As the financial industry has exploded in popularity, mortgages are now being packaged and customized like consumer products. They now offer features that didn’t exist a few decades ago. Many of these features can be very beneficial to a borrower depending on their situation.
Many people don’t make it a point to familiarise themselves with these features, however it is well worth the effort to research the available options. Here are some of the features that you might not be aware of.
Offset Accounts
An offset account is a feature that allows you to pay off your mortgage much more rapidly, and without even thinking about what you are doing. An offset account acts just like a checking account. You can add and withdraw funds through an ATM, the bank, and an online account.
The difference is that the offset account is tied to your mortgage. Rather than earning interest in the offset account, the interest owed on your loan is deducted. Frankly, the interest that you earn from a savings account is minuscule compared to the interest that the bank charges you for your mortgage. It is much more beneficial to have this interest deducted from your home loan.
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Extra Payments
Many lenders now offer the feature of making extra payments toward your mortgage. In the past, many lenders would charge you an “early payment fee” if you tried to do this. If not, they would most likely just hold onto the payment and apply it toward the next month, meaning that it would not affect the amount of interest that you owe.
The advantage of making an extra payment toward the mortgage should not be understated. Because of compound interest, you are charged interest on the interest that you owe. The sooner you pay off your interest, the less interest you have to pay.
In most cases, lenders will only offer the option of extra payments with a variable rate home loan. It can be more difficult to find the extra payment feature available for a fixed rate mortgage. You should be aware of the trade off, since variable rate mortgages run the risk of becoming more expensive over time.
Redraw
This is another option that is typically only available if you purchase a variable rate mortgage. Once again, be aware of the trade-off that you face in risks.
The redraw feature allows you to withdraw extra payments that you have made toward the mortgage. Obviously, you would need the extra payments feature in order to take advantage of this option.
The greatest benefit of this option is the fact that you don’t need to be too concerned about putting too much money toward your mortgage. If you paid extra into your mortgage, only to realise that you needed the funds for something else, you could withdraw those funds for your own use.
Make sure that you are fully aware of the terms and conditions of the redraw feature. In some cases, you may be charged a fee for the redraw, which somewhat defeats the purpose of using it.
Line of Credit Mortgage
This means that you can pull money out of your mortgage and repay it at will, using it in much the same way that you would use a credit card. Most of these loans will come with a spending limit. They can be used to buy most kinds of Australian property.
This type of home loan isn’t suitable for everybody, but it does have its advantages. The interest rates are comparable to that of a home loan and much lower than that of a credit card. It is a simple way to consolidate your debts, possibly reducing the total amount of interest that you owe on all of your debts.
A line of credit loan is an interest only loan with no set term. You decide when to pay on the principle of the loan. This can be very useful for some people, but if you find it difficult to manage money you could easily end up getting yourself into trouble with a large amount of debt and no equity in your home.
Variable and Fixed-Rate Mortgages
Many lenders now offer the choice between a variable and a fixed rate mortgage. A fixed rate mortgage allows you to lock in the interest rate for a set number of years. This means that the interest rate will stay the same for several years. If you are the type of person who would rather know exactly how much money you will owe for each payment, rather than being subjected to changes in the primary interest rate, this might be the best fit for you.
If you choose a fixed-rate home loan, you should be aware that it comes with limitations. In most cases, as mentioned above, you will not be able to make extra payments (or redraw extra payments that you have previously made).
You should only apply for a fixed-rate mortgage if it is reasonable to think that interest rates will go up. If you plan to sell your home, make extra payments, or refinance your loan in the future, it is much more beneficial to apply for a variable rate mortgage. Fixed rate home loans are notorious for their lack of flexibility, although there are some lenders who don’t fit this description.
Possible Favourable Interest Rates on a Foreign Currency Mortgage
There are some lenders who allow you to borrow a home loan in a different currency. If the interest rates are lower in another country, this means that the cost of the monthly payments could be lower as well.
This does not come without its downside, however. Because of the flexible nature of exchange rates, you are placing yourself under risk exposure by taking out a foreign currency mortgage. If the value of the foreign currency suddenly increases, your Australian dollars won’t be worth as much, and you will be forced to pay more for the loan. The banks are well aware of this risk, and are therefore cautious about who they lend to.
At Mortgage Broker Australia we usually recommend an Australian Dollar Mortgage. Lenders are far less likely to approve a Foreign Currency Mortgage and even if approved the about you are allowed borrow is usually a smaller percentage of the property value.
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For more information on mortgage features Mortgage Broker Australia can help. We specialise in foreign property investment, so enquire online today and take one more step towards owning real estate in Australia.
