered by the lender in question. Common package options include a linked offset account and a credit card.

The main benefit offered by a home loan package is being able to pay one, smaller annual or monthly home loan fee for multiple products and features, instead of paying multiple ongoing fees which could end up being more expensive.

However, it’s worth noting that home loan package fees can still be fairly sizeable, so you’ll want to make sure you’re getting enough value from the components of the package to make paying the package fee worthwhile.

Salary crediting is an arrangement under which your salary is paid straight into your home loan account by your employer. This can be useful for managing your cashflow, especially when combined with other home loan features.

For example, if you were to have your salary credited straight into a mortgage offset account, you’d be getting an initial benefit from every single dollar of your pay – even the ones you plan on spending.

Additionally, salary crediting could save you having to remember (or schedule) your home loan repayments, as it’ll mean your funds start in your home loan account without you having to move them there.

Some lenders and home loans offer the option to split your home loan into two components: one on a fixed interest rate and the other on a variable interest rate. The proportions of your split (e.g. 50/50, 30/70) will typically be up to you.

Splitting your home loan can be beneficial for a few reasons, the main one being that it typically makes it easier to ride out interest rate increases. If interest rates go up, your fixed rate component will remain unchanged, and stop your repayments from increasing as much as they would have if you were on a regular variable rate home loan.

The downside of this, though, is that this fixed rate component reduces your benefit from rate cuts, as it won’t decrease in size if rates go down – unlike your variable rate component.

So, while a split rate can offer you something like a ‘best of both worlds’ option, you’ll want to have a think about your current financial priorities, and what kind of interest rate might suit them.

Depending on the lender and loan, ‘home loan portability’ may be advertised as a feature option. This means you can move homes, or otherwise switch the property being used as security against your mortgage, without having to take out a new home loan or refinance to a different one.

However, there are typically some caveats. Lenders offering home loan portability generally operate on a ‘like for like’ basis, meaning the new security will need to be worth at least as much as the old security, if not worth more. This is so you and the lender don’t have to make any changes to the current loan amount or loan term.

With that in mind, home loan portability may not be as valuable a feature to you if you plan on downsizing in the near future, or don’t plan on buying a property as expensive as your current home.