Here is a list of the most common home loan features lenders offer with their home loans.

We explain some of these features in more depth on their own page if you want to learn more about them.

You might not need all of these features, so don’t overlook a loan with an attractive interest rate and fee structure for flashy features you might not even need.

With that out the way…

Here’s your list of home loan features

Offset account

An offset account is a transaction account linked to your home loan. The money in this account could offset the money you owe, meaning you’re only charged interest on the difference. Plus you can easily withdraw your money from this account if you ever need it.

Loans with offset accounts can sometimes come with higher interest rates. Sure you can save a lot in interest, but if you don’t plan on carrying a large balance in the account or you’d be tempted to spend the easily accessible funds, it may not be worth it.

Extra repayments

This is when the lender lets you pay extra on top of your normal agreed-upon repayments. It can help you pay less in interest and/or pay your loan off early.

But be aware that if you pay off a fixed-rate loan early, you may incur a fee called a break fee or break cost (break costs don’t typically apply to variable-rate home loans).

Redraw facility

A redraw facility goes hand-in-hand with extra repayments. It basically lets you access the funds from your extra repayments if you need them down the road. If you haven’t made any extra repayments, you can’t get any money out.

There is sometimes a fee for withdrawing these excess funds, so you should only use this feature for emergency situations.

Repayment holiday

A repayment holiday lets you take a short break from making your regular payments if you’ve previously built up enough of a buffer through extra repayments. It will apply those extra funds toward your monthly repayments and it comes in handy during transitional times like starting a new job, having a baby, losing a job or retiring.

Fixed-rate loan

This is a loan where the interest rate doesn’t fluctuate with the Reserve Bank’s official cash rate. Lenders usually only offer fixed-rate loans for periods of 1-5 years, after which your loan will revert to the variable rate.

Fixed-rate loans often have higher-rates to start off with, and it’s usually more expensive to pay them off early. However, they do offer consistency.

Split-rate loan

A split-rate home loan is a feature that lets you split your loan into two loan products: a fixed-rate loan and a variable rate loan. This lets you enjoy the flexibility and additional features of a variable-rate loan while also benefiting from the stability and consistency of a fixed-rate loan.

Remember that your fixed-rate portion will usually revert to a variable rate at the end of your fixed-rate period, which will vary based on the lender.

Interest-only loan

If you need to reduce your monthly payments, some lenders will offer an interest-only payment for a short time (usually up to 7 years). That means your payments won’t be large enough to cover any of the principal, which is the actual amount you borrowed.

This is great for first-time buyers whose funds are tight and investors who want to minimise taxes. However, it means that you’ll pay more in the long-run so it’s not good to make a habit of it.

Low-deposit loan

Most lenders will pony up 80% of the home’s value, meaning you have to come up with the other 20% first. But some will offer low-deposit options and may give you up to 95% of the home’s value.

If you’re able to score a low-deposit home loan, you’ll usually be required to purchase Lenders Mortgage Insurance (LMI) that will protect the lender if you default.

If you think you can scrape together the rest of the deposit and you’re happy to enter the market a little later, it’s probably best to wait and avoid the extra costs.

Home loan portability

Home loan portability is a feature that lets you keep your existing home loan but transfer it to a new property. It’s an alternative to refinancing that can save you both time and money, although there may be some fees involved.

How to think about features

When comparing home loans, you should first identify the features that you absolutely need. For example, if you need a low-deposit loan because you only have 10% saved, then it doesn’t make sense to compare any loan without this feature.

After that, you should think of all the other features as nice-to-haves and decide if having any of these features is enough of a boon to counteract slightly higher rates and fees on loans that don’t offer them.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

The post What home loan features do you actually need? appeared first on Credit Simple NZ.

Need a new kitchen? Fancy that round the world trip? Just whack it on the mortgage.

In 21^st century New Zealand we extend the mortgage every time we have a bit of ‘spare equity’ built up. It’s like we’ve inverted the whole concept of borrowing and the aim of paying it off has disappeared out the window.

If you don’t pay that mortgage down as you would other debt, you could be forced to work until you drop just to pay the mortgage instead of retiring at 65 or 70.

If this is you, stop in your tracks. Before you extend the mortgage again to magic away your credit card debt, new car, kitchen, bathroom, holiday or even a new 3D TV, ask yourself some honest questions.

Honest question 1
Does that kitchen, bathroom or extension really add value to your home? We tell ourselves we’re ‘investing’ in a new kitchen, but we’re really buying a new kitchen because we want one. Have you ever seen anyone in an ‘Italian’ kitchen and bathroom shop with their spreadsheet to find out which kitchen bench would have the best return on investment? No they’re buying the bench of their dreams. What’s more, by the time they sell, that new kitchen will be well used.

Honest question 2
Does everyone really pay for their holidays on tick? No. Some people save up and pay up front for holidays. Slipped onto a standard principal and interest mortgage at 6 per cent, that $10,000 holiday snowballs into $19,329 over 25 years. That’s almost double the cost of the holiday.

Honest question 3
Is it really cheaper to put the car on the mortgage? It would be if the loan for the car were paid off in five years. The trouble is that typically Kiwis add the car to the mortgage without doing the maths. Just like the holiday, a $10,000 car will cost you $19,329 over a 25-year term. It’s actually cheaper on a 12.99 per cent car loan paid off over five years. If you do that you’ll only pay a total of $13,649. If you do put it your ‘new’ car on the mortgage make sure the term for that part of the loan is just five years.  Or here’s a radical thought: buy a banger for cash or keep your existing car.

Honest question 4
Will this really clear the credit card debt or making it easier to spend more? Sweeping the credit card debt onto the mortgage (aka debt consolidation) is sometimes sold to Kiwis as the panacea for our financial woes. If you can’t control your credit card spend, however, and aren’t willing to cut the card up, you’ll almost certainly end up in the doo-doo all over again and will slowly ratchet up your mortgage debt every few years.

Honest question 5
Am I really cut out to be a landlord? Extending the mortgage to buy a rental property or business is in theory a better financial decision than buying consumer goods such as kitchens, paying off the credit card, and blah-de-blah-de-blah. Good rental investments can make money. They can also be the ruin of you financially if the downturn comes just after you’ve bought or you’re beset by a host of other fish hooks. If you go in with your eyes open and the sums done that’s fine. Otherwise skip this step.

The antidote: paying down the mortgage
Whacking your spending and credit card debt on the mortgage is like dressing up in the Emperor’s New Clothes. Everyone can see that you’re naked except you because you’ve fooled yourself into thinking the spare equity in your mortgage is real wealth.

The reality is that life is a lot less stressful with a smaller mortgage noose around your neck. And if something comes along to trip you up such as illness, accident or divorce, you’ll be in a far better financial state to weather the storm.

You could treat that ‘spare equity’ as your retirement fund. Plenty of Kiwis who pay off their mortgages can move into a smaller home or cheaper location once they retire and live off the leftover equity.

So here’s the antidote. Treat your mortgage like you should do your other debt. Look for ways to pay it down – even one dollar at a time. Learn about the needs versus wants trap. Then track, trim and target. Finally fatten up your finances with the Three Naughty Things rule.

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