Better understand your home loan features

Home loans come in a variety of different types with different features. There’s more than just the interest rate to consider, for instance. There’s also whether you might want a redraw facility or offset account, whether you can make extra repayments, a line of credit or a package discount, to name a few features. Let’s break these down further.

You may be considering a loan with a fixed or variable interest rate. These can each come with various home loan features.

A variable rate home loan is a home loan where the interest rate may rise or fall with the market. These home loans often come with features such as allowing unlimited extra repayments, redraw or offset accounts which can help you pay off your home loan sooner.

A fixed rate home loan is a home loan where the interest rate will remain the same during a set period. Often this period is for the first two to five years of the home loan, though you may be able to fix an interest rate for shorter or longer terms. After this period the loan will revert back to a variable rate, unless you apply for another fixed term.

A redraw facility lets you redraw (or take out) money from your home loan that is made up of any extra repayments you’ve made in addition to your minimum weekly, fortnightly or monthly repayment. The surplus of extra repayments is what you can take out if you need it.

A traditional principal and interest home loan will require you to make regular repayments to your lender to reduce the amount you owe. Some home loan products allow you to make extra repayments on top of these, meaning you pay off the home loan sooner.

This feature can be more common in variable rate home loans than fixed rate.

Paying fortnightly instead of monthly may also help reduce the amount of interest you pay over the life of the loan. That’s because there are only 12 months in the year, but there are 26 fortnights.

For example, if you were making monthly repayments of $2000, you’d be repaying $24,000 a year. But if you switched to fortnightly payments of $1000 (half your monthly payment) you’d be repaying $26,000 a year. This subsequently reduces the total interest payable over the life of the loan.

A home loan package is when a lender will offer a combination of financial products at a discounted interest rate or with reduced fees for each product.

A home loan package might include services like the following being all provided by the same lender under a package:

• Bank accounts
• Credit cards
• Offset accounts
• Share trading apps or access to share trading services
• Home and contents insurance.

Owner-occupier home loans are more commonly principal and interest loans. These home loans are made up of two parts: the principal amount is the amount you borrow and the interest rate is the amount the lender charges you for the benefit of loaning you the money.

However, there are interest-only loans available which allow the owner to only pay back the interest portion of the loan, while the principal remains the same for a set period of time.

Usually the interest-only period lasts between one and five years. After this period, you would begin to pay back the principal and interest portions of the loan unless you refinanced the loan.

Interest only loans are more common for investors looking to reduce their regular repayments. Always seek professional advice when investing and reviewing potential tax benefits, especially when claiming deductions on negatively geared properties.

The disadvantage of interest only is that the principal remains the same for the interest-only period. In other words, you're not reducing the amount you owe, while still paying interest.

Home loan portability is a feature that lets you stay with the same home loan product, but change the security, in this case a property.

The main advantage of loan portability is that it can save you the time it takes to refinance. However it’s important to understand this process can come with fees for your lender to reorganise the loan to include the new security
Loan portability is usually used for customers who are selling and buying a property at the same time as it allows you to keep your existing facilities like credit card and online banking accounts.

This feature is usually only beneficial if the timing of these transactions is aligned and may need to be approved by the lender.

A mortgage offset account is an account linked to your home loan (like another savings account).

Offset features are common in variable rate home loans and work like an everyday bank account. Some borrowers may choose to receive their salary into an offset account.

The money in this account is “offset” against the balance of your loan, meaning you only pay interest on the difference.

For example, on a home loan of $600,000, if you had $50,000 in a linked offset account, you would only have to pay interest on $550,000.

As the balance in your offset account rises, the amount you save on interest increases as well. This can save your money, and may reduce the life of the loan.

A line of credit on a home loan allows you to access some of the equity that has built up on a property. You can access this money up to a pre-approved credit limit.

Line of credit loans will charge interest on the amount that has been used, not the limit. For example, if you have a line of credit loan of $50,000, and withdraw $10,000, you would pay interest on $10,000, not $50,000.

If you’re in the market for a home loan, you might find it helpful to visit our home loan comparison guide for more information and to compare a range of home loan options