We’ve had it good for so long! The RBA’s decision to raise the cash rate means interest rates are on the rise, so let ME spell out the home loan features you can take up to help see the amount of interest you pay go down.
1. Set up an offset
As the name (kind of) suggests, an offset account can help you ‘counteract’ the interest you pay on your home loan, helping you pay it off faster.
An offset account is basically an everyday transaction account, but with special powers. Because it’s linked to your home loan, the money you keep in the offset reduces the interest that accumulates on your loan. The higher the balance, the less interest you pay. Isn’t that interesting?
Let’s pretend you have $300k left on your home loan, and $30k in your offset. Instead of being charged interest on the full $300k, you’re only charged on the difference i.e. $270k. If you grew your offset balance to $50k (go you), you’d only pay interest on $250k.
It's one of the simplest ways to minimise interest charges even when the rates go high.
Pros: You can reduce the length of your loan and save on the interest charged as part of your repayments by reducing the loan balance you’re charged interest on. Plus, there’s flexibility with unrestricted access to that offset account money.
Cons: Offset accounts can come with additional fees and higher interest rates, so check them first. Plus, to link your loan to an offset, you’ll have to be on a variable rate. Also, to see a big difference, you’ll need to make big deposits.
2. Draw up a redraw
A redraw facility lets you make additional payments on your home loan. And while you’re probably now wondering why you’d want to do that, it’s a feature that gives you access to extra funds if you need or want them.
So if you face an unexpected bill (or a need a much anticipated holiday), you can ‘redraw’ the added funds to pay for it. And if you don’t? Congrats – you’ve just made extra payments on your home loan, reducing your interest.
Of course, a redraw is designed for occasional use, like accessing an emergency stash of cash from under the mattress. Just remember, you have to put it there to be able to take it back out. And if you do, your home loan balance and interest charges go up again.
Pros: Better money management – what’s not to love about rainy day savings or sunny holiday spendings when you need it? Plus you may pay less interest.
Cons: A redraw may come with fees and withdrawal restrictions, so always check before you sign up.
So there you have it. Interest rates may rise, but now you’ve got different options to put you in the best possible position to manage them. Homework’s done, time for a tasty recess snack – you earned it.
Want to know more? Talk to ME about the right home loan features for you.
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.