Loan features
Information on typical features of home loans
The interest rate
The interest rate is the "price" you pay to the lender when you borrow money.
Variable rate loans
With a variable rate loan, the interest rate can rise or fall throughout the life (or "term") of the loan. The interest rate can change depending on the economic climate and competition amongst lenders. You should ensure that you could meet any increases in your mortgage repayments if the interest rate increases during the term of your loan.
Fixed loans
With a fixed loan, the interest rate is "locked in" for a certain period - usually between one and ten years. This type of loan provides borrowers with certainty about the amount of their repayments during the fixed period and protects them from interest rate increases. However, borrowers will not be able to take advantage of any drop in interest rates either.
Introductory rates
"Honeymoon" or "introductory" rates on loans are interest rates that are generally lower than most lenders are offering in the home loan market and may be fixed or variable for a short period of time, usually between six months and one year. Beware! You should make sure that you could still afford your mortgage repayments once the fixed interest rate period finishes and the interest rate becomes the standard variable rate.
Combination loans
A combination loan allows you to split your home loan into a fixed rate part and a variable rate part. Generally, you can decide how much of the loan will be subject to a fixed rate of interest and a variable rate of interest.
Usually, the fixed rate part of your home loan is available for a period of between one to five years. Beware! You may be required to pay two sets of application fees for a combination loan and you may be charged a fee every time you re-negotiate a new fixed term portion of the combination loan.
Repayment features
Some home loans, such as fixed interest rate loans, may have restrictions on making payments that are greater than the agreed or scheduled payments. It is useful when the terms of a loan allow you to make extra repayments towards the loan, including making lump sum payments. If you are able to make extra repayments on a loan, it will reduce the amount of money you must repay to the lender and it will also reduce the length of time it takes you to repay the loan.
If you have a fixed interest rate loan for a certain time period, there may be high penalties applicable if you decide to pay out the loan before the time period expires, for example, if you sell your property or you decide to refinance with another lender.
Redraw
Some loans will allow you the flexibility to withdraw any extra payments that you have made towards the loan. You should check the rules about withdrawing these extra payments, such as fees you may be charged and minimum amounts you can withdraw at any one time.
Offset loans
Offset loans are a particular type of loan facility where you pay all of your income into the loan account and withdraw funds, as required. The loan typically includes the use of a credit card to pay for your daily expenses, which can be paid off once a month via the loan account.
A benefit of this type of loan is that your income is being used to pay off the loan. A drawback with this type of loan is that it may be tempting to overspend.
With this type of loan, if you do not pay off your home at a reasonable rate, you could end up paying the loan off over a longer period of time. If you overuse the credit facility, you may find that the amount you are required to repay blows out so that you are unable to repay the loan and if so, you may risk losing your house.