Home » community » News » Home Loan Features Explained

Home Loan Features Explained

Home Loan Features – What’s on offer, and what are they all about?

When searching for the right home loan in Australia, it’s essential to look beyond just the interest rate. Many loans come with additional features that can enhance flexibility, save you money, or help you manage your finances more effectively. These features can be the difference between a loan that meets your needs and one that doesn’t. By understanding the purpose and benefits of these features, you’ll be better equipped to make an informed decision. Here are some of the most common home loan features, helping you assess which ones align with your financial goals and lifestyle.

Redraw Facility

Redraw Facility – Definition

A redraw facility is an optional home loan feature that allows you to access extra repayments made on your loan. For example, if your minimum monthly repayment is $2,000 and you repay $5,000 in a given month, the additional $3,000 becomes accessible through the redraw facility.

Redraw Facility – Purpose

The main purpose of a redraw facility is to provide financial flexibility. It acts as a backup fund for unexpected expenses or planned expenditures such as renovations, debt consolidation, holidays, weddings, and so on. While the additional repayments reduce the interest charged on your loan, the redraw feature ensures you can still access those funds when needed.

Redraw Facility – Considerations

A redraw facility may not suit everyone. Funds are generally less accessible compared to an offset account, and some lenders impose restrictions such as limits on the number of redraws per month or delays in accessing the funds. If you require immediate access to your money, an offset account might be a better choice. Consider the frequency and amount of additional repayments you’re likely to make to decide if this feature is right for you.

100% Offset Account

100% Offset Account – Definition

An offset account is linked directly to your home loan and works like a standard transaction account. The money you keep in this account offsets your home loan principal, reducing the interest charged. For example, if your loan balance is $300,000 and you have $50,000 in your offset account, you only pay interest on $250,000. As far as home loan features are concerned, offset accounts are relatively common as a way to entice borrowers to a particular lender.

100% Offset Account – Purpose

This feature is a powerful tool for saving on interest while maintaining easy access to your money. By depositing your income or savings into the offset account, you reduce your interest payments without locking away your funds. It’s especially useful for borrowers who have higher balances in their savings or transactional accounts.

100% Offset Account – Considerations

Not all offset accounts are created equal. Some lenders charge monthly fees, impose minimum balance requirements, or limit the number of offset accounts you can open. Additionally, the benefit of an offset account depends on the balance you maintain—low balances may result in negligible interest savings. Review the terms and compare lenders to maximise your savings.

Unlimited Additional Repayments

Unlimited Additional Repayments – Definition

This feature allows you to make unlimited extra payments towards your home loan on top of your regular scheduled repayments. These additional payments reduce the principal amount owed, helping you save on interest and pay off the loan faster.

Unlimited Additional Repayments – Purpose

Unlimited additional repayments are ideal for borrowers who expect to have surplus income periodically. This could include bonuses, tax refunds, or windfalls that can be directed towards reducing your loan balance. By doing so, you not only save on interest but also reduce the overall term of the loan, paying it off sooner.

Unlimited Additional Repayments – Considerations

While this feature is common with variable-rate loans, fixed-rate loans often impose restrictions or penalties for making additional repayments. Before committing to a loan, confirm whether your lender offers unlimited additional repayments and whether it applies to the type of loan you’re considering.

Split Loans

Split Loans – Definition

A split loan divides your home loan into two parts: one with a fixed interest rate and the other with a variable rate. For example, you might fix 60% of your loan while keeping the remaining 40% variable. This allows you to balance the benefits of both rate types.

Split Loans – Purpose

Split loans are designed to offer the security of fixed repayments while retaining the flexibility of a variable-rate loan. The fixed portion protects against interest rate hikes, providing predictability in budgeting, while the variable portion allows you to take advantage of rate decreases or make extra repayments without penalties.

Split Loans – Considerations

Choosing the right split ratio is critical. Too much in the fixed portion can limit your ability to make additional repayments, while too little may expose you to interest rate fluctuations. Additionally, lenders may charge fees for splitting a loan or for adjusting the split ratio later.

Interest-Only Loans

Interest-Only Loans – Definition

An interest-only loan allows you to pay only the interest for a specified period, typically 1 to 5 years. During this time, the principal remains unchanged, resulting in lower monthly repayments compared to a principal-and-interest loan.

Interest-Only Loans – Purpose

This feature is particularly attractive to property investors who want to maximise cash flow while claiming interest repayments as a tax deduction. For owner-occupiers, it can provide temporary financial relief during periods of reduced income or high expenses.

Interest-Only Loans – Considerations

Interest-only loans come with risks. Once the interest-only period ends, repayments increase significantly as the principal must be repaid within the remaining loan term. Over the long term, these loans are more expensive, as the principal isn’t reduced during the interest-only phase. Refinancing to a new loan with, for instance, a 30-year term can bring repayments back down, however this does increase your interest payments over time.

Repayment Schedules

Repayment Schedules – Definition

Home loans in Australia typically offer monthly repayment schedules, but some lenders allow fortnightly or weekly repayments. Fortnightly and weekly schedules align more closely with income cycles, making budgeting easier for many borrowers.

Repayment Schedules – Purpose

More frequent repayments can reduce the overall interest paid on your loan. For example, there are 26 fortnights in a year, meaning you effectively make one extra monthly repayment annually, potentially accelerating your loan repayment and saving on interest.

Repayment Schedules – Considerations

The benefit of more frequent repayments depends on how your lender calculates interest. Some lenders offer true fortnightly repayments, while others simply halve the monthly repayment amount, offering no real benefit. Confirm the repayment structure with your lender.

Repayment Holidays

Repayment Holidays – Definition

A repayment holiday allows you to pause your home loan repayments for a set period, typically between 1 and 6 months. This feature is usually available to borrowers who have made prior extra repayments.

Repayment Holidays – Purpose

Repayment holidays can provide financial relief during significant life events, such as maternity leave, temporary job loss, or medical emergencies. By pausing repayments, you can redirect cash flow towards other immediate needs.

Repayment Holidays – Considerations

Repayment holidays are not without drawbacks. Interest continues to accrue during the pause, and the loan term may be extended or repayments increased to compensate. Use this feature judiciously and only when necessary.

Loan Portability

Loan Portability – Definition

Loan portability allows you to transfer your existing home loan to a new property without refinancing. The terms, balance, and interest rate of your current loan remain unchanged.

Loan Portability – Purpose

This feature is ideal for homeowners who are upsizing or downsizing. By avoiding the costs and time involved in refinancing, you can streamline the process of moving between properties.

Loan Portability – Considerations

Loan portability is only feasible if both property settlements occur on the same day. Additionally, lenders may impose fees or conditions, such as limits on the loan amount or property value.

Technology & Flexibility

Technology & Flexibility – Definition

Many lenders now offer digital tools, such as apps and online platforms, to help you manage your home loan. These tools provide access to account balances, repayment schedules, and redraw facilities.

Technology & Flexibility – Purpose

Technology enhances convenience, allowing borrowers to monitor and manage their loans from anywhere. Features like real-time updates and automated repayment scheduling reduce the effort involved in staying on top of your finances.

Technology & Flexibility – Considerations

Not all digital tools are created equal. Some may lack intuitive interfaces or essential features. Before choosing a lender, explore their technological offerings to ensure they align with your needs. Also, in a world where cybersecurity threats are so prevalent, it’s important to remain vigilant when using apps and online services.

Choosing the Right Features

Selecting the right home loan features can make a significant difference in your financial journey. Each feature offers unique benefits and considerations, so assess your financial goals, income stability, and lifestyle needs before making a decision. The Finance team at McKinley Plowman can help tailor a home loan to suit your individual circumstances, with the features that best suit your borrowing position and goals – get in touch today on 08 9325 2411 (Perth), 08 9301 2200 (Joondalup), or via our website.

written by:

Paul Moran

Paul has over 35 years of experience in finding financial solutions for homebuyers, investors and business owners.
A licensed broker and member of the Mortgage & Finance Association of Australia (MFAA), Paul’s extensive experience includes 20 years with a major bank, seven of which were as commercial banking manager.
Paul delivers a holistic financial solutions to achieve the best possible outcome for a client’s personal or commercial lending needs. Paul also provides a comprehensive financial consultancy to business owners on commercial, equipment and invoice finance.