The difference between offset and redraw (and why it matters)
Among Australians looking to realise their dream of home ownership, COVID-19 has prompted many to put their plans on hold, at least for the time being.
One of the key reasons for the delay is that more than two-thirds of first home buyers have had to tap into their deposit savings as a result of the pandemic. New research from Gateway Bank shows that more than 80% of those first home buyers will need an additional year to save for a deposit.
However, first home buyers should not be disheartened by the current market uncertainty and can use this time to get home loan ready. Knowledge is crucial when it comes to your finances and understanding key terms can save you thousands of dollars in interest over the life of your loan, as well as making the process as seamless as possible.
Before taking active steps towards securing a home loan, there are five key commonly misunderstood terms every first home buyer should know.
1. Split home loan
A split home loan allows you to fix the interest rate on a portion of your loan, while keeping the other portion variable. This can protect you against sudden rate increases, but also allow you to take advantage of current low interest rates. Flexible lenders provide an opportunity to split your home loan at any time - during the application process or after funding.
2. Offset account
An offset account can help you reduce the interest you pay on your loan as well as the term of your loan. An offset account is a regular transaction account linked to your home loan, where the balance is offset against the outstanding balance of your loan and you are only charged interest on that outstanding balance. For example, if you have $300,000 owing on your home loan, and $30,000 in your 100% offset account, you only pay interest on $270,000 of your loan. This can account for considerable savings over the duration of your loan.
It's a good idea to choose a lender that offers multiple offset accounts per individual loan. By having the option of multiple offset accounts, you can really begin to advance your savings strategy. A common strategy is to set-up three or four separate offset accounts as digital 'jam-jars' and use each account for a saving goal such as: school fees, Hawaii holiday or new car. Even if you have a smaller amount siting in your offset, over time you can make significant savings on interest.
A redraw facility allows you to access the money you have contributed as extra repayments to your variable rate home loan, offering a financial safety net whereby you can redraw those funds for any purpose.
4. Comparison rate
A comparison rate shows the actual cost of a home loan and includes both the interest rate as well as any fees and charges in a single figure. These fees include set up costs (such as valuation costs) and ongoing costs (like annual package fees), but it does not include fees like government stamp duty and break fees.
Comparison rates are advertised alongside interest rates, and while very low interest rates can be appealing, it's worthwhile looking and comparing the comparison rates as this will give you a better idea of your total costs.
5. Rate lock
While interest rates can change from the time you apply for a loan to when it's funded, a rate lock guarantees your chosen fixed interest rate for an agreed period of time. It's a good option for buyers who haven't yet found the right property but don't want to miss out on historically low fixed rates. Just make sure you get all the information on associated fees.
Knowing these terms is the first step to maximising home loan flexibility and choosing a loan that can adapt to your changing needs. Getting your home loan is a significant financial decision, so make sure you're getting all the information you can to best be prepared.