5 Features You Need to Know

You might have come across the term ‘flexible mortgage’, or maybe you’re simply looking for flexible home loan features. Whatever your ideal borrowing position, there’s likely a mortgage solution for you.

What is a flexible mortgage?

In some parts of the world, a flexible mortgage might be a product in itself. This isn’t the case in Australia, though some lenders might name their home loan products as such.

For the most part, a flexible home loan is one that has a variable interest rate and simple customisation options. That might mean a borrower can choose to:

• Pay more than their set, regular repayment to repay their loan faster

• Reduce their repayments if needed

• Take a repayment holiday

• Pay interest only for a period of time

A flexible mortgage could allow a borrower to do all of the above at various points over their home loan’s lifespan.

So, since ‘flexible’ isn’t a category of mortgage products in itself, how can a homeowner set themselves up to benefit from flexible features? Fairly easily, as it turns out.

5 features to build flexibility into your home loan

Variable interest rates

Perhaps the most common flexible feature offered on Australian home loans are variable interest rates. Variable rates are those that move up and down over time.

Variable rate borrowers are often able to make changes to their home loans that fixed rate borrowers cannot and can refinance their home loan whenever suits them, while fixed rate borrowers might face break fees when refinancing.

That’s not all, though. Many of the following flexible features aren’t commonly offered on mortgages with fixed rates.

Looking for a competitive home loan rate? Check out some of the market’s best:

Split rates

For borrowers who want a balance between flexibility and stability, split rates can offer a middle ground.

A home loan offering a split rate option allows you to divide your mortgage into two portions – one with a fixed interest rate and the other with a variable rate.

This can provide the best of both worlds – the fixed portion providing certainty over your repayments and protection from interest rate hikes while the variable portion allows for greater flexibility.

Ability to make extra repayments

One major benefit of going down the variable rate path is the ability for a borrower to repay their home loan faster than they’re expected to.

See also: Extra & lump sum payment calculator

That means if you’re a diligent saver, receive a bonus at work, or sell an asset, you can use the extra cash to reduce the principal balance of your home loan. Doing so will likely result in you paying off your mortgage sooner and paying less interest than you otherwise would.

And, if your home loan comes with a redraw facility, you can still access those extra repayments if and when you need to – adding another layer of flexibility.

Fixed rate borrowers, on the other hand, are generally limited when it comes to extra repayments.

Offset accounts

Want even more flexibility? An offset account might be able to offer it to you.

Money kept within a full offset account is ‘offset’ against the principal balance of a home loan. That means the borrower doesn’t pay interest on the value of the funds kept within the account. Let’s look at an example:

Sam recently sold her car for $25,000 and is wondering what to do with the money. She owes $450,000 on her home loan, which has an interest rate of 6.00% p.a., and so decides to park the money in her offset account.

That means Sam is only charged interest on $425,000 ($450,000 – $25,000), but her repayments will remain the same. The money she saves in interest will act like an extra repayment.

If she keeps the funds in the offset account for the duration of her 30-year mortgage, she could pay her mortgage off four years faster and save more than $107,000 in interest.

What makes an offset account more flexible than a redraw facility is the fact that you can dip into an offset account the same way you might a transaction or savings account. Thus, the funds are always in easy reach if you need them.

However, offset accounts are less common than redraw facilities and often come at a cost – either an additional fee or a higher interest rate.

Interest only options

Another layer of home loan flexibility comes from the option of switching to interest only repayments. A borrower making interest only repayments instead of principal and interest repayments won’t pay down their debt (the principal), rather they’ll simply cover the cost of the accumulating interest.

While they’re normally the domain of property investors, interest only periods can help to minimise an owner-occupier’s mortgage repayments when needed. Though, switching to interest only repayments for a time can result in a person paying more interest overall, as they’ll owe more for longer.

Repayment holidays

The final feature that can commonly affect how flexible a mortgage is is whether or not it offers optional repayment holidays.

This is different from a repayment deferral offered to those seeking hardship arrangements, who have legal grounds to seek to change their debt agreements.

Multiple lenders, such as CommBank and Westpac, offer optional repayment holidays to borrowers suitably ahead in their repayments.

Other lenders might offer the option to pause repayments in the event of a legitimate reason, such as illness.

Meanwhile, many will allow eligible borrowers to pause their repayments when they welcome a new baby to the family.

If a repayment holiday may provide a useful safety net in the future, it might be worth seeking out a home loan that offers the flexibility of taking one. Though, if you choose to put off making repayments for a time, beware of capitalised interest.

Should you prioritise increased flexibility over a lower interest rate?

Flexibility in a mortgage can offer peace of mind and financial security, but it often comes at a cost.

Some home loans with extra features, such as offset accounts or repayment holidays, may carry higher interest rates or more fees than more basic home loan products. That raises an important question: is it worth paying more for flexibility?

The answer will likely depend on your financial situation and goals.

A lower interest rate will reduce the overall cost of your mortgage, potentially saving you thousands over the life of the loan or helping to pay off your home loan faster. However, if your circumstances change – say, you receive a financial windfall, take a career break, or need to reduce repayments temporarily – having a flexible home loan could prove invaluable.

When a flexible mortgage might make sense

• You have an irregular income or work in a commission-based job, meaning your earnings fluctuate.

• You want an offset account to reduce the interest payable on your mortgage while keeping funds easily accessible.

• You anticipate needing a repayment holiday at some point, such as during parental leave.

When a lower interest rate might be better

• You have a stable, predictable income and plan to make steady repayments without needing extra flexibility.

• You want to minimise your interest costs as much as possible and don’t require features like an offset account.

• You don’t foresee needing to pause or adjust your repayments in the near future.

Ultimately, the best choice will depend on how much you value flexibility compared to potential savings. And, if you choose either option only to work out the other would suit you better, you can always refinance to a different home loan.

Before making a decision, it’s worth comparing home loans to see how much extra flexibility might cost – and whether the trade-off is worth it.

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