Loan Features Explained
Sometimes, some home loan products are referred to as say, redraw loans or mortgage offset loans. These are a bit of a misnomer though, because what’s being referred to as a loan type is really, more of a loan feature. In the table below we look at some of the more common loan features, which can be found in various types of loans.
Mortgage Offset
Mortgage offset accounts allow borrowers to use their savings and income to reduce the amount of interest they pay on their mortgage. This works by using the interest that would usually be paid to them on their savings to instead be deducted from (“offset” against) the amount of interest they owe on their mortgage. Furthermore, under this arrangement, as you don’t actually receive any interest on your savings in your hands (that interest is offset against your home loan debt rather than being credited to your savings account), no tax is payable on it. You get the full, tax-free benefit of the savings interest in reducing your home loan debt. Read more >>
Redraw
More borrowers are moving to include redraw facilities when establishing a loan, and it is easy to see why. The ability to make extra repayments into the mortgage, instead of putting that money into say, a savings account, allows borrowers to reduce the interest on their loan, which in turn helps reduce the term of the loan. Read more >>
Principal and Interest
‘Principal and interest’ and ‘interest-only’ loans are designed to give borrowers a choice in the way they make their repayments, and how much and when they repay. Both will suit different borrowers’ needs and circumstances.A principal and interest loan requires borrowers to make payments on the interest accrued on the mortgage, as well as repay a part of the principal. In this way, repayments on principal and interest loans actually reduce your debt. Repayments are calculated and spread out so that the last scheduled payment fully pays out the loan. Read more >>
Interest Only
An ‘interest-only’ loan requires a borrower to pay only the interest component of the loan. This structure requires the repayment of the original borrowed amount in a lump sum when the loan period is complete or the property is sold. Most interest-only loans revert to a principal and interest loan after a set initial period. Read more >>
