Banks launch ‘no frills’ products
However, the new generation of “no-frills” loans do not include an offset account.
A key question for customers is whether it’s worth paying a slightly higher interest rate for all the bells and whistles associated with a regular home loan, including an offset account.
Otto Dargan, founder of mortgage broker Homeloanexperts.com.au, says it’s hard to generalise, but basic loans can be useful for smaller amounts or for people with little money to spare. park in their clearing account.
“Basic loans definitely have their place, especially for smaller loans,” says Dargan.
Dargan also says offsetting accounts are less beneficial when interest rates are low. He points out, for example, that having $10,000 in an offset account when your mortgage rate is 2.5% would save just $250 per year, which may be less than the annual “bundle fee” charged. by a bank.
He says it can make sense to have a “no frills” product for an investment loan. This is because the interest paid on these loans is tax deductible, which means investors prefer to offset their funds against their home loan instead.
The value of compensation in a particular case depends on other details, such as the rates offered and the amount of your savings.
For example, RateCity’s calculations suggest that if a loan with a clearing account has a rate 0.4 percentage points higher than a “no frills” loan, you would need an average clearing balance of $64,000. over two years to break even with a regular loan. ready. This calculation is based on a $750,000 loan with 25 years remaining to term and includes expected interest rate increases.
Despite the dominance of the big banks in the mortgage market, it’s also worth noting that the lowest rates in RateCity’s database don’t come from the Big Four, but from smaller lenders.
So far, “no-frills” loans have been a tiny part of the mortgage market, and Citi’s Sproules thinks that will remain the case. Even so, recent moves by banks to cut some rates underscore that the cheapest deals inevitably go to new customers, or those willing to negotiate for a better interest rate.
ANZ Bank chief executive Shayne Elliott acknowledged this reality in an interview with radio station 3AW last month, saying customers needed to “keep us honest”.
“Our job is to make sure that we are as fair as possible across the entire product line. But yes, you should call your bank [and ask for a lower rate]“, Elliott said.
- The advice given in this article is of a general nature and is not intended to influence readers’ decisions regarding investments or financial products. They should always seek professional advice that takes their personal circumstances into account before making financial decisions.