Choosing the right features
When looking into buying a house, it’s not all about location and price. Choosing the right home loan is equally important and there are a few features you should look out for. Not all home loans are the same. Some will offer more flexibility when it comes to repayments, others will come with stricter terms but possibly a lower interest rate. It’s important to know what you’re after and which home loan features may provide benefits to you in the long run.
If you don’t know where to start, don’t worry, we will take you through everything you need to know about mortgage features!
What to consider with your home loan
A home loan is one of the biggest financial commitments you will most likely make over the course of your life. Therefore, it makes sense to choose the right features that fit your lifestyle and give you as much flexibility as possible.
First of all, there are two different types of loans:
- Principal and interest loans
This is the most common type of mortgage. The amount that you borrow is called the principal. Let’s say you borrow $450,000, your principal is $450,000. On this amount, you pay interest, so you will end up paying back more than you initially borrowed. For principal and interest loans, you repay a certain percentage of your principal plus interest on top and reduce the amount you owe over time.
- Interest-only loans
Interest-only loans are less common as they help you defer the initial payment for an initial period of time. For a few years, you only pay interest and then start making repayments afterwards. This may allow you to keep your payments lower for a little while, however, they will increase in the future. So, it’s important to ensure that you are financially stable and able to afford them.
Interest rates and loan terms
When weighing up home loan features, you want to have a look at the interest rates and loan terms. Your interest rate is the percentage that you will pay on top of your principal. Therefore, you should always choose the lowest interest rate available to you. This can save you thousands of dollars over a loan term of 25 years. Which brings us to the next thing to consider. When choosing a loan term, it may be tempting to keep your repayments low and space it out over time. However, the longer you choose your loan term, the more you will end up paying in total. If you choose a shorter loan term, you will make higher repayments each month but overall pay less in interest. You can choose between three different types of loans:
- Fixed interest rates
For a certain amount of time (e.g. the first 5 years) your interest rate is fixed and won’t change. This can be a good deal if the current rate is already low and it is likely to increase over the next couple of years. After that fixed interest period, your interest will either change to a variable rate or you can negotiate another fixed term. This may make it easier to budget for the next couple of years and allows you to lock in a good rate. However, fixed-interest loans come with some downsides: They often don’t allow extra repayments and have fewer features.
- Variable interest rates
A variable interest rate will change with the market. This means you only have a vague idea of what your repayments may be like in the future. However, variable interest rates often come with more mortgage features and therefore offer more flexibility with your repayments.
- Split loan or partially fixed rate
If you can’t decide between the two, you can combine both options. You can split your loan into two parts (e.g. 50/50 or 40/60) and secure a fixed rate for one part while the other has a flexible rate. This allows you to budget better while having access to additional loan features.
Types of home loan features
You can choose between a variety of home loan features depending on your lender and what is available to you. Here are some of the key ones to consider:
Some mortgages allow you to withdraw extra payments that you have made in addition to the required minimum payment. If you choose to pay an extra $250 every month, this would allow you to withdraw $6,000 after 2 years of payments. This is ideal if you want to make extra repayments but keep them accessible in case you have a change of circumstances in the future. Some contracts may charge you an additional fee for withdrawing money though, so you should look out for that in the small print.
While it is wise to choose a payment rate that you can comfortably afford, you may want to make extra repayments over the life of your mortgage. You can either add an additional amount to your regular repayments each month or make irregular additional repayments whenever you have some extra cash handy. However, mortgages with a fixed rate often won’t allow you to make additional payments.
This mortgage feature comes in handy if you would like to take a break from mortgage repayments due to a change of circumstances. The most popular reason is the arrival of a new baby and reduced income for a period of time due to maternity leave. However, if you or your partner are in between jobs or have to deal with bigger bills for medical treatments, not having to worry about mortgage repayments may bring you some peace of mind. Depending on your contract, you can either reduce the payments or completely stop them for periods of up to six months. During this time, the interest adds to your loan and you resume payments after that time. This may eventually increase your payments for a while until you get back to where you were before.
You may not think about it now but if you want to move places again in the future before ending your loan term, this feature allows you to move your loan towards another property in case you sell it. Therefore, you wouldn’t have to apply for a new mortgage and can transfer terms and conditions that you had already committed to.
Home loan features may come at a cost
When comparing your options, you should consider which home loan features you really need. While some of them are nice to have, you may not benefit from them at all. Additional features often come with additional costs and you will only benefit from them if you actually use them. Before settling for a mortgage type, it may be worth writing a list of things that are important to you and others. These are simply “nice-to-haves”. You may save money by choosing a basic home loan with limited features if you don’t plan on using them.
For more information on how to choose a home loan, check out our guide to interest rates!
We would love to hear about your home loan experiences. Let us know the good, the bad and the ugly.
Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.