Finance

Offset accounts, lines of credit and when to use these whistles and bells

When choosing a mortgage you will likely notice a number of extra features, such as offset accounts, that may be available to you. These ‘whistles and bells’ can prove very useful if utilized correctly, however not every add on will suit every home owner – particularly if you are paying for the privilege.

In this article, we will have a look at some common added features for loans, however there are many others and lenders are increasingly creating new products that provide borrowers different opportunities and facilities. For this reason, there are also some tips below to assist you with determining, generally, whether the feature is worthwhile.

Common features you may come across:

Offset accounts: These are standard transaction accounts that you have linked to the loan on your property. You can put whatever you like into the account and take funds out and at the end of each day the amount in the account is “offset”, hence the name, from your loan. Effectively, you can keep savings in that account and any spare money each day and lower the interest you have to pay.

Lines of credit: A line of credit is like having a credit card. You have the funds sitting there available for you to use and you pay interest on the amount that you use. Those using lines of credit should ensure they have enough discipline to diligently pay it off after using it.

Redraw facility: This allows you to make use of any repayments you have made in excess of the minimum. You can draw these payments back out to pay for something else as you like.

These are just a few of the available features and some loans will include a number of these for borrowers to use. However, they might not all suit you as a borrower. If you are choosing between loans and some include different features from each other, then you want to ask the following questions:

  1. Am I paying fees for these extra features?
  2. What costs might I incur without these whistles and bells?
  3. Will my rate be higher for having access to these add ons?
  4. Is it likely I will actually use them?
  5. How much would I save over the term of the loan by using these features?
  6. What am I looking for most in my loan? (Flexibility, affordability, convenience)

 

When determining if the feature is worthwhile, you need to consider how much the upfront fee or ongoing increased rate actually costs you over the loan term compared to how much the individual feature is likely to save you. If the feature is not something you see yourself using, then it may not be worthwhile.

 

It is also worth looking closely at the comparison rate to see how the loan product stacks up. Is the benefit tangible and enough to justify poor performance when compared to other loans in the market? It may be worth speaking to your broker to see what your options are before making a choice.
Often the whistles and bells include one-off vouchers for certain services or ongoing advisory around your loan. For instance, it isn’t unheard of to see financial planning gift cards included as well as property reports and even the use of apps and software to assist you. While these things may be nice bonuses, they do not necessarily mean that the mortgage is the right one for you. Some waive fees and provide cash back bonuses, but you want to calculate these into your long term considerations to determine whether the total cash back and savings now equals out in the long run.

Remember to look at all the offered benefits to do your sums. Reduced ongoing costs and waived application fees may have the potential to outweigh any interest rate reduction on other loans. The money and overall cost isn’t the only consideration. If you’re looking for increased flexibility, convenience and certainty, then in some situations you may choose certain added features. One feature, for example, is called ‘portability’ and allows you to take your home loan with you to the next property you buy. If you see a move in the not-too distant future, then you may want to consider the convenience of this type of feature.

Sometimes, many lenders are offering incentives at once with similar rates and fees and at this point it comes down to your own diligence to determine which features you will use most effectively.

 

   Points to remember:

  • There are many ‘extra’ features available in the market
  • Not all features suit all buyers
  • Ensure to know how much you would pay for those features
  • Sometimes the ‘payment’ is a fee, sometimes it’s a higher rate
  • Work out how much you would save (in time and money)
  • Look at the comparison rate