What type of home loan do you actually need?
What type of home loan do you actually need?

Interest rates plunge on basic loans

BASIC home loan interest rates are plunging as lenders try to entice more customers to take up their no-frills products, according to new research.

And while these loans have been oft-maligned and overlooked due to a lack of flexible features, times have changed.

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An exclusive Canstar analysis for moneysaver HQ revealed basic loan interest rates have been 0.27 per cent lower on average over the past 12 months than standard variable and package standard variable rate products, which are more popular for their favoured for flexibility around making extra repayments, having linked offset accounts or being able to fix rates on portions of the loan.

Many basic loan products are not only cheaper to pay off, but have evolved to incorporate more flexibility, according to Canstar research manager Mitchell Watson.

"When basic loans came out they gave you a cheap rate but were locked down with a lack of flexibility," Mr Watson said. "Now sometimes they are as flexible as other loans. There is no limit to how much extra you can repay and you can actually redraw too. Basic is probably a bad name for them now because they have many more features."

First home buyers can especially benefit from cheaper interest rates. Picture: Damian Shaw
First home buyers can especially benefit from cheaper interest rates. Picture: Damian Shaw

The analysis showed a sizeable difference in cost between products for the major lenders. Headline rates on ANZ's 'Standard Variable Home Loan' were 5.2 per cent in mid-April, while the basic 'Simplicity Plus' product came in at 3.99 per cent, albeit with a new customer discount included. Meanwhile, CBA's 5.22 per cent 'Standard Variable Rate' product was a far cry from its 'Basic Variable: Extra' rate of 3.99 per cent. NAB boasted 3.69 per cent on its 'Base Variable Rate Home Loan', with a 0.48 per cent discount thrown in, compared to 5.24 per cent on its 'Tailored Variable' product and a 1 per cent discount saw Westpac stump up a 3.59 per cent rate for its basic 'Flexi First Option' loan, compared to 5.24 per cent for the standard 'Rocket Repay Home Loan'.

"Nobody necessarily wants a 'basic' home loan, but it's really about understanding whether all that flexibility is really necessary," Mr Watson said. "Are you willing to pay extra for something you may not need?

"Offset accounts for example are one of the features with higher costs, but if you're not putting a decent amount of money into that offset, it may not be worth it."

Mr Watson said package loan products also came with more bells and whistles, such as no-fee credit cards and other benefits, but would only suit someone happy to have all their finances with the one lender.

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"I'd put a basic loan on your shortlist, but also look at the other variables," Mr Watson said. "Make sure you choose one with low interest rates, low fees and the features you need."

Basic loans may not suit all borrowers however, with fixed rate enthusiasts and property investors better off elsewhere, Mortgage Choice spokeswoman Jacqueline Dearle said.

"Basic loans generally tend not to have a fixed rate option so borrowers wanting to split their loans between variable and fixed may need to look at a standard packaged loan," Ms Dearle said. "Investment borrowers who have excess funds should be using an offset account, rather than redraw and can be better served with a more fully-featured product. Borrowers with very large loans could get significant discounts that provide rates much lower than the basic loans offered."