What Home Loan Features Are Best?

It’s easy to get overwhelmed when you’re applying for a loan because there are so many options available.  When I’m initially talking to people about getting a loan we talk about their circumstances and what options they would like in their loan.  Most of the time people don’t know what home loan features are available and it can take quite a while to explain all the options.  So I’m going to cover the different loan features in a few posts here so that you will have an understanding of what’s out there and whether they might suit your circumstances.   A home loan is a long term commitment so it’s important to get the right ‘fit’ from the start because changing it later can cost time and money.

Choosing the Best Home Loan
There are lots of loans out there but we need to find the best one for you!

 

We’ll start today with whether you should go for a basic home loan or a home loan package.

Basic Loans

Do you want a ‘set-and-forget’ loan where the repayments are taken from your everyday transaction account, that could be at another bank?  Most lenders offer basic loans and they are exactly that – basic.  They don’t have offset accounts, or redraw, or extra repayments.  They generally have no monthly or annual fees and they don’t offer a transaction account with the lender.  I like them for investment property loans because they allow you to have the loan with that lender for a few years, then move to another lender who is offering a better rate or conditions at the time.  You don’t need to open a bank account with them because your repayments are taken from your existing transaction account.  So they are inexpensive and simple.

They are frequently used by investors for their investment properties because all the investor wants is a simple, low cost, interest only loan.

They are also often used by people who want a low cost home loan when they don’t expect to have extra funds in an offset account, or to make any extra repayments.

Many lenders charge an establishment fee or application fee to cover the cost of setting up the basic home loan.  This can range from $0 to $950, but some can go as high as $1600 depending on the lender and the type of loan!  The lender may also charge a monthly fee from $0 up to $12.  Initially $12 per month can look high but if you consider that it adds up to $144 per annum and a home loan package can cost $395 per annum, it can be a cheaper way to have an investment loan with another lender.

The variations in charges can be considerable, and this is where it is important to compare the interest rates as well as the loan costs to work out which one is the best value for your needs.  That’s something we can help you with but first we want to make sure you’re choosing the right type of loan to start with in terms of a basic loan or a home loan package.  So is a basic loan right for you?

Basic Home Loans Summary:

  • Home loan application fee may be payable ($0 to $1600)
  • Monthly fee of between $0 and $12
  • Repayments are usually transferred electronically from your everyday banking account with another lender.
  • No transaction account
  • No credit card

Home Loan Packages

Do you want one lender to look after all or most of your banking?  Package deals can include an everyday transaction account, your home loan and some offer a credit card.  Generally you will pay an annual fee of $395 for a package deal.  The advantage here is that your transaction account can be set up as an offset account.  So when calculating the interest on your loan, the amount of money in your everyday transaction account (offset account) is subtracted from the amount owing on your loan, and the interest is calculated on what’s left.  So if you have $10,000 in your offset account and a loan for $290,000, the interest will be calculated on $280,000.

These tend to be used by people purchasing or refinancing their home loan.  If you don’t have a lot of direct debits happening in your everyday transaction account you might be happy to move your everyday banking to a different lender if it gets you a good deal on your home loan.  On the other hand, if you have lots of transactions on your everyday transaction account, like various loan repayments being taken out of it, a few sources of income going into it, then you may not want to move your everyday banking.  In this case if you are taking out a home loan with a different lender you can still use an offset account and keep your savings in it.  Some people prefer this because they keep their savings separate from their everyday transaction account so there is less chance of them dipping into their savings for everyday purchases!  You can set up regular deposits to the offset account, or just transfer any extra funds electronically in and out of the offset account when you want to.

Multiple Offset Accounts

Multiple Mortgage Offset AccountsSome lenders will let you have more than one Offset Account on a loan and that way you can keep your everyday transactions in one account and your savings in another.  It is possible to have up to 9 offset accounts so if you want to keep your savings in different accounts for your holiday, kids schooling, property deposit, etc but still have the offset benefit against your home loan this can be a great option!

 

 

Home Loan Packages Summary:

  • Annual fees (most lenders charge an annual fee between $120 and $398 when the loan is first settled and every year after that)
  • Home loan application fee is usually included in the annual fee
  • Transaction account is included
  • Credit card is often included (if required)
  • Transaction account may be used as an offset account for the loan.
  • Some lenders offer multiple offset accounts (up to 9!) if you want to keep your savings in different accounts

 

Basic Home Loans and Home Loan Packages are both great products when they are used the right way.  You don’t need to pay an annual fee if you only want a basic loan. Similarly, why search for the loan with the cheapest fees if you would be better to have a package with multiple transactional offset accounts, a credit card and one annual fee to cover them all?  Everyone is different and so are the loans that work best for them.  Our role is to work with you to find the best match!

Your Turn!

Do you have any questions about basic home loans or home loan packages? Or maybe you have an experience you’d like to share about a loan you’ve had and what you liked or didn’t like about it?

 

(Acland Street cakes photo courtesy of VirtualSteve at the English language Wikipedia, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=3867054)

6 Replies to “What Home Loan Features Are Best?

  1. Hi Rachel. Its good to know that their are loan packages out their to suit most budgets, as everyone’s circumstances are different. If I was in the market for a loan, I think the basic loan would be the option for me. However, you mention that this is normally for people who are looking for a low cost interest only loan. If your payments are only paying off the interest, does the basic loan come with the option of being able to repay part of the loan with each monthly payment that you make. As that way you could see the balance coming down each month.

    1. Hi Daniel,

      Yes, the basic home loans can have interest only or principal and interest repayments. Serious investors tend to use the interest only option so they just pay the interest repayments and don’t worry about reducing the amount owing on the loan. People buying their own home usually use the principal and interest repayments so they can pay off some of the principal and reduce the loan over time. Both are good options – it depends what your goal is with the loan.

      Thanks for your great question!

      Cheers,

      Rachel

  2. Wow, basic loans sound like a great way to go. They are simple and cost effective. Lenders can, and do, charge a lot of fees for some of their loans. As if you are not paying enough for interest! I like how you break out the entire experience, with the explanation of the offset accounts, etc. You definitely have a lot of experience. Is there a penalty for paying off the loan early?

    1. Hi Steve & Kris,

      Before 1 July 2011 there were early repayment penalties for paying off a variable interest rate loan within 3 to 5 years of starting the loan, but from that date forward there has been a ban on early repayment penalties for variable loans. So if anyone tells you that they paid excessive fees at the end of a variable term it might be because it was before the ban came into effect.

      Fixed interest rate home loans have a set term and if you want to pay them off early you may be hit with ‘break costs’ which will be based on the difference in interest rate between what you are paying on the loan and what the rate would be if you took out the loan today, and the number of months left at the fixed rate. I cover it in a fair bit of detail in my post http://rrloans.com.au/are-fixed-interest-rates-bes… so have a read of that if you’d like to know how to calculate the break costs.

      Most loans have an Exit Fee (though it might be called something else, like a Discharge Fee, depending on your lender). These are really just an administrative charge and range between $150 and $375.

      Thanks for a great question!

      Happy borrowing!

      Rachel

  3. We are making plans to buy a house later this year. I am familiar with the basic mortgage loan, but the home loan package is something new to me. Your post provides a very clear explanation of the differences between the two loan types. I think the basic loan is a good match for us based on our goals. Thank you for providing this very helpful information.
    Roy

    1. Hi Roy,

      Congratulations on moving towards buying a house this year! It’s an exciting time and a bit commitment so you want to make sure that the loan you get suits your needs both now and for the next few years at least. The basic loan is a good, low cost product and as long as you understand that it doesn’t have all the ‘bells and whistles’ of the home loan packages, it can be ideal for your needs.

      Take a look at my post on ‘Are Fixed Interest Rates Best for Home Loans?’ as well because that might be of interest for your situation, and if you have any questions as you move closer to buying your house do let me know.

      Happy borrowing!

      Rachel

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