Your house is probably the most expensive thing you'll ever buy (at least if you don't intend to splash out on a private jet), particularly if your home loan isn't structured to your advantage. The wrong type of mortgage could cost you tens of thousands of dollars, and yet there are still some dark spots in people's understanding of important – though admittedly dull-sounding – home loan terms.
Researchers at McCrindle recently found that a mere 39 per cent of mortgage holders know for sure what a split home loan is, while it wasn't much better in the realms of offset accounts (54 per cent) and redraw facilities (57 per cent).
If you want to test your financial literacy, here's a quick exam. One answer is right and one is definitely wrong – do you know which?
Q: What is a split home loan?
A) The process of dividing your home loan into both fixed and variable rates. Fixed rates offer security by staying the same even when interest rates dip or rise. Meanwhile, a variable rate allows homeowners to pay less interest should the amount charged by their lender fall – or more should it rise. A split mortgage involves putting a proportion of your home loan into each camp, allowing you to hedge your bets when a property market is difficult to predict.
B) A split home loan is a way to rent half of your house to tenants, giving you the flexibility to pay off your side of the property quicker with the extra rental income.
Answer: A – this was easy! However, 35 per cent of people don't know if their home loan splits, McCrindle found.
Q: What is an offset account?
A) An offset account is a way to store your money overseas in countries with low tax rates. By avoiding income tax, you'll be able to pay off your home loan quicker through lump-sum deposits.
B) An offset account is a separate transaction account that is linked to your mortgage. The money in the offset shows your lender that you're financially stable, and you can be rewarded with lower interest rates, allowing you to pay off your home loan quicker and thus save money.
Answer: It's B – 36 per cent of people with a mortgage don't have a clue how many offset accounts they can have. The next one will be harder!
Q: What is a redraw facility?
A) Using spare money in your savings to pay off your home loan. If your mortgage terms call for repayments of $400 per month but you actually pay $600 for six months, you'll be $1,200 closer to finalising your loan. These extra savings can often be accessed in an emergency.
B) A quicker way to refinance the terms of your home loan and 'redraw' your agreement, should changes in your financial situation force you to reassess your options.
Answer: A – OK, maybe that wasn't too difficult!
How did you do? We'd like to hear your results, and can clear up any confusion should you need our help.