When comparing home loans, it is easy to focus on just the interest rate and assume the lowest propagated rate is automatically the best option. However, the right home loan is about much more than the rate you see on the comparison table. Home loan features attached to the loan can affect how much interest you pay, how quickly you can pay off the loan, how easily you can access your money and how much flexibility you have in the long run.
From our experience helping home buyers and property owners compare home loans, we know that the most suitable loan isn’t necessarily the one with the lowest rate. The right combination of interest rate, fees, repayment options and useful home loan features can make a meaningful difference over the life of the loan.
Depending on your circumstances, features such as an offset account, redraw facility, unlimited additional repayments or loan portability may help you manage your finances more effectively. Other options, such as fixed rate, variable rate or split loan, can provide different levels of certainty and flexibility depending on your financial goals and attitude towards changing rates.
Ultimately, whether you’re a first home buyer, an experienced investor, or simply refinancing, understanding the features available to you can help you make more informed decisions about the home loan you choose.
Redraw Facility
A redraw facility can be a useful feature if you want the flexibility to make extra repayments towards your home loan while still having access to those additional funds if you need them later. When you make repayments above the required amount, the extra money can reduce your loan balance and, in turn, the amount of interest charged. With a redraw facility, eligible additional repayments may be available for you to withdraw in the future, subject to the lender’s terms and conditions.
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How Does a Redraw Facility Work?
Let’s assume you have a home loan with a required monthly repayment of $2,000. If you decide to pay $5,000, which is an additional $3,000 toward your loan. Depending on the lender and the specific loan product, the $3,000 may become available through the redraw facility.
The extra repayment also reduces the amount you owe. If your home loan balance was $500,000 and you made an additional $3,000 repayment, your balance could fall to $497,000. Along with that, if all other factors remain unchanged, interest will also be calculated on a lower balance.
However, it’s worth noting that if you later redraw the $3,000, your loan balance will increase again. This means you may pay more interest over the remaining loan term than you would have if you had left the additional repayment in the loan.
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What Should You Check Before Choosing a Redraw Facility?
A redraw facility can be particularly valuable for borrowers who regularly have surplus cash and want to use it to reduce loan interest without permanently giving up access to the money. However, the feature should be assessed alongside the interest rate, fees, repayment options and other home loan features.
Before choosing a home loan with redraw, check whether additional repayments are permitted, if redraw is available on all additional repayments, the minimum and maximum redraw amounts, if redraw transactions are free, how quickly funds can be accessed, if there are limits on withdrawals, if the rules change when your circumstances do, and whether the loan has other features that may better suit the way you manage your money.
From a mortgage broker’s perspective, I find that borrowers sometimes focus heavily on whether a loan offers redraw without considering how they will actually use the feature. A redraw facility can be valuable, but it should support the way you manage your finances rather than simply being another feature for product comparison.
The key is to consider the complete loan rather than choosing a feature separately. A slightly different interest rate or fee structure could have a greater financial impact over the life of your home loan than a redraw facility you rarely use.
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Offset Account
An offset account can be one of the most valuable home loan features, particularly for borrowers who regularly keep money in savings or receive their salary into a transaction account. It can help reduce the amount of interest charged on your home loan while allowing you to retain access to your money.
An offset account is a separate bank account linked to your home loan. The account balance is offset against your outstanding loan balance when the lender calculates interest. With a 100% offset account, every dollar you keep in the account can reduce the portion of your home loan on which interest is calculated.
How Does an Offset Account Work?
Let’s say you have a $600,000 home loan and $50,000 sitting in a linked offset account. With a 100% offset, interest may be calculated as though your outstanding balance were $550,000 rather than $600,000. You still owe $600,000 on the home loan, and the $50,000 remains your money. However, because the savings are offset against your home loan balance, you may pay less interest than you would without the offset.
The potential benefit becomes more significant when you maintain a substantial balance in the account over a long period. The money does not need to be used to make an additional loan repayment to provide an interest-saving benefit.
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How Can You Make the Most of an Offset Account?
The value of an offset account largely depends on how much money you can consistently keep in it. Some borrowers choose to have their salary paid directly into the account and then use it to pay household expenses. For example, if your salary is deposited into your offset account and your regular bills are paid from the same account, your money may spend more time reducing the balance used to calculate home loan interest.
You could also keep your emergency savings, annual expenses and other accessible funds in the offset rather than maintaining separate savings accounts that may not provide the same home loan interest benefit. The strategy is not about avoiding spending altogether but considering where your money is held and whether it can provide additional value while it is sitting there.
100% Offset Versus Partial Offset
Not all offset accounts work in exactly the same way. A 100% offset account generally offsets the entire account balance against the linked home loan. Some products may offer a partial offset, where only a percentage of the account balance is taken into consideration.
For example, if you had $20,000 in a 50% offset account, only $10,000 may be used to offset the loan for interest calculation purposes. This is why you have to look beyond the words when comparing home loans. Always check whether the account is a 100% offset, whether there is a separate account fee and whether any conditions apply.
Unlimited Additional Repayments
Making additional repayments can be a simple way to reduce your home loan balance and potentially pay less interest over the life of the loan. Instead of paying only the required amount each month, you can put extra money towards your home loan whenever your budget allows.
For borrowers who receive bonuses, commissions, tax refunds or other irregular income, the ability to make unlimited additional repayments can be particularly useful. Rather than leaving surplus cash sitting in a low-interest account, you may be able to use it to reduce the amount you owe and potentially pay off your loan sooner.
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Why Unlimited Repayments Can Be Useful?
Some home loan products restrict how much extra you can repay or charge fees for certain additional payments. Others may allow unlimited additional repayments without a specific penalty, particularly variable-rate products. Having this flexibility means you can increase your repayments when your financial circumstances are favourable without having to permanently commit to a higher scheduled repayment. Ultimately, the key advantage of unlimited repayments is flexibility, you can freely choose when and how much extra you contribute, abiding by the terms of your loan.
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Loan Repayment Frequency
The frequency of your loan repayment can affect how you manage your budget and, depending on how the repayments are structured, may help you reduce your home loan sooner. Most borrowers are familiar with monthly repayments, but some lenders also offer weekly or fortnightly options.
Choosing a repayment frequency is not simply about paying more often. It is important to understand how the lender calculates the repayment amount, how interest is charged and whether changing the frequency will result in you paying more towards the loan over a year.
Monthly, Fortnightly and Weekly Repayments
A standard home loan will often be set up with monthly repayments. For example, if your required repayment is $2,000 per month, you would make 12 repayments of $2,000 over a year, for a total of $24,000.
A lender may instead allow you to make fortnightly repayments. There are 26 fortnights in a year, so your repayment is set at $1,000 per fortnight. Hence, you would make 26 payments, contributing $26,000 over the year. That means you would effectively make an additional $2,000 repayment over the course of a year compared with paying $2,000 each month.
Weekly repayments work on the same principle, with the required amount divided across more frequent payments. The exact calculation varies between lenders, so it is important to check how your lender determines the repayment amount rather than assuming every loan works in exactly the same way.
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Match Your Repayments to Your Income
One practical advantage of more frequent repayments is that they can align more closely with the way you receive your income. If you are paid weekly or fortnightly, making repayments on the same schedule can make budgeting easier. Instead of receiving your income and then setting aside money for a large monthly payment, you can allocate part of each pay cycle towards your home loan repayment.
Home Loan Portability
Home loan portability can be a useful feature if you expect to sell your current property and purchase another one in the future. Instead of completely closing your existing home loan and applying for a new loan, portability can allow you to transfer your current loan from the property you are selling to the new property you are buying.
For borrowers who are happy with their existing lender, interest rate and loan structure, this can make moving homes so much more convenient. It may also help avoid some of the costs and administration associated with refinancing and establishing a new loan.
However, loan portability is not automatically available in every situation. Lenders generally have specific eligibility requirements, and the feature may not be suitable. If your new borrowing needs are significantly different from your current loan.
How Does Home Loan Portability Work?
The idea is relatively simple. You sell your existing property and purchase another property while keeping the same home loan. Let’s suppose you have a $450,000 home loan secured against your current property and you decide to sell that property and buy a new home.
If your lender offers portability and you meet its requirements, the lender may allow the security for the existing loan to be changed from your old property to your new property. Your loan can then continue against the new property rather than being discharged and replaced with a completely new loan.
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Requirements for Home Loan Portability
Lenders impose different conditions before approving portability. One common requirement revolves around the value of the properties involved. The lender may require the new property to be of equal or greater value than the property being sold, although the specific requirements vary.
The lender may also assess whether the proposed transaction remains acceptable under its lending criteria. If you are borrowing additional money to purchase the new property, you may need to complete further assessment or documentation. Settlement timing can also be important. The sale of your existing property and purchase of the new property generally need to be coordinated so the lender can transfer the security without complications.
Cashback Deals
Cashback offers are not technically a home loan feature, but they can be an important consideration when comparing home loans, particularly if you are refinancing. A cashback offer is generally a financial incentive provided by a lender to eligible borrowers who switch their loan to that lender.
At first glance, receiving several thousand dollars when taking out a new loan can seem like an obvious benefit. However, cashback should be assessed alongside the interest rate, fees, loan features, and overall cost of the loan. A larger upfront incentive does not necessarily mean you are getting the right home loan for your circumstances.
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How Do Home Loan Cashback Offers Work?
A lender may offer an eligible borrower a cash payment after they refinance or settle a new home loan. The payment may be deposited into an account after settlement or once other conditions have been satisfied. For example, a lender might advertise a cashback incentive for borrowers who refinance a minimum loan amount and meet specified eligibility requirements. If you qualify, the cashback could help offset some of the costs associated with switching lenders.
Those costs may include items such as loan establishment costs, valuation fees, government charges or other refinancing expenses, depending on the circumstances. The important point is that cashback offers are generally subject to conditions. The advertised amount should not be treated as guaranteed until you have confirmed that you satisfy the lender’s eligibility criteria.
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Cashback and Refinancing
Cashback can be attractive when refinancing because it may help offset some of the upfront costs of moving your home loan. However, refinancing is a long-term financial decision. A cashback payment is generally received once, whereas the interest rate and ongoing fees can affect your finances for years.
For example, imagine two loans: one offers a $4,000 cashback payment but has a higher interest rate and ongoing fees, and another offers no cashback but has a lower interest rate and lower costs. Depending on your loan amount and circumstances, the savings from the latter could potentially exceed the initial cashback from the former over time. This is why we recommend comparing the total cost of the loan rather than simply choosing the largest upfront profit.
Tips For Picking Home Loan Features
When choosing a home loan, it can be easy to get caught up in the number of features a lender offers. However, more features do not necessarily mean a better loan. The most useful features are those that provide genuine value based on how you manage your money, your financial goals and the way you expect your circumstances to change.
Some features, such as flexible repayment options and online banking, may be included at no additional cost, while others can involve ongoing fees. An offset account, for example, may be available as part of a home loan package that carries an annual fee. That fee may still represent good value if you regularly maintain a substantial balance in the account and the interest savings outweigh the additional cost.
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Consider How You Actually Manage Your Money
A useful way to assess home loan features is to start with your normal financial habits rather than the features themselves. If you tend to keep a significant amount of money in savings, an offset account may allow those funds to work harder while remaining accessible. If you receive bonuses, commissions or other irregular income, the ability to make additional repayments may be more valuable. If you expect to move home in the future, loan portability could be worth considering. Different Circumstances have different solutions.
Likewise, if predictable repayments are important to your budgeting, a fixed rate may provide the certainty you want for the agreed fixed period. If flexibility is more important and you are comfortable with changes to your repayments, a variable rate may be more suitable.
Your income structure can also influence which features are useful. Someone receiving a regular salary may benefit from having their income paid into an offset account, while a self-employed borrower or investor may have different cash-flow requirements.
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Look Beyond the Interest Rate
While interest rate is an important part of any loan decision, it should be considered alongside fees and features. Some loans might have a slightly lower interest rate but charge higher ongoing fees and provide fewer repayment options, while some can have a marginally higher rate but include an offset account, flexible additional repayments and other features that are useful to you. Depending on the loan balance and how you use those features, the second one could potentially offer greater overall value.
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What Home Loan Features are Right for You?
There is no universally right combination of home loan features that might suit everyone. The most suitable option depends on your circumstances, financial priorities and how you intend to manage the loan.
For a borrower with substantial savings, an offset account may be particularly valuable because the funds can remain accessible while potentially reducing the amount of interest charged. On the other hand, for someone who regularly receives additional income, flexible repayments may make it easier to reduce the loan principal and potentially become mortgage free sooner.
A borrower who values certainty may prefer a fixed rate, particularly if knowing the required repayment is important for household budgeting, and a borrower who wants greater flexibility may prefer a variable rate home loan, particularly if they expect to make extra repayments or want the ability to change their repayment strategy.
Some borrowers may benefit from a split home loan. This allows the home loan to be split into two portions, with one part potentially using a fixed interest rate and the other using a variable rate. This can provide a balance between repayment certainty and flexibility, although the suitability of this structure depends on the borrower and the specific loan available.
At the same time, the purpose of the borrowing also matters. A first home buyer may have different priorities from an experienced property investor. Someone buying a home to live in may prioritise straightforward principal and interest repayments, while an investor may be considering different loan structures, cash-flow requirements or interest-only repayments.
The important thing is to avoid selecting a feature simply because it is available. Instead, consider whether it can help you manage your home loan, reduce unnecessary costs or give you flexibility that you are likely to use. Get in touch with us at Nice Loans, a Brisbane-based mortgage broker, to figure out which home loan features suit your financial circumstances the most.
