In my opinion banks spend a lot of money in complicating the $1.4 trillion home loan market. The millions of dollars spent on marketing and branding does a lot to capture an audience but in my experience it creates a lot more confusion for the end customer. When I have conversations with clients, I try to eliminate confusion by simplifying the home loan market into 5 loan products that a typical customer would have to choose from.
Standard Variable Rate Loan (SVR)
I’m starting with the standard variable rate loan because it is basically the home loan product that you should never have. Its interest rate is highly inflated relative to the other products on offer because it’s basically used as a benchmark to price every other variable home loan product in the banks product set (note: when you see a product advertised with a discount relative to this rate don’t assume that it’s anything special, it’s the norm). The logic behind using this rate as a benchmark is to allow for the easy adjustment of interest rates when a change is made. Put simply, you retain your contracted discount but the benchmark changes, impacting your overall interest rate.
Basic Variable Products
These guys are really targeted at those people who don’t really like fees and are discounted for the life of the loan (discounted relative to the SVR). The bottom line is that they normally have a variable rate with limited features like redraw (access to surplus funds on your home loan) and extra repayments. To be honest I have favoured this type of product in recent times for suitable clients. One point to note, if you’re going for this type of loan product make sure you ask whether there are associated fees related to redraw usage because this can take the logic of the fee free product and throw it out the window.
Introductory Variable Products (Intro)
Since the introduction of life of loan basic products these guys have fallen out of favour in the market. They basically start out with a low interest rate over a predetermined period and then revert to a higher rate after the introductory term expires. They do have the added benefit of low to no fees but what annoys me the most about these products is that they typically target lower deposit customers who won’t likely have an ability to refinance after the intro period finishes. From a bank’s perspective for the home loan customer who sets and forgets they are awesome because the longer the customer is retained the more profit that is derived. I would avoid these guys unless you have enough equity in your property to make adjustments after introductory period expires.
I’m not really sure how the term packages really came about for this set of home loan products but the reality is that with the annual fee you pay, you get a life time interest rate discount (unless the loan is fixed which I’ll get to later) and a full set of features to boot including an offset account or accounts (depending on the bank). They are also synonymous with under the table pricing (rates you don’t see advertised). The real question is, is the annual fee justified in the interest rate you receive and the features you get access to? The answer is different for everyone, but they can be valuable to the right customer. The target market for this product is really for customers who need/want an offset account (you should test the value of this first), have a portfolio of loans and have a higher loan limit.
Fixed Rate Loans
If you want certainty over repayments or protect yourself against interest rate rises, then these guys should work for you. The rate is set for a predetermined term, which at expiry will revert to a higher variable rate. In general, the product features are limited as well as caps on additional repayments but there are a few players in the market that allow access to redraw and offset. Currently, you’ll find the best priced fixed rates in the market will attract an annual fee and will be categorised under a package like the variable option mentioned above.
I have purposely not gone into detail on the couple of other products in the market like lines of credit, self-managed superfund loans or reverse mortgages because for the vast majority of people in the market you will never need them. They are also falling out of favour with customers and banks. Familiarise yourself with the 5 mentioned above and don’t be caught out by the catchy names and jargon. If you want to make things even simpler, get in contact with Beyond Broking today on 1300 GO BEYOND and we will provide you with a solution.