Helpful hints - Credit tips

Home loans

Don’t pay for loan features you won’t use. Redraw facilities and other features may come at the price of higher interest or additional fees.

Locking in to a fixed rate mortgage can be a good idea if interest rates rise, but these loans are often less flexible than variable rate home loans. You may be able to make extra repayments – and this is something worth looking for, but if you want to refinance the loan before the fixed rate period expires, you could face substantial exit costs. Interest-offset accounts let you use your savings to reduce the interest on your mortgage. Instead of receiving interest on your savings, interest is charged on the outstanding loan balance less your total savings amount. The rate on these home loans is often higher though, so if you have small savings and a large mortgage, it may not be the best option.

Making your mortgage payments weekly or fortnightly will see you trim your mortgage interest bill. It works this way because if you halve your monthly repayment each fortnight, you will pay the equivalent of 13 monthly instalments per year – not 12.

Making extra repayments on your home loan is the only way to pay your mortgage off sooner and make substantial savings in interest. As a rule, every dollar you make in extra repayments saves around two dollars over the life of the loan. ‘Find’ the extra money by collecting the change from your wallet each day, and once a month put it towards your mortgage – even small amounts build up over time.

Use your annual tax refund to make a lump sum repayment on your mortgage – you’ll never miss what you’ve never had!

The benefit of making extra repayments is greatest in the early days of your mortgage when the bulk of your repayments go towards paying interest rather than principal. This is also the time when extra repayments have the greatest effect in reducing the loan balance – so start making extra repayments from day one.

Don’t let low interest rates be the only factor you consider when choosing a home loan. Mortgages are long-term loans, so be comfortable that you can live with the loan. In particular, some loan features like redraw may be extremely useful to you.

Increasingly lenders are offering ‘package loans’ that combine a home loan, credit card and transaction account. These packages usually involve a rate discount, which can mean saving half a percent or more on the cost of your loan. The downside is that packages also charge annual fees, which can amount to a few hundred dollars. If your home loan is small, this annual fee can eat into the interest savings, so be sure to check that the benefits of a package outweigh the costs on the amount you intend to borrow.

Redraw facilities allow you to use mortgage interest rates to finance other purchases by drawing out of your account any money you have put in over the minimum repayments. There are often fees attached to redraw facilities though, and possibly a minimum redraw amount. Remember though, if you do use the redraw option, you lose a lot of the ground you have gained on your mortgage, so it will take longer to pay off – with a higher interest bill.