A home loan is probably the biggest financial commitment you will ever make... but not all mortgages are made equally.
Take your time to research and explore the different options available to you, to find a home loan that best suits your current financial position, lifestyle and home ownership goals.
When you’re evaluating and comparing mortgages, interest rates are obviously a very important factor to consider. However you should also evaluate rates in context of the other features a loan has.
Some home loans will have access to benefits and extras, others will offer more flexibility, while some will give you the capacity to reduce the interest you pay on your home loan, based on the surplus savings you can put into an offset.
Here are some questions we are frequently asked, and the answers that will hopefully guide you to making a home loan choice that will serve you well over the term of your loan.
Is a cheaper home loan interest rate always best?
A short answer – no. First and foremost, keep in mind that what appears to be the cheapest loan on the market might not necessarily be the best loan for you in the long term. For instance, it may not allow for flexibility if your circumstances change in the future.
Also watch out for 'honeymoon' deals that offer attractively low repayments for the first year or two, but then revert to a higher interest rate that is locked in for the life of your loan, possibly with penalties for making additional repayments or attempting to refinance.
“Sometimes, people choose the cheapest offering right at the beginning, and then three years later, they regret it when the introductory period is over,” says Wendy Brown, Head of Broker Home Loans at Macquarie’s Banking and Financial Services Group.
“It's more about understanding what features are going to be most appropriate for you over the short, medium and long term and what home loans there are out there that meet your needs.”
What’s the difference between fixed rate and variable interest rate?
A fixed rate means the rate stays the same for a set period of time. A variable rate can move up or down according to market forces, which impacts the amount of interest you pay. Variable rates can offer greater flexibility, such as letting you make extra repayments and the ability to redraw money from those repayments. On the other hand, if you prefer the security of knowing exactly what your repayments will be for a given period of time, then fixing your interest rate is a good idea.
Some borrowers might benefit from fixing part of their loan and have the remainder on a variable rate, that way if you’re in the fortunate position of being able to pay your loan off sooner, you can do so without incurring fees.
How does an offset account work?
A home loan offset account is a good way to reduce the interest you owe. The money you deposit in your offset account offsets the balance of your home loan – with interest calculated only on the difference between your offset account balance and your loan balance.
Brown says, “You can have up to 10 offset accounts, and can itemise and isolate them – one may be saving for an overseas holiday, another for your children's school fees. They all link to offset your home loan. It’s a really good, structured way of managing your money and making it work hard for you, too.”
Are all home loan accounts offset accounts?
No, more basic home loan accounts are also available, and may suit your needs perfectly. The Macquarie basic home loan has no annual fee, unlimited redraw, and you can make payments directly to and from your home loan account. For example, you could get your salary paid directly into your home loan account.
“This is a home loan for people who just want to manage their mortgage in isolation, without any additional benefits,” says Brown. “They don’t want or need anything else, the simplicity suits them.”
What’s a redraw facility?
If you have made additional payments on top of your minimum mortgage repayments, a redraw facility lets you withdraw these additional payments when you need to. Putting spare money into your home loan redraw is a great way to reduce the interest you pay over the term of your loan.
Can I make additional repayments on my home loan?
Being able to make additional repayments whenever you can is a valuable option, as even a few thousand dollars extra a year can significantly reduce the amount of interest you pay and the term of your loan. You can make additional repayments without penalty when you choose opt for a Macquarie variable rate home loan. Additional repayments can be redrawn if you find yourself in need of funds in the future.
Remember, your choice of home loan can have a significant impact on your overall financial position.
Talk to your mortgage broker or financial planner to get a clear picture of what you are likely to need over the next three to five years.
- Fixed rates give you repayment certainty, while variable rates can offer more repayment flexibility to pay off your loan faster.
- Offset accounts allow you to structure your savings thematically. The balances work together to reduce the loan balance you pay interest on.
- A basic home loan is just that.
- Remember, cheaper isn’t always best. Look deeper than the interest rate.
- Beware of honeymoon offers – an attractive interest rate to begin with may be followed by a high rate that you’re locked in to.
- A redraw facility can offer you the option of accessing some capital should you need to.
Talk to one of our home loan specialists about which home loan is right for you. Call 13 62 27 today to discuss your personal circumstances.