Think you understand your home loan? Think again
Redraw facilities, offset accounts, split home loans and interest vs comparison rates - these are the home loan terms that a large portion of Aussies find pretty damn baffling according to new data from Gateway Credit Union.
The Mortgage Holder Sentiment Report revealed that split home loans were the most widely misunderstood term with 40% of us not quite sure of what these are or how to capitalise on them, a number which has grown by 12% since 2015.
“A home loan is a significant financial commitment and it seems many people are entering into it blindly and under utilising their loan facilities, and potentially missing out on saving thousands in interest over the life of their loan,” said Gateway Chief Customer Officer, Lexi Airey.
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Some of the other most confusing pieces of home loan jargon were interest vs comparison rates, which 32% of Aussies don’t get, redraw facilities which 18% of us can’t quite comprehend and offset accounts that 14% of us don’t understand.
Without these key pieces of home loan wisdom, Aussies are underusing some of the most helpful features associated with mortgages and paying more than they need to in interest over the life of the loan.
“There is an opportunity cost for borrowers who don’t know what features they have available with their home loans,” said Airey.
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Perhaps one of the most alarming statistics to come from the report was that almost half of Aussies don’t know if their current mortgage package offers split home loans as an option, and we’re not much better when it comes to offset accounts.
“For instance, the research revealed that 43% of borrowers have no idea how many offset accounts they can link to their home loan, compared to 36% back in 2015,” said Airey.
With many experts predicting a rate rise in the not-too-distant future, there has never been a more appropriate time to do some home loan homework. Here are a few super simple definitions to get you started.
Redraw facility
If you’ve been putting your spare cash towards your home loan by making extra repayments to pay off your loan quicker, a redraw facility could come in handy. This feature will allow you to redraw this money in the case of an emergency, but keep in mind there may be a one-off activation fee or minimum and maximum amounts you can redraw at one time.
Offset accounts
Another feature that will allow you to pay off your home loan more quickly, think of this as a transactional bank account linked to your home loan. The ongoing balance in this account will offset the principal amount of your loan, reducing your interest repayments. You’ll also be able withdraw, deposit and make EFTPOS payments via this account.
Split home loans
Maybe you like the security of a fixed rate, but also want the lucrative rates on offer by variable home loans. Split loans give you the best of both worlds, allowing you to fix one part of your home loan, while keeping the other at a variable rate.
Interest rate vs comparison rate
This one is more easily understood if we break them up.
Interest rate
The interest rate, sometimes known as the ‘headline rate’ is the percentage of the principal amount that you will be paying your provider to lend you the money you need for your home loan.
Comparison rate
A comparison rate, on the other hand, is the rate that reflects the true cost of the home loan and is a useful tool when it comes to comparing products. This rate takes into account fees, charges and introductory offers and providers are legally required to advertise these rates alongside the interest rate, to help borrowers compare loans on equal footing.
Now that you’re all clued up on home loan lingo, you’re ready to check out Mozo’s home loan comparison tables which will help you sift through a range of options on the market when refinancing.
If you’d like some more easily digestible home loan information it is also worth checking out our dedicated home loan guides hub where you can find a more comprehensive guide explaining a host of home loan terms.
* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.
** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.
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