Fixed interest rate
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A fixed interest rate is the interest rate that is set, or ‘fixed’ for the agreed term of the loan.
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Honeymoon rate
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A ‘honeymoon rate’, which is also referred to as an introductory rate, is the special low interest rate offered by some lenders on some home loans for a short term, introductory period (normally the first 1 – 3 years of a home loan).
When the ‘honeymoon’ is over for the home loan, the interest rate usually reverts to a higher rate, which is often the lender’s standard variable interest rate.
If you are considering a home loan that has a ‘honeymoon rate’, speak with the lender to find out the terms and conditions of the rate so that you know what to expect.
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Interest only loan
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An interest only loan is one where the borrower makes monthly repayments against the interest on the loan, but not against the principal, ie the principal amount is not reduced.
The interest only period on interest only loans is normally limited to a certain time frame, after which the repayments will change to encompass both the principal and interest for the duration of the loan.
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Line of Credit
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A line of credit is a flexible loan arrangement that has a specified limit or maximum availability of funds which can be used at the borrower’s discretion. That is, the lender agrees under the line of credit to give the borrower access to funds up to a certain agreed limit, over a predetermined period.
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Offset account
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An offset account is a non-interest earning account where the balance held in the account is ‘offset’ against the principal amount in the home loan, thereby helping to minimise the interest payable on the overall loan.
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Overdraft facility
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An overdraft facility is a feature that exists on either a cheque account or savings account that enables the bank or lender to extend credit to the borrower up to a maximum amount. The borrower can then draw against the overdraft amount as they need.
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Portability
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Portability in relation to a home loan is the capacity for the home loan to be transferred from one property to another without the need for any refinancing. Having a portability feature in a loan can be of benefit as it essentially saves the borrower from having to pay new loan set up fees and government costs.
Some lenders may charge to use this feature – so find out before you sign up for a home loan that has a portability option.
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Principal and interest loan
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A principal and interest loan is one where repayments are repaid over the term of the loan, thereby reducing the whole loan amount during the loan period.
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Redraw facility
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A redraw facility is a feature that enables the borrower to make additional repayments into their loan account and then be able to access or ‘redraw’ those funds, when and if they need to do so.
Having a redraw facility can help you to minimise the interest on your loan by enabling you to make extra repayments, which reduce the principal amount owed.
A redraw facility can also give you ready access to extra funds if you suddenly need them, however, in the interim, the money is working to reduce the interest on your loan.
Some lenders may charge to use this feature, so find out before you sign up for a home loan that has a redraw facility.
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Repayment Holiday
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A ‘repayment holiday’ is a feature whereby when / if you have made enough extra repayments into your home loan and as such, have built up extra funds, you have the option of stopping or reducing the amount of loan repayments you need to make as your redraw funds can be used to cover these payments.
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Split loan
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A split loan is one that is divided or ‘split’ into two or more different accounts. When taking out a home loan, some borrowers choose to split their loan so that a portion is set at a fixed interest rate and the other portion is set at a variable interest rate.
This style of split loan means that the borrower knows exactly what s/he has to repay each month on the fixed part of the loan (as the interest is set) and can at the same time benefit from the flexibility of the variable part of the loan – which means that when interest rates drop, less interest will be payable on this part of the loan.
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Switch to fixed interest rate fee
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A switch to fixed interest rate fee is a fee that is charged by the lender to cover or partially cover any internal costs encountered by the lender in order to change the loan from a variable rate to a fixed rate loan.
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Weekly / fortnightly loan repayments
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The majority of home loans have repayment schedules that entail monthly repayments. However, some lenders will allow you to tailor your loan to make your repayments on a weekly or fortnightly basis.
As the interest payable against your home loan is calculated daily, the more often you make payments against the principal, the less interest you will have to pay over the life of the loan.
While this is a handy feature, some lenders may charge extra fees for this benefit, so make sure you enquire about any fees before taking out a loan with repayments scheduled for weekly or fortnightly payments.
For more information and ‘jargon – busting information’, check out the RAMS Glossary
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