5 great home loan features – and the sneaky reasons lenders offer them

Everyone knows about home loan interest rates, especially since they’re quite high at the moment. But if you’re just starting your property-buying journey, what other features should you consider in a mortgage? What are the pros and cons? And why does your lender offer them in the first place?

Let’s review the top five features when comparing home loans.

Firstly, let’s compare. What’s the difference between a fixed and variable interest rate?

A fixed rate home loan has a set interest rate for a certain period, called your ‘fixed term’. Your monthly repayments will be the same during your term because your interest rate won’t change. Terms usually last 1 to 5 years, though some lenders offer 7-year fixed options.

Variable home loans change at the discretion of your lender and are sensitive to cash rate decisions from the Reserve Bank of Australia. Some years your variable interest rate (and therefore your repayments) might be relatively low, while others may be higher. 

In short, fixed rates stay the same while variable rates…vary.

Both types of home loans have their pros and cons. For instance:

• Fixed mortgages mean predictable repayments and thus financial certainty, but–
  
• Variable mortgages mean you can drop onto a lower rate, and often come with interest-saving features like offset accounts (see below).
  

It is relatively easier to refinance a variable mortgage, too. Breaking a fixed mortgage early usually requires you to fork out a hefty break fee. 

Comparing the rates and features between fixed and variable mortgages can help you decide which option works best for you. Either way, your lender won’t be too fussed: variable rates can change to suit their business needs, while fixed rates guarantee a steady revenue. 

DID YOU KNOW? In the USA and UK, buyers can fix their mortgages for up to 30 years. We can’t in Australia because our government entities don’t back mortgages. Hence lenders aren’t willing to risk having such an extended loan term on their balance sheets.

An offset account is a savings account attached to your home loan. Since many lenders are banks, they want to maximise the business they can get from you. 

So what’s good about an offset? In short: it saves you interest. Your bank subtracts the money in your offset from your full mortgage (i.e. your principal), so you only pay interest on the remainder.

For example:

• If you have a $500,000 mortgage,
  
• And $250,000 in an offset account,
  
• You only pay interest on $250,000 of your home loan. 
  

Offsets are more common in variable home loans, especially packaged loans, though some fixed loans will have them. You may be charged higher fees for opting for a loan with an offset account, too, and keep in mind it doesn’t reduce the amount you pay on your principal balance. A $500,000 loan is still a $500,000 loan.

However, you can use your offset account like a regular savings account: stashing funds for a rainy day, paying bills, or saving for that sweet European adventure. So if you’re in the market for a savings account and don’t mind banking with your lender, it can make a smart option.

Got some extra cash, like a work bonus or a tax refund? Some home loans offer free extra repayments, meaning you could put that check towards your mortgage and pay it off sooner. 

This feature isn’t a standard because it affects how lenders make money. They don’t make money off you repaying your principal (i.e. the size of the original loan you take out). They make money off the interest you repay, and they like consistency. 

The longer your home loan lasts, the more interest a lender can charge you. By paying off your loan sooner (without paying extra fees), you lessen the number of repayments you have to make and decrease the amount of interest you pay over time. 

As a bonus, this makes free extra repayments a potential interest-saving hack for the savvy borrower. 

Keep in mind: some lenders may offer extra repayments, but charge a fee or cap the amount or number of repayments you can make. Plus, what happens if you need the money later? That’s where a redraw comes in.

Want to get back your extra repayment? Look for a home loan redraw, or redraw facility. 

Think of it as a less flexible offset account: if you put $7,000 extra into your home loan to save on interest, but remember you owe your partner a birthday gift, you can dip back into that $7,000 through your redraw. 

There are some caveats to consider, however. Like an offset account, most redraw facilities are only available with variable home loans. Your redraw may also come with fees, extra paperwork (like an activation form), and limits to how much and how often you can redraw. Theoretically, a lender doesn’t want you taking back your cash too much, not when it could be their cash, too!

However, there are still some pros. If you opt for free extra repayments, a redraw can give you a little peace of mind and usually comes cheaper than a personal loan.

Some lenders offer flexible repayment schedules for certain types of home loans. Most mortgages are repaid monthly, but some can be paid weekly or fortnightly. How does payment frequency affect the cost of your mortgage?

There are 52 weeks and 26 fortnights in a year. By paying smaller amounts more frequently, you could actually pay down your loan faster. As with free extra repayments, this ultimately saves you interest because you’ve paid off bigger chunks of your principal in a shorter time. Interest is also calculated daily, so fewer days between payments means less interest. 

The maths can make or break this feature, however. Lenders calculate weekly/fortnightly payments differently, so if your fortnightly repayments are half your monthly ones, you save interest, but if they’re any less then you don’t. Check with your lender to see how they set payment schedules – you’ll want one that benefits you, not just them.

Compare home loans – and their features – in the table below.