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Choosing a home loan can be one of the biggest financial decisions in your life, and not all loans offer the same features. Given the importance of the decision, it’s vital that you spend time working out what you need from your loan as this is a long-term financial commitment, and you want to make a decision that you’re completely comfortable with.
Very simply, an offset account is a transaction account linked to your mortgage. The benefit of an offset account is that any balance held in the account is “offset” against your loan balance for the purpose of calculating the interest due. An offset account can help you pay down your mortgage faster, potentially saving you a lot of money over the course of the loan.
As an example, if your loan is $300,000 and you have $20,000 in an offset account, you only pay interest on $280,000 for each day that the $20,000 balance is maintained. If you’re able to maintain a higher balance in your offset account, your repayments will have a stronger effect on the principal, and you will pay off the loan faster.
The bigger your home loan, the more interest you pay, so extra repayments help in two ways: they reduce your loan principal, and they reduce the interest you pay. Extra repayments early in the loan term are most effective due to the time value of money concept. The more you can pay into your home loan earlier in the term, the less interest you will pay over the longer term.
Not all home loans will allow you to make extra repayments and many cap the amount you can pay in a calendar year. Some loans will also charge a fee or even a penalty for paying off the loan early. This is most often the case with fixed interest rates, so tread carefully when considering a fixed rate loan.
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A redraw facility allows you to withdraw any additional payments that you’ve previously made into your loan account. This means that while the money is in your account, you’re reducing the amount of interest that you pay, yet you still have access to the money.
This is a feature that can offer great flexibility and it’s worth looking at as part of your overall financial strategy. For some people, a redraw facility may be a more effective way of saving for medium-term goals (like a holiday) than a traditional savings account.
Despite the benefits, make sure you’re fully aware of any charges that may be attached to your redraw facility. Some lenders may charge a fee and can also limit how much you can take out.
Repayment holidays can be invaluable if you’re experiencing financial difficulties or have to manage an unexpected event that affects your ability to make repayments. Lenders have different approaches to repayment holidays. Some may not offer them at all, while others offer a partial reduction, a complete break or a combination of both.
It’s important to remember that your interest still accrues on the loan, and in the long-term you may end up paying more over the course of the loan. Whilst repayment holidays can help you out of a tight spot, they’re not going to be a long-term fix, so this feature is something you would need to discuss with a financial professional.
Which option is right for you?
The features that are best for you depend entirely on your personal situation, and it’s important to have the right advice. If you’re not sure about what you need, or want some help finding a loan that has the features you want, a mortgage broker can be of real benefit.
A Yellow Brick Road adviser can help you understand the available options, and decide which features best suit you.
Contact us today on 1800 927 927.