Home loan features, in plain English

The right home loan is about more than a rate. Features and repayment structures affect flexibility, fees and total interest. Here are the main differences to discuss before you decide.

Offset versus redraw

An offset is a separate transaction account linked to an eligible loan. Its balance reduces the loan amount used to calculate interest, according to the product’s rules. It does not reduce outstanding principal. Check whether the offset is full or partial and whether extra fees or a higher rate apply.

Redraw lets you access eligible extra repayments you have made into a loan. Access, minimum amounts, fees and availability depend on the lender. Unlike money in a separate offset account, these extra payments have reduced the loan balance. Do not assume redraw is always immediately available.

Using a property as an investment later can create important tax differences between these arrangements. Ask a qualified tax adviser before moving or redrawing funds for a different purpose.

Fixed versus variable

A fixed rate stays the same for a set period, which can make budgeting more predictable. Extra repayment limits, feature restrictions and potential break costs may apply. At the end of the fixed period, your rate and repayments may change.

A variable rate can move up or down, so repayments and interest costs can change. Variable products may offer more repayment flexibility or offset facilities, but features and fees vary. A split loan combines fixed and variable portions; it is not automatically the best choice for every borrower.

Principal and interest versus interest-only

With principal and interest repayments, each repayment covers interest and reduces the amount borrowed over the loan term. Interest-only repayments do not reduce principal during that period, unless you make eligible extra payments.

Interest-only payments can be lower initially, but repayments can rise when that period ends because principal must be repaid over the remaining term. Rates may differ and total interest can be higher. Availability is subject to lender criteria. Interest-only is not automatically suitable for an investment property.

Questions worth asking

• Which features will I use, and what do they cost?

• Can I make extra repayments or access money if my plans change?

• What happens at the end of a fixed or interest-only period?

• How does the total cost compare over the same loan amount and term?

Choosing a home loan: Moneysmart

Nicholas can explain suitable options and their trade-offs. This guide is general information only, not personal financial, tax or legal advice.