A standalone mortgage, or even a DIY bundle, may provide better value
If you could save more than $37,000 over the life of your mortgage by opting for a non-packaged version, why then are over half of all new mortgages written by the major banks supersized to packages? Is it the discounted loan or the lender’s strategy of locking us in with lots of “goodies” that drives the popularity of these products?
A package home loan combines your mortgage with a number of additional products. Generally these include a fee-free credit card, fee-free transaction account, bonus rates on term deposits and/or insurance products at discounted prices.
All these perks come at a single cost of around $400 a year.
The whole marketing spiel behind a package home loan is that you want more than just a mortgage. You’re after the complete banking experience and for convenience you’re happy to have this with the one institution.
Sounds great but let’s be honest here. The real hero is the interest rate discount on the home loan – up to 0.9%. If this is what lures you into a packaged loan, then I’m afraid to say you could do better.
Assuming a $400,000 home loan and like-with-like features, Canstar compared the cost of a low-rate package loan with a low-rate standard loan. Even though the interest difference is only 0.35%, by putting the $400 annual fee saved by not having a package loan into the standalone loan the borrower would be $37,000 better off.
The savings are big but it does depend on the borrower picking a cheap home loan and, more importantly, hoping that it stays cheap for the remainder of its term. This isn’t always that easy.
“Everyone’s personal situation is different,” says Mitchell Watson, from Canstar.
“When comparing package banking discounts, prioritise the products you will actually use. After all, you are paying for the whole banking bundle, whether you use it or not. The value you ultimately get will depend on how you use the products.”
Typically the larger the home loan the smaller the annual fee appears in the comparison, says Watson.
If you like the idea of bundling your home loan but are not too sure whether you’d get value out of pre-packed ones, some lenders do offer you the option of
customising your own bundle and then they apply an interest rate to that.
“This DIY approach helps you tailor your loan but it’s a good idea to compare the total offer,” says Watson. “You need to compare the features, fees and interest rate assigned to your custom-built loan against other loans in the market to make sure you’re getting what you want in a loan and for a competitive price.”
Two lenders that currently offer this feature include P&N Bank and Bendigo Bank.
P&N’s Home Loan & Bag allows customers to choose the products that they may need. The home loan (3.99%) comes with both offset and redraw. No annual fee is charged. Available products include an annual fee-free credit card with a purchase rate that matches the home loan and a transaction account with no monthly fee.
Bendigo’s Connect Package allows homeowners to connect three or more products to save money. Each of the first three products adds an additional 0.05% discount to the 1% base discount (totalling 1.15%).
If you’re still unsure whether or not a package home loan is a good idea, ask yourself what you’re really wanting to achieve. You can build your own great package and avoid any ongoing fees.