Home loans can seem overwhelming, but understanding a few key features can help you manage your mortgage more confidently. In this post, we’ll explain four important mortgage terms in a simple and detailed way: Refinancing, Offset Accounts, Redraw Facilities, and Split Loans.
1. Refinancing
What is refinancing? Refinancing means replacing your current home loan with a new one. You can refinance with your current lender or switch to a new lender.
Why would you refinance?
- Lower interest rates: If you find a loan with a lower rate, you can save money on repayments.
- Better features: Switch to a loan that offers useful features like an offset account or redraw facility.
- Access your equity: Use the value you’ve built in your home to fund renovations, investments, or other big expenses.
- Combine debts: Combine other loans (like credit cards or personal loans) into your home loan to simplify payments and reduce overall interest.
Example: Imagine your current loan has a 6% interest rate. If you refinance to a loan with a 5% rate, you could save thousands of dollars over the life of your loan.
Things to consider:
- There may be fees for refinancing, so calculate the costs before deciding.
- Look for a loan that matches your financial goals.
2. Offset Accounts
What is an offset account? An offset account is like a regular savings or transaction account, but it’s linked to your home loan. The money in this account reduces the amount of your loan that earns interest.
How does it work?
- If you owe $400,000 on your home loan and have $20,000 in your offset account, you only pay interest on $380,000.
- You can still use the money in your offset account for everyday expenses.
Why use an offset account?
- Save on interest: Your loan balance is reduced, so you pay less interest.
- Reduce loan term: Paying less interest means you can pay off your loan sooner.
- Easy access: Your savings are available anytime for emergencies or spending.
Tip: The more money you keep in your offset account, the more interest you save.
3. Redraw Facilities
What is a redraw facility? A redraw facility lets you withdraw extra repayments you’ve made on your home loan.
How does it work?
- If your minimum monthly repayment is $2,000 but you pay $2,500, the extra $500 goes toward reducing your loan balance.
- Over time, you can “redraw” these extra funds if you need them.
Why use a redraw facility?
- Pay off your loan faster: Making extra repayments reduces your loan balance and saves interest.
- Access extra money: You can withdraw the extra payments for emergencies, home improvements, or other needs.
Example: If you’ve made $5,000 in extra repayments, you can redraw that $5,000 when needed.
Things to consider:
- Some lenders may charge redraw fees or limit how much you can withdraw.
- Redrawing reduces the interest savings from your extra repayments.
4. Split Loans
What is a split loan? A split loan divides your home loan into two parts: one part has a fixed interest rate, and the other has a variable interest rate.
How does it work? For example, if you have a $500,000 loan, you could split it like this:
- $300,000 fixed rate: The interest rate stays the same for a set period, so your repayments don’t change.
- $200,000 variable rate: The interest rate can go up or down, giving you flexibility to make extra repayments.
Why choose a split loan?
- Stability: The fixed portion protects you if interest rates rise.
- Flexibility: The variable portion allows extra repayments and benefits if rates drop.
- Balance risk: You get the best of both worlds – security and flexibility.
Example: If interest rates are low but might rise soon, splitting your loan can help you lock in a low rate for part of your loan while keeping flexibility on the rest.
Things to consider:
- Fixed loans may limit extra repayments.
- Variable loans can change with the market, which might increase your repayments.
