How different loan features can help you manage your mortgage
Many Kiwi mortgage holders are turning to different home loan features to give them the freedom to manage their finances better – here’s how some of them work.
03 July 2017
When it comes to choosing a home loan there are so many different features that home buyers find it difficult to make sense of which is the best option.
To help you better understand some of these features, here is a breakdown of some of the more popular options.
This is probably the simplest feature to understand because, as the name suggests, it involves having the freedom to make extra repayments on your mortgage throughout the life of the loan.
At any time in life you might receive a little windfall, like a bonus, or inheritance money from a relative. When these payments come through, borrowers can choose to put some or all of it towards paying down their mortgage.
Making extra repayments either as small incremental amounts each month, or as larger one-off lump sums, can end up saving you thousands of dollars in interest over the life of the loan, so it can really pay to have this feature.
Line of credit
A line of credit is generally only available to those that have a large amount of equity in their home. Having a line of credit is when your lender approves an amount, secured against the equity in the property, that you can draw down when you need it. The line of credit portion of your loan will generally have a variable interest rate, however you only pay interest on what you draw down, not the approved amount.
While having a line of credit is helpful should you need to fund an emergency, or renovate your home, it also requires discipline as it can extend the loan term. It’s best suited to those that are good with their finances and aren’t tempted to overspend each month.
An off-set account is when you nominate a savings or transaction account and have the balance of that account off-set against your loan principal. When your lender calculates the interest owed on the loan, the amount in the off-set account reduces the principal and with it the amount of interest you’re charged.
When considering an offset account it’s a good idea to talk to your mortgage broker about those lenders that calculate the offset amount daily rather than monthly, as this is often the better option.
If used properly, an off-set account has the potential to save you tens of thousands in interest over the life of the loan.
Some lenders will allow customers to go on a partial or full repayment holiday, however the criteria for when a repayment holiday can be taken varies from lender to lender. For example, if you’ve made extra repayments on your loan and have available redraw, it may be easier to qualify for a repayment holiday.
A repayment holiday is not to be confused with going through financial hardship.
This generally occurs in instances when the borrower is unable to meet the repayments for the loan because of an unforeseen event or emergency. If you are going through financial hardship, it pays to talk to your lender as soon as possible to find out what options you have.
Basic principal and interest, or interest only loans
Loan products that have limited features are generally referred to as basic loans. Basic loans can have fixed or variable interest rates. Their attractiveness typically lies in the lower interest rates they offer, however this can come at the expense of features.
For example, many basic loans have maximum repayment thresholds, which means the borrower incurs additional fees or charges if they make repayments past a set threshold.
These types of mortgages are good for borrowers who want to set and forget their mortgage, make one payment each month and who don’t expect to make any additional repayments during the term of the loan.
Where can you learn more?
Understanding each loan product can be difficult and requires expert guidance. If you’d like to learn more about home loan features like these, a Mike Pero Adviser will be able to help you learn more about how they work, and which one is might fit you.
You can find your nearest Mike Pero Adviser here.