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Making sense of the banks' mumbo jumbo
By Tammy may


Deciphering confusing home loan jargonWant to get a home loan? Confused by all the different mortgage products?  Here's a handy translation guide for making sense of the banks' mumbo jumbo.

This post is written by Scott Matthews. He has years of experience in the mortgage broking industry and pulls no punches when it comes to revealing his thoughts about the banks’ true intentions. See part one for more of Scott's helpful translations.

Interest-only loans are exactly that. The loan payments cover interest owing on the loan, but do not reduce the principal. They're very common in property investing because interest-only loan repayments (when compared with combined principal and interest repayments) are more likely to be covered by the property's rental income, and 100 percent of the repayment is tax deductible.

A Line of Credit (L.O.C.) is, at least in my opinion, a gimmick introduced by the banks to increase their profits. This is how it’s supposed to work: A credit card is attached to your home loan which you're supposed to use for all of your expenses (groceries, petrol, clothes, entertainment, everything). At the end of the month, the card balance will be drawn down against your mortgage balance. In the meantime, your salary is being deposited into the loan on a weekly basis, thus reducing the loan balance and the amount of interest calculated against it.  Sounds good in theory, so where does it go wrong? Well, people tend to spend easier than they save. Instead of accumulating credit in the L.O.C., most people find a reason to spend it and, as such, the loan never goes down.

An Offset Facility is like a Line of Credit, but honest and beautiful! It’s a great way to cut years off your home loan and save thousands of dollars in mortgage interest. In simple terms, it’s a bank account that reduces the balance of your home loan and saves you money in interest charges. Imagine you have a $500,000 home loan and an offset account where you keep a balance of $50,000. At the end of the month, when your mortgage interest is calculated, the interest will be calculated on a balance of just $450,000 (loan balance minus offset balance.) There's also a tax benefit because you’re saving interest rather than earning it. One bank in particular does offset accounts better than all others—contact me directly if you want the details.

A Redraw Facility describes the ability to withdraw any extra money you pay off your mortgage. It’s like an offset facility, but less transactional. Imagine your  loan repayment is $1000 a month, but you choose to pay $2000 a month instead. After 12 months, your repayments will be $12,000 ahead. With a redraw facility, you can take that money back at any time without having to apply for it. As with an offset facility, the added tax benefit is that you’re saving interest, not earning it.


Finance LifeScott Matthews is the principal at Finance Life, one of MyBudget’s trusted service providers. Finance Life is pleased to offer MyBudget clients home loan refinancing, debt consolidation and loans for mortgage or business with flexible terms and competitive rates. Scott can be contacted at (08) 8274 8000 or scottm@financelife.com.au.

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