Home Loan Package Discount Packs More Punch
Apart from the convenience of bundling your banking together – home loan, transaction account and credit card – the real hero of package banking is the discounted home loan rate. This can be up to 0.7% off the going standard variable rate for the life of the loan. Now that mortgage rates have dropped 40% in one year, the impact of the package discount has to be even more significant (when viewed as a component of the overall interest cost). You may end up with a relatively cheap home loan rate once the package discount is applied.
The trade off for a discount on a home loan is the annual fee. It can be steep – usually around $350 – but it encompasses all products in the package and has largely remained unchanged since the last package banking star ratings.
Of course, the larger the home loan the less the annual fee appears in comparison. The value of the package to an individual lies in the overall savings made when the simple cost versus savings maths are done. More about that later.
Home loan packages have changed
In order to be competitive, many banks offer similar standard variable reference rates – the average amongst the five major banks currently standing at 5.78% - but package deals are not as similar as they might appear on the surface.
CANSTAR CANNEX noted a number of differences:
- 0.7% was once the standard package loan discount, however more and more are starting at 0.5% for amounts under $250,000, with the discount steadily rising towards 0.7% as you borrow larger amounts.
- Fixed rate loans are available in a package. The discounts tend to be significantly lower than for variable rate loans. 15 offer a fixed rate loan as part of the package, of which only 8 offer a discount, ranging from 0.1% to 0.45%.
- Be aware that not all loans come with the same basic features. If you’re after something specific such as offset account or transactional mortgage, you should check that this is available in the package’s home loan features.
- 20 of the 22 institutions assessed waive the annual fee on one or more of their credit cards offering rewards programs. These may be worthwhile for those who regularly spend large amounts on their cards and repay in full but there are ongoing fees to consider. Beware that in many cases, the credit card annual fee is waived only for the first year.
- All packages we star rated charge no account-keeping fees for their transaction accounts.
- Other benefits apply such as discounted home & contents, car insurance, and discounted financial planning services. It’s easy to imagine home buyers being in the market for home and contents insurance at the same time as financing their homes so this may be particularly worthwhile. However the value of discounted financial advice depends on individual consumer needs.
So, compare the interest rate net of the package discount and compare annual fees. Then decide whether the other benefits of the package are of value to you.
Standard Variable versus Package Interest Rates
We looked at 37 home loan packages offered by 22 institutions this time around and found that since our December 2008 report:
- 6 increased the interest rate discount on a $250,000 loan
- 16 cut their interest rate on loans of $250,000
As has been widely reported in the press over the past few months, the Reserve Bank cuts have not necessarily been passed on in full to home loans. Instead there have been a few nips and tucks delivered to home loan interest rates at varying times. As it stands now, the once-widespread 0.7% package discount is now only available on loans upwards of $350,000. Smaller loans generally come with a smaller discount of 0.5%.
The charts above look at two different borrowing amounts, $200,000 and $400,000. While the standard variable interest rate is the same for each amount, the package discounts vary widely. That’s why it’s important to focus on the package rate and not just the advertised standard variable rate to get a true picture of what your loan will cost you.
At this point you can then decide whether the loan flexibility, free transaction account, credit card and other benefits of the package are of value to you.
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