Is Basic Low Rate Home Loan Right For You?
In today’s competitive home loan market second tier banks and mutual lenders are not only offering low rates on their home loan products in an attempt to increase their market share, they have also increased their market penetration by making their products available through the broker network.
Pricing seems to be the key driving force behind borrowers choosing a non-major bank where one of the first things a borrower wants to know is, what rate are you offering?
According to AFG Monthly Mortgage Index, quarter of all home loan processed in Australian is now with a non-major bank. And if we were to go by the Advisers Third Party Banking Report, this is on a large part due to rates on offer combined with service level.
Let’s look at two pricing scenarios based on a $300,000 variable loan over 30-year term, one based on a non-major’s product and the other let say from one of the major national banks with the assumption that the borrower will try to maximise their savings using the redraw or 100% offset facility where available. The borrowers will also match the repayment cycle to their fortnightly pay period and chose to take only joint one credit card:
Scenario 1. According to ratecity as at 04 May 2015, one of the best non-major product is a variable ‘Low Rate’ loan @ 4.35% with no annual (for loans over $150,000) or on-going fee. It does not have an offset facility and each redraw will cost you $25, also any loan variation request incurs $150 - $250 fee per request dependant on variation type. There is no account keeping fee however to have a debit card a monthly fee of $2 is payable and the Qantas frequent flyer credit card attracts a $190 per year fee for primary and $60 per year for secondary card holder with limited balance transfer options and no fee waiver policy.
Scenario 2. Package loan @ 4.6% with a major national bank with an annual package fee of $395. Loan has free 100% offset as well as free redraw with minimum amount of $2000. The package fee entitles you annual fee waiver on two credit cards with 0% balance transfer option for up to 15 months (including the premium Qantas frequent flyer cards which is $250 per year) and no loan variation or valuation cost. There are no account keeping or debit card fee.
Neither loan has establishment fee. Based on the above scenario and stated assumptions, let’s look at the annual cost of each scenario:
For scenario 1, annual cost is [$17,921 (repayment) plus $650 (cost of redraw to match household budgeting) plus $24 debit card fee plus $250 credit card fee] = $18,845.
And for scenario 2, annual cost is [$18,455 (repayment) plus $395 (package fee)] = $18,850
On the face value, by taking the lower rate with the non-major bank the borrower is $5 per year ahead, is this the real story?!
What if you decided to take a second credit card linked to your ‘fly buys’ account? That’s another $95 per year savings with the package and what if you decided to extend that loan to buy/ replace a car or to fix the loan, there is no variation cost with the package whereas on the ‘basic’ or ‘low rate’ rate products, these add cost.
Competition in the market is a great thing for the borrowers and should be promoted however by chasing Home Loans based on interest rate alone, are you winning on the value stake?