Opportunities exist to use your spare change wisely when you have a home loan. Banks make money by lending deposits to borrowers you can short circuit the borrowing of your own money easily.
Two of the best ways of doing this are offset and revolving credit home loans. Did you know you can even utilise money sitting in family accounts(parents & kids), with an offset home loan.
Whats the difference between a fixed or floating mortgage?
It’s important to understand some of the key differences between a fixed and floating home loan.
Remember you can split your mortgage:
- into different loan products, so fixed or floating
- into different fixed terms, for example a chunk for 2 years and a chunk for 4 years
Fixed rate
A fixed rate mortgage gives you the certainty of knowing exactly what your repayments will be for a period of time. Most banks let you fix your mortgage rate from 6 months to 5 years.
Banks generally charge a break fee if you repay your fixed rate mortgage during the chosen fixed term. So if you are planning to pay off large chunks of your mortgage, a fixed term may not be the best way of structuring all of the mortgage. Selling your home can mean a break fee if you are fixed.
Extra payments on a fixed rate
Some banks do allow some additional payments to be made in any one year, varying from 5% of the total amount to a 20% increase in the loan repayments. If you want to pay off more than that proportion, then you might consider fixing only part of the loan.
Floating rate
A floating rate mortgage enables you to pay off large chunks anytime. The interest rate can move either up or down so some people prefer to only float some of their mortgage.
Revolving credit
A revolving credit mortgage is similar to a floating rate mortgage in that it allows for extra payments. The difference is that with a revolving credit mortgage you are able to withdraw any additional payments you made in the past.
To enable these so-called ‘redraws’, these accounts come with all facilities similar to a cheque account, i.e. internet withdrawals, auto payments and EFTPOS.
The interest on your mortgage is calculated on the daily balance. So any money you are not using can be used to save money.
Interest only
An interest only mortgage is an option on any of the types of loans described above. It means what it says – you pay only the interest and don’t pay back the principal. The benefit is that you will lower the regular commitment from your cash flow but of course the amount you owe remains the same. It can be an expensive option in the long run and is generally only a short-term strategy. It will pay to talk to us, as professional mortgage brokers, about the true cost of interest only.
Offset
How does it work?
Basically bring down your home loan interest costs by using money sitting in other bank accounts, without having to pay off the home loan. You can link bank accounts with home loans and only be charged interest on the difference. You can also link kids with parents.
A couple of things
- You can link multiple accounts with a floating portion of your home loan
- If linking parents account – they have full control of their accounts, will not receive interest & you will be able to see their balance but not their transactions
The repayments?
Your home loan repayments are worked out on the floating rate and stays the same, regardless of how much your credit balances are. However the portion going towards the principle changes based on the linked bank account balances. You will achieve a shorter home loan term as more money is redirected towards the principle repayments.
