5 steps to mastering your mortgage

Mortgages are the foundation of home ownership in Australia, and if you are entering the real estate market – be it your first home or a property investment – understanding the most common mortgage features will help you compare options and control your financial future.

Here are five basic mortgage features to consider when taking out your home loan:

1. Fixed or variable interest rates

Do you choose a fixed or variable interest rate? Each has pros and cons.

Fixed interest rate loans

Choosing this option means your interest rates will be fixed for a set period of time, commonly 1 to 5 years.

Pros:

• Budgeting is simpler, as your repayments are fixed.
• You will have more certainty, as interest rate rises will not affect your loan.

Cons:

• You won’t benefit from interest rates drops.
• Charges may apply if you pay out the loan prior to the end of the fixed interest period.
• Extra payments may not be allowed or could incur fees.

Variable interest rate loans

These offer greater flexibility but also come with greater risk. If interest rates change, your repayments may too, for better or worse.

Pros:

• Generally your payments will go down when the cash rate drops.
• You have more flexibility including options to pay off your loan early, make extra repayments, and access redraw facilities and offset accounts.

Con:

• You will experience more uncertainty as your payments will generally increase with cash rate rises (or can increase independently of cash rates).

Splitting your loan between fixed and variable interest rates is an option and can hedge your risk.

2. Redraw facilities

The ability to redraw funds from your mortgage account depends on the type of loan you have and whether you have made extra repayments that put you ahead in your repayment schedule. Variable interest rate home loans are more likely to offer this feature. There may be restrictions on how often you can redraw funds, maximum and minimum amounts, and limitations on your redraw methods – online, phone or in-branch banking.

3. Offset account

Linking an offset account to your variable rate home loan can reduce your overall interest payments. Normally the interest you pay on a home loan is calculated on the total amount owing – but, by establishing an offset account, the interest will be calculated on your home loan debt less the amount in your linked account. Offset accounts do not earn interest, so it is only beneficial if your home loan interest rate is greater than your savings account interest rate.

4. Mortgage repayment holiday

Life is full of twists and turns, and having the ability to take a temporary break from mortgage repayments can be a godsend. Not all lenders offer this facility, and it is important to consider the ramifications. The length of your mortgage repayment holiday can impact your ability to pay off the overall loan – while interest repayments may stop, interest charges do not.

Related: mortgage repayment calculator

5. Switching loans or lenders

As your circumstances change so do your home and loan requirements. Just keep in mind that changing your existing loan may incur fees. When it comes to changing lenders, the Government abolished exit fees as of 30 June 2011, so they will not apply if your loan was established after this date. However, break fees are likely to apply when it comes to ending a fixed interest rate loan.