You’re on the housing ladder and making inroads into your repayments. Well done! But now interest rates are rising, you’re probably wondering how to make the most of your home loan.
It’s natural – Australians haven’t seen a rate rise for over a decade. We’ll take a look at some of the home loan features that could help you to pay down your loan faster and reduce your interest costs. Just be sure to consider your individual circumstances before you make a change.
1. Reduce interest with a home loan offset account
One of the features that can help you bring down the balance of your loan is an offset account.
Offset account meaning
An offset account is a stand-alone savings account that’s linked to your home loan, with the same lender.
You can make regular or one-off deposits to your offset account and withdraw from it as needed, so it operates like a normal transactional savings account. It even comes with a debit card, enabling you to withdraw cash from an ATM.
The primary difference between a traditional account and an offset account is that the money in an offset account doesn’t earn its own interest. Instead, it offsets the balance in that account, against your mortgage balance. In other words, at the end of each day, the account balance is subtracted from your home loan balance before interest is calculated.
This reduces the amount of interest you pay on your mortgage because the interest charged on your home loan is calculated on your loan balance minus the funds held in your offset account.
Benefits of a mortgage offset account
In this rising interest rate environment, depositing funds into an offset account reduces your interest charges without having to refinance and could help to give yourself an ‘interest rate cut’. You can also make extra repayments to your offset account. That means you have the opportunity to shave months or even years off your home loan term.
By having a separate offset account, you can also continue working towards other financial goals, like a holiday or shiny new car.
Things to consider about an offset account
Before you get your heart set on a home loan offset account, make sure that your loan is eligible for one. Getting in touch with your bank can help you find the answer.
Once you’ve got the green-light, find out if there are any account fees you will need to pay and if they would outweigh the financial benefits. It’s also important to know if there are any limits to the number of transactions you can make. For example, in an emergency, could you easily access the funds in your offset account?
If you are content with all of these factors, the biggest question to ask yourself is whether the reduced interest on your home loan will be greater than if your savings were sitting in a savings account.
2. Get the flexibility of a home loan redraw facility
Another feature you could consider for your home loan is a redraw facility.
What does redraw mean? A redraw facility isn’t a separate account from your home loan. Instead, it’s a feature of a variable rate mortgage that enables you to make additional repayments into your home loan, above the minimum payment amount. This reduces the balance owing on your home loan, which means you’ll pay less interest and can pay your loan off faster.
Benefits of a redraw facility
As well as paying less interest, another big benefit of a redraw facility is the flexibility you have. You can withdraw from the additional repayments you have made at any time, should you need to. This means that if you are faced with an unexpected expense, or you see a great deal on flights that you don’t want to miss out on, you can ‘redraw’ the funds from your account. However, you must have been making additional repayments beforehand.
If you do make a withdrawal, the balance of your home loan will also increase by the amount withdrawn, and your interest costs will go up too.
Having a redraw facility is reassuring when interest rates rise as you’ll be able to access these additional repayments. It can also give you the wiggle room to put future payments on hold by taking a repayment holiday. This break from your scheduled repayments can range from three months to a whole year.
Things to consider about a redraw facility
If it sounds too good to be true, that’s because not every home loan is eligible for this feature. You can only access a redraw facility if you have a variable rate home loan. So, if you’re switching your loan, bear in mind that redraw facilities are not available for fixed rate home loans.
Additionally, if you do make withdrawals from your available redraw, your home loan balance will increase. In a flow-on effect, the amount of interest you are charged will go up and may increase your required repayment amount.
On top of all that, before you draw up a redraw, find out from your financial institution whether there are any withdrawal restrictions or additional fees involved.
So, which one is right for you?
The good news is, both home loan features reduce the interest bill on your loan. Choosing which is best for you comes down to personal preference and which is most suitable to your financial situation. Understanding the practical differences between these options can help you make the best decision for your circumstances.
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