It doesn’t matter whether you’re buying your first property or adding another house to your investment portfolio, taking out a mortgage has become a rite of passage for home ownership in Australia. To put it in perspective, the Australian Bankers Association found households have borrowed an astounding $1.46 trillion for real estate as of March – a 7.3 per cent increase on last year.
The world of lending is varied, with plenty of options to choose from. Understanding some common home loan features can help you decide the type of mortgage that’s right for your and your financial situation. With that in mind, here are three that you might want to consider.
1. Variable interest rates
It’s hard to escape interest rates – after all, they’ve dropped to historically low levels. But what does this mean for your home loan? There are typically two choices you can pick from: variable and fixed.
Variable rate home loans have become a particularly popular choice among borrowers, as they shadow market forces, like Reserve Bank’s official cash rate (OCR) decisions. If the cash rate takes a fall, as it has been doing over the past few years, the amount of interest you pay on the loan drops in tandem.
On the other hand, an increase interest rates can have the opposite effect. This means your mortgage is at the whim of external conditions, which can make it a slightly riskier option. However, variable rate home loans typically offer flexibility, like making unlimited additional repayments and having access to redraw facilities or an offset account. This can let you pay off the loan more quickly.
2. Fixed home loan
On the other side of the coin are fixed rate home loans. As the name might suggest, this feature allows you to lock in a particular rate on your mortgage for a set period of time. This can be a benefit for borrowers who like the financial certainty of knowing exactly how much you’ll need to pay over the course of the fixed interval.
These aren’t dictated by the official cash rate – instead, you can take advantage of a low rate to get ahead, and you might even be in a better financial position when the set period ends.
Just remember: There are usually a few strings attached to this form of mortgage. For one, you might not be able to make extra payments. Not only that, but if variable rates fall, you won’t be saving as much on interest – but you’re protected from any sudden increases.
Another feature to consider is the option to have a home loan split with both a fixed and variable interest rate.
3. Offset accounts
Offset accounts are another feature you might come across. These are typically attached to variable rate home loans, and gives you the option to link your mortgage to a separate account. This works like a normal savings account, but with a key difference: The amount you hold in the account is offset against the remaining balance on your home loan.
This can significantly cut down on the amount of interest you’ll need to repay, especially if you’re clever with your additional repayments. For example, transferring a portion of your salary into your offset account can build a solid foundation and help you pay down your mortgage in a shorter period of time.
If you’ve got any questions about the mortgage features available to you, speak to our team of lending professionals at Police Bank for more information.