As you probably already know, there has been big news in Australia recently: the RBA has cut rates for the first time in four years.
In response to the cut, you might consider how you can benefit by reviewing the features of your current loan, or by considering the features of a loan you are thinking about getting.
Whether you are refinancing with an existing loan, or are new to the world of loans and mortgages, this article is for you.
More vs Less Common Loan Features
Let’s start with pointing out which loan features are generally more vs less common.
It’s likely your current loan is offering the features under the “most common loan features” or “common other loan features” category. In this instance, you could think about how to take advantage.
Meanwhile, you might be surprised if your lender is offering anything under the “less common loan features” category, or else consider switching lenders if there is something that could really benefit you.
The Most Common Loan Features Include…
- Flexible repayments
- Extra repayments
- Offset accounts
Common Other Loan Features include…
- Loan splitting
- Redraw facilities
- Zero or low fees
Less Common Loan Features Include…
- Loan portability
- Repayment holidays
- Salary crediting
- Cashback incentives
- Round-up tools
- Top-ups
For the purpose of this article, we won’t go into all of these, but feel free to give us a call or book a free consultation if you’d like to learn more, or simply have us review and optimise your current loan features.
Let’s delve into 10 of these features in greater depth.
1. Flexible repayments
Most lenders offer flexible repayments, which refers to the ability for borrowers to change their repayment schedule depending on their financial situation. This can include making extra repayments, making repayments less frequently or even taking repayment holidays.
Repayment flexibility can vary depending on the type of loan you have. Variable rate loans offer more flexibility than fixed-rate loans, which usually penalise early repayments with fees.
Purposes and benefits
- Borrowers can make repayments more or less often, depending on when is most suitable. This may be weekly, fortnightly or monthly, benefitting people with fluctuating incomes.
- Borrowers can save money by making more frequent repayments during low interest rate periods
- During low interest rate periods, you might choose to makes less frequent repayments if you expect rates to continue cooling. Then, you could make more frequent repayments once you think rates won’t lower much further. This can potentially maximise money saved.
Drawbacks
- Can include extra fees and ongoing costs
- Can result in financial mismanagement if not handled responsibly
- In cases of recently lowered interest rates (like the RBA rate cut), rates might lower further. Those increasing payment frequency too soon can miss out on benefits from even lower rates.
2. Extra repayments
Lenders usually allow unlimited additional repayments on variable-rate loans, though typically penalise excess additional repayments on fixed-rate loans.
Purposes and benefits
- Allows you to pay off your loan quicker. Making extra repayments during lower interest periods means a larger portion of your payments will go towards paying off the property (as opposed to interest).
Drawbacks
- Most lenders limit extra repayments for fixed rate loans, either in percentage or dollar values
- You won’t be able to access this extra money paid if you need it unless you have a redraw facility
3. Salary crediting
Salary crediting refers to a process where when you are paid your salary, part of it automatically pays your mortgage repayment. This is all without you having to do anything further than setting up the arrangement. While salary crediting is not the only way to automatically pay your mortgage each month, but some people prefer it for a number of reasons.
Purposes and benefits
- A convenient way to not miss your mortgage repayments, while managing your finances
- Less risk of insufficient account funds to pay the loan
- You can quickly get an idea of how much cash you can spend outside of paying the loan
Drawbacks
- Less flexibility with your salary cash
- Relies on consistent, on-time salary payments
To set this up, check with your lender for eligibility and specifics. You typically need to give your loan company’s BSB number to your employer.
4. Split rate loans
Split loans allow borrowers to divide their loan between different structures. The most common arrangement is dividing the loan in two: a fixed rate loan, and a variable rate loan. This is a great model if you want to combine flexibility (the variable rate loan) with stability (the fixed rate loan).
Purposes and benefits
- Can balance the benefits and risks of fixed and variable rate loans
- You may customise fixed or variable rate loan proportions to your liking
Drawbacks
- Potential duplicate fees (establishment and ongoing)
- Likely limited extra payments for the fixed rate loan portion
5. Redraw Facilities
Redraw facilities offer you the ability to access any extra repayments you made on your loan. This is good for emergencies, or if you would like to put the money towards any promising opportunities you encounter.
Purposes and benefits
- Gives you a financial safety net in case of emergencies, while still allowing you to take advantage of rate cuts by making extra repayments that can still be accessed
Drawbacks
- You might have to pay fees either per redraw, or a flat fee
- Some lenders might have minimum withdrawal amounts. This depends on lender policies, which can greatly vary from lender to lender. Not all lenders have minimum withdrawal amounts.
- More commonly, lenders have maximum withdrawal amounts (per withdrawal)
- Not usually offered with fixed rate loans
6. Offset or Multiple Offset Accounts
Offset accounts allow you to pay interest on an amount less than your loan.
They do this by linking an account, for example your savings account, to the loan. The amount in this particular account is subtracted from the loan. Some lenders even offer multiple of these offset accounts.
Unlike a redraw facility, you can access the money in your offset account/s whenever you want.
Here is an example:
Let’s say your loan is $700,000, and you have $30,000 in your offset account. In this instance, you will only be paying interest on $700,000 – $30,000, or $670,000.
Purposes and benefits
- You can reduce loan interest while still having flexibility with the money (for daily expenses and whatever else you need)
- Multiple offset accounts are offered by some lenders, allowing you to have different accounts for different purposes
Drawbacks
- Interest rates are typically higher for loans with offset accounts
- You might encounter account-keeping fees for using an offset account
- Offset accounts require a large enough balance to really be beneficial
7. Loan Portability
This is mainly used for people moving homes, or for other cases of property transitions.
Loan portability allows you to move your current home loan to a new home or property. Essentially, you are keeping the same loan but swapping properties. If you’re thinking about moving homes post-RBA rate cut, this could potentially benefit you.
Purposes and benefits
- Save money on fees involved with applying for a new loan
- Keep the familiarity of your existing loan, so you don’t have to get used to a new one
- In some instances, lenders might allow loan top ups
Drawbacks
- Lenders need to approve of the new property (in terms of value and location)
- Lenders do not usually increase the loan amount during portability
8. Cashback incentives
Some lenders offer cashback incentives for loans. They are designed to attract customers either looking for a loan, or existing borrowers who may want to refinance for them.
Cashback incentives work by lenders giving customers money in two main scenarios: either when customers apply for a new home loan, or when they refinance their existing loan. However, lenders do sometimes run other promotions.
Purposes and benefits
- Can help short-term with costs such as stamp duty
- Can cover costs associated with refinancing or setting up a new loan
Drawbacks
- Might provide short-term benefits. However, ultimately, cashback deals might not be favourable in the long run due to potentially higher loan fees or interest.
- Limited-time offers can cause borrowers to act before thinking about whether the offer is right for them
During rate cuts, such as currently, lenders might try to be more competitive by running cashback deals. You might want to look out for or inquire about deals that could benefit you.
9. Lump sum payments
Lump sum payments refer to when the borrower reduces the loan’s principal by making large, one-time payments towards the loan.
Purposes and benefits
- Can lead to significant savings as it reduces the principal balance, leading to less interest
- You can pay off the loan more quickly, especially where interest rates are lower (since a larger portion of the payment goes towards your property rather than the interest)
Drawbacks
- Not all loans offer lump sum payments without penalties
- Making a lump sum payment means you will have less money to use for other expenses
10. Zero or low fees
Some lenders offer zero or low fees for common fees, including those involved in setting up the loan and extra repayment fees. Lower fees are typical for more basic loans that exclude features such as offset accounts. Less commonly, loans might offer zero fees, which can come with conditions or less favourable features like higher interest.
Purposes and benefits
- Can benefit people in tough financial situations by making loans more affordable.
- Fewer or less fees to think about for borrowers
Drawbacks
- Prioritising low or zero fees can lead to exclusion of potentially beneficial other loan features like redraw facilities
- Higher fee loans might sometimes be a more favourable option, as they can have lower interest rates
As always, we hope you both enjoyed this article and learned something new. This is for educational and entertainment purposes only, and does not constitute official professional advice. Consider booking a free consultation for personalised recommendations.
Warm regards,
Next Step Mortgage Broking
