5 excellent home loan functions – and the sly factors lending institutions provide them

Everyone learns about home loan interest rates, specifically because they’re rather high at the minute. But if you’re simply beginning your property-buying journey, what other functions should you think about in a home mortgage? What are the benefits and drawbacks? And why does your loan provider provide them in the very first location?

Let’s evaluation the leading 5 functions when comparing home loans.

Firstly, let’s compare. What’s the distinction in between a repaired and variable rates of interest?

A set rate home loan has a set rates of interest for a particular duration, called your ‘fixed term’. Your regular monthly payments will be the very same throughout your term due to the fact that your rates of interest won’t alter. Terms normally last 1 to 5 years, though some lending institutions provide 7-year repaired alternatives.

Variable home loans alter at the discretion of your loan provider and are delicate to money rate choices from the Reserve Bank of Australia. Some years your variable rates of interest (and for that reason your payments) may be reasonably low, while others might be greater. 

Got some extra cash, like a work bonus or a tax refund? Some home loans offer free extra repayments, meaning you could put that check towards your mortgage and pay it off sooner. 

This feature isn’t a standard because it affects how lenders make money. They don’t make money off you repaying your principal (i.e. the size of the original loan you take out). They make money off the interest you repay, and they like consistency. 

The longer your home loan lasts, the more interest a lender can charge you. By paying off your loan sooner (without paying extra fees), you lessen the number of repayments you have to make and decrease the amount of interest you pay over time. 

As a bonus, this makes free extra repayments a potential interest-saving hack for the savvy borrower. 

Keep in mind: some lenders may offer extra repayments, but charge a fee or cap the amount or number of repayments you can make. Plus, what happens if you need the money later? That’s where a redraw comes in.

Want to get back your extra repayment? Look for a home loan redraw, or redraw facility. 

Think of it as a less flexible offset account: if you put $7,000 extra into your home loan to save on interest, but remember you owe your partner a birthday gift, you can dip back into that $7,000 through your redraw. 

There are some caveats to consider, however. Like an offset account, most redraw facilities are only available with variable home loans. Your redraw may also come with fees, extra paperwork (like an activation form), and limits to how much and how often you can redraw. Theoretically, a lender doesn’t want you taking back your cash too much, not when it could be their cash, too!

However, there are still some pros. If you opt for free extra repayments, a redraw can give you a little peace of mind and usually comes cheaper than a personal loan.

Some lenders offer flexible repayment schedules for certain types of home loans. Most mortgages are repaid monthly, but some can be paid weekly or fortnightly. How does payment frequency affect the cost of your mortgage?

There are 52 weeks and 26 fortnights in a year. By paying smaller amounts more frequently, you could actually pay down your loan faster. As with free extra repayments, this ultimately saves you interest because you’ve paid off bigger chunks of your principal in a shorter time. Interest is also calculated daily, so fewer days between payments means less interest. 

The maths can make or break this feature, however. Lenders calculate weekly/fortnightly payments differently, so if your fortnightly repayments are half your monthly ones, you save interest, but if they’re any less then you don’t. Check with your lender to see how they set payment schedules – you’ll want one that benefits you, not just them.

Compare home loans – and their features – in the table below.