4 must know home loan features that affect your repayments

Posted on Thursday, November 8, 2018 - 10:37

One of the problems that plague both new and old mortgage holders is grappling with home loan features and terms that can eventually affect how they pay off their home loan. Terms such as redraw facility, lenders mortgage insurance, home loan split, and offset accounts have left some Australians muddle. This guide breaks down what each means and how it will affect the way you pay off your loan.

Redraw facility

A redraw facility is a feature that comes with a loan that allows you to overpay your loan. This basically paying more than the minimum repayments that are stipulated on your loan. Not all home loans will come with a redraw facility which is something that you can check with your lender.

You will be able to access your banked overpayment funds that have gained interest. It can be a pool of cash that can later be used for emergency situations, but also keep in mind that if you redraw these funds will affect the paying off your mortgage. There could also be a fee, known as the activation fee, that may come with it and can go up to range from $0 – $50 per redraw. You could also be limited to how many times you can use this facility and a cap on the amount that you take out.

Comparison rate

A recent survey among Getaway Bank found that there has been a 5% drop in the number of Australians that definitely understood what a comparison rate is, some Aussies are still not sure how this differs from the interest rate. A comparison rate is slightly higher than an interest rate and differs in the sense that it combines the interest rate with the fees and charges of the loan. It can help you basically calculate the true cost of a loan which can affect your repayments throughout the term of a loan. It is vital that you calculate the cost of a loan using a loan calculator to see if the loan is affordable for your situation.

Lenders Mortgage Insurance (LMI)

According to the survey, 40% of Australians did not know what Lenders Mortgage Insurance (LMI) meant. Some Aussie mortgage holders think that this is something that is paid out to them which is a misleading myth. It is a feature that is created to protect lenders from the risk of lending money to potential mortgage holders that have less than 20% of the deposit to put towards a loan. This basically means that if you borrow more than 80% of the Loan to Value Ratio you will attract an LMI fee which varies from lender to lender.

Offset Account

An offset account is basically a savings account in which you save money to reduce the interest on the amount that you owe on a loan. For example, if you take out a home loan to the value of $400,000 and place $100,000 in the offset account you will only be charged interest on the $300,000 on your loan which can help mortgage owners pay off their loan quickly.

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