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Are Basic Variable Home Loans the New Black?

With basic or ‘no frills’ loans recently called into question over price, Canstar completed its own analysis to show how basic variable loans have evolved and why they remain an attractive option for some borrowers.

Standard variable loans have typically been popular with borrowers wanting the ability to make extra repayments, have unlimited redraws on any extra repayments, or access to an offset facility.

Such features can be very useful for borrowers wanting to save on interest and repay their loan faster.

Despite basic variable loans being traditionally known for being lighter on features, times are changing.

Some basic variable loans today are putting customers firmly first where features are concerned, with almost all the basic variable owner occupier home loans analysed below offering the ability to make extra repayments and redraw those funds if necessary.

Percentage of Owner Occupier Loans with Select Features Available
Basic Variable Standard Variable
Make Additional Repayments 100% 100%
Redraw Facility 99% 97%
Source: www.canstar.com.au. Based on owner occupier loans available for $350,000, 80%LVR and principal and interest repayments.

More recently, home loans with redraw facilities (such as those offered by basic variable loan providers) are making it easier for borrowers to access extra repayments made into their home loan by removing fees or caps on redraw, or giving access to redraw funds via internet banking.

Looking at the market trends, there also appears to a widening gap between the average basic variable loan interest rate and average standard variable rate, as illustrated by the below chart.

Basic & Standard Variable Average Interest Rates

When it comes to the Big 4 banks, most lend at the package variable rate, with the standard variable rate mainly used as a benchmark rate from which other rates vary by subtraction of the package discount. The tables below display the various standard, package and basic variable rates on offer at the time of writing from the Big 4.

It’s important borrowers keep in mind the terms and conditions of these rates and be wary of introductory rates that can sharply adjust to a higher rate at the conclusion of the introductory period.

ANZ Home Loan Rates
Loan Rate Comparison rate*
Standard Variable: Standard Variable Home Loan 5.20% 5.30%
Package Standard Variable: Breakfree Package Standard Variable Home Loan 4.40%^ 4.80%
Basic Variable: Simplicity Plus 3.99%# 4.03%
Source: www.canstar.com.au. Rates current as of 19/03/2018. Rates based on a loan for $350,000, 80%LVR and principal and interest repayments. ^Special rate available to existing customers with new lending of $100,000 or more or new customers with lending of $250,000 or more. #Includes special offer discount of 0.56% available for new customers borrowing $50,000 or more. Refer to lender websites for full conditions and eligibility.

Commonwealth Bank Super

Commonwealth Bank Home Loan Rates
Loan Rate Comparison rate*
Standard Variable: Standard Variable Rate 5.22% 5.36%
Package Standard Variable: Wealth Package Standard Variable Rate 4.62% 5.00%
Basic Variable: Extra 3.99% 4.00%
Source: www.canstar.com.au. Rates current as of 19/03/2018. Rates based on a loan for $350,000, 80%LVR and principal and interest repayments. Refer to lender websites for full conditions and eligibility.

NAB bank

NAB Home Loan Rates
Loan Rate Comparison rate*
Standard Variable: Tailored Variable 5.24% 5.37%
Package Standard Variable: Choice Package Tailored Variable 4.39% 4.78%
Basic Variable: Base Variable Rate Home Loan 4.17% 4.21%
Source: www.canstar.com.au. Rates current as of 19/03/2018. Rates based on a loan for $350,000, 80%LVR and principal and interest repayments. Refer to lender websites for full conditions and eligibility.

Westpac logo

Westpac Home Loan Rates
Loan Rate Comparison rate*
Standard Variable: Rocket Repay Home Loan 5.24% 5.37%
Package Standard Variable: Premier Advantage Package Rocket Repay Home Loan 4.44% 4.82%
Basic Variable: Flexi First Option 3.59%? 4.42%
Source: www.canstar.com.au. Rates current as of 19/03/2018. Rates based on a loan for $350,000, 80%LVR and principal and interest repayments. ?Includes a 1.00% p.a. discount off  Flexi First Option Home Loan Variable Rate for two years from loan settlement date adjusting to the then applicable variable Flexi First Option Home Loan interest rate for the remaining loan term. Refer to lender websites for full conditions and eligibility.

While basic variable home loans tend to have a lower rate, Canstar analysis also confirmed they are less likely to offer a 100% offset facility. That said, some do, so it is worth looking around if you are interested in a basic variable option and this is a feature that is important to you.

Percentage of Owner Occupier Loans with Select Features Available
Basic Variable Standard Variable
Offset Facility (100% offset) 24% 83%
Source: www.canstar.com.au. Based on owner occupier loans available for $350,000, 80%LVR and principal and interest repayments.

But is the lack of an offset facility a deal-breaker when it comes to choosing between a standard and basic variable loan?

Canstar data shows offset facilities tend to come at a cost. According to Canstar’s 2018 Home Loan Star Ratings, a home loan with an offset facility has an interest rate 33 basis points (0.33%) higher on average than a loan without an offset facility.

Canstar researchers reported the average advertised interest rate on Canstar’s database for an owner occupier loan of $350,000 at principal and interest repayments with an offset facility was 4.51% compared to one without which was 4.18% which equates to an additional $65 per month in repayments on a 25 year loan.

Based on these average interest rates, you would need to have a balance of $17,297 in your offset account when you take out the loan to cover the difference you could be paying in interest.

As at September 2017, 38% of owner occupied and investment residential loans in Australia (from ADIs with more than $1b in term loans) had an offset facility, according to the Australian Prudential Regulation Authority (APRA).

Offset facilities are seen by some as a more flexible and convenient way to get ahead on a home loan by allowing access to funds through a transactional offset facility while minimising interest payments on a mortgage. It is not an option that suits all borrowers though, as the value you can receive from an offset account depends on how much you keep in the account. In addition, the financial benefit should be weighed against both the interest rate and fees that come with the product, as these factors can quickly eat away any savings that you may have thought possible by using an offset account.

As with all financial decisions, it’s important to closely consider your circumstances and preferences when deciding on which type of home loan is best for you.

Canstar’s research team rated 3,086 home loans from 91 lenders in its 2018 Home Loan Star Ratings.

View the full ratings here.

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