Your investment could get you a better return with these home loan features.
With a plethora of competing lenders and home loan packages to choose from, selecting your home loan can be a difficult process. That’s why we’ve put together a comprehensive list of ‘must-have’ home loan features that every investor must consider before buying a property.
Observe these five features of home loans and you’ll be on your way to making informed decisions that will help you maximise your returns and reduce your tax liability.
Top 5 home loan features
1. Interest only repayments
What are interest-only repayments?
Interest-only repayments require you to repay only the interest portion of your loan, allowing you to pay less each month than a standard principal and interest (P&I) loan. If you’re investing in property, interest only repayments enable you to minimise your mortgage repayments in the short-term, while your property ideally increases in value in the long term.
For example, if you owned a property worth $360 000 with a $300 000 interest only loan at 7%, then your monthly repayments would be $404 per week. If you made principal and interest (P&I) repayments on the same loan, your monthly repayments would rise to $534.
Are there any risks with making interest-only repayments?
Interest-only repayments can be risky because you’re making no progress on your overall mortgage. You should realise that if you’re making interest only repayments, you’re not meeting your overall borrowing commitments, as no principal is being paid.
In the above scenario, after five years, you’ll still owe $300 000 on the property if you take out an interest only loan. However, with a standard P&I mortgage, after five years you have reduced the balance of your loan by $50 000.
However, investors that have good financial management can benefit from the flexibility from interest-only loans because it allows you to make principal repayments even when the loan is interest-only, while still giving them the cash flow benefits of interest only repayments.
2. Low Rate
As the property may be one of your most valuable investments, a low rate loan could help you to pay off your mortgage sooner. However, it is important to realise that low rate home loans have distinct features and benefits compared to other home loan categories.
Features of low rate home loans
- Less interest: As the name suggests, loans with low interest rates can save you money on repayments.
- Variable interest: A low rate loan will normally charge a variable rate which means that the rate is susceptible to fluctuation as your lender may raise their standard variable rates.
- Less features: Lenders can afford to offer low rates because these loans don’t usually have many other features, such as a redraw facility or an offset account.
Why choose a low rate?
- Lower repayments: A lower interest rate means lower repayments, which is useful if you’re a first time investor or trying to keep costs down. A lower rate also makes it easier to pay more than the minimum repayments.
- Less impact from official rate rises: Even though most low rate loans have a variable rate, if your interest rate is low to begin with, then it will take longer for rate changes to affect you.
- Easy to manage: A low rate loan with basic features can be beneficial as you don’t have a range of loan features to consider when making your decision.
What is an offset account?
An offset account is like a regular transaction account that is added to your mortgage account. You can deposit funds into this account at any time and withdraw them again via ATMs and EFTPOS transactions.
Each dollar kept in this account ‘offsets’ the amount of interest you pay on your mortgage. For instance, if you have a 100% offset account with $10 000 in it and your mortgage balance is $300 000, your interest charges are calculated on the balance of $290 000.
As we mentioned above, reduction in interest can shorten your loan term, as you’ll be able to pay your loan off sooner.
If you link an offset account to your mortgage and arrange to have your salary or any other income you receive paid into it, you can reduce your mortgage balance faster. This is because interest on your loan is calculated daily, so every day you have funds in your offset account will contribute towards reducing the total interest payable.
Are there any risks with offset accounts?
- Higher interest: Offset accounts are usually offered on full featured home loans that can include higher interest rates.
- Additional fees: The offset account may have a monthly account-keeping fee.
- Understand the differences: Ensure you know the difference between a partial offset account and a 100% offset account. A partial offset account will only offset a percentage of the balance in your offer account, not the full amount.
4. No ongoing fee
What is an ongoing fee?
When combined with the right features, home loans with no ongoing fees are a great option for savvy investors. These types of loans reduce the cost of your loan while often providing competitive rates that enable you to manage your repayments more effectively.
Loans with no ongoing fees allow you to pay your costs upfront, such as application fees, without having to worry about having to manage ongoing fees throughout your loan period.
Typically, many lenders will charge ongoing monthly fees to maintain your home loan account or to pay for extra features like 100% offset accounts. Package loans, which bundle your home loan with a credit card and savings account from the same lender also tend to charge ongoing annual fees which cost between $200 - $500.
To compare home loans with no ongoing fees, try to identify what ongoing fees are being omitted. For example, a lender might waive monthly or annual fees, but still charge additional fees for a redraw facility which could impact the overall cost of your loan.
5. No application fee
As the name implies, home loans with no application fees are those which charge $0 application fee. These loans may not have application fees for the following reasons;
- Promotions: The lender may have waived the application fee to gain new customers for a special promotion.
- Packaged home loans: Lenders will waive application fees on these types of loans but instead will charge an annual fee.
- Basic home loans: These loans generally have less features with lower fees.
The application fee is charged by the lender to cover the costs associated with processing your application. This fee can range between $200 to $1000 depending on the provider and type of home loan. Finding loans with no application fees is beneficial because it allows you to set money aside for more important expenses.
Which home loans don’t charge an application fee?
The good news is that there are various types of home loans that don’t include applications fees, including;
- Full featured home loans: These types of loan offer various features such as offset accounts, and often charge $0 application fees as part of a promotional offer.
- Packaged home loans: These loans bundle a borrower’s home loan, transaction account and credit card together. This comes with the benefit of netting you interest rate discounts and waivers on fees. Generally, these home loans will charge an annual fee that can range between $150-$500.
- Basic home loans: Most basic loans will have minimal features and will offset this by offering low fees and interest rates. Generally, the first rate which is discounted or waived for basic loan packages is the application fee.
Compare investment home loans
As a home loan investor, it is critical that you research, understand and compare the different features of loan packages to uncover the best loan options for you. In doing so, you will benefit from significant cost savings and better financial management.