Join The Professionals
Sydney Morning Herald
Wednesday October 8, 2003
Lucinda Schmidt reports on a little-known way to save thousands on your home loan.
Shaving half a per cent off your home loan will give you one of the best investment returns you will ever make. And it is tax-free. With the average Australian home loan at a record high of $187,542, finding one that offers a discount to the standard variable mortgage rate could save you thousands.
The sums are pretty straightforward. Figures prepared by the research house Cannex show that shaving 0.5 percentage points off a standard variable rate of 6.57 per cent on a $250,000 home loan, taken over 25 years, saves about $24,000.
For a $150,000 loan, the saving is about $14,000, and for a $350,000 home loan, the saving is $32,000. And those savings are in after-tax dollars.
Even for a home loan that is paid off faster - say, over 10 years - the savings amount to thousands of dollars ($11,000 on a $350,000 loan, $7000 on a $250,000 loan and $5000 on a $150,000 loan).
A discount rate obviously makes financial sense, but how do you find one? One way is with basic no-frills packages, which often appeal to first home buyers (see story, page 6).
Another option - which is fast becoming the most popular type of home loan product - is the "professionals package".
The name is a bit of a misnomer, because many banks have dropped the requirement that borrowers are doctors, lawyers or other professionals, or that they earn a high salary.
Instead the focus tends to be on how much you are borrowing from the bank. If it is more than $150,000, you will qualify for most of the professionals packages, and if it is $250,000-plus, you could get up to 0.7 percentage points off the standard variable rate.
As well as the interest rate discount, the packages offer other savings. Typical incentives include no loan application fee or ongoing loan service fees; no service fees or transaction fees on an everyday savings account; no annual fee on a gold credit card; and discounts on other bank products such as margin lending facilities, house and contents insurance and life insurance.
Some banks also offer a small bonus interest rate on term deposits and savings accounts.
The packages are based around the standard variable rate home loan, which offers all the "bells and whistles" such as mortgage offset accounts, redraw facilities and lump sum repayment options.
The cost of all these discounts and bonuses is an annual package fee for most banks of about $300. That fee is more than covered by the discount on the standard variable rate.
When other savings, such as credit card fees and transaction account fees, are factored in, most people will be many hundreds of dollars ahead using a professionals package.
For example, the accompanying hypothetical case study from the National Australia Bank shows the savings for a couple using the bank's National Choice package.
On a $150,000 home loan over 25 years, the couple will save $750 for the first few years from the discount interest rate. Add to that a $250 saving on account transaction fees, $120 on the credit card annual fee and incentive program fee, plus some insurance discounts, and the couple are well in excess of $1000 better off each year (and close to $2000 in the first year, when the $696 loan application fee is waived).
It all sounds too good to be true and begs the questions: why doesn't everyone with a $150,000-plus mortgage have a professional package? The answer is, not everybody knows about them, because the banks do not advertise the products widely.
That said, the popularity of the packages is growing rapidly, pushed along by improved offerings and mortgage brokers.
The banks are quite secretive about exact customer figures for their professionals packages. A spokesman for the National Australia Bank says: "This is our most popular National home loan package and represents a significant portion of our home loan book."
Westpac says: "It is the most popular product in our home loan portfolio by heaps." And the Commonwealth Bank says: "Packages are becoming increasingly popular as clients discover the benefits they offer."
ANZ is a little more upfront than the other big banks, saying that an average of 1280 packages have been sold each month since its Breakfree package was introduced in January.
The accompanying table summarises the main features of the professionals packages on offer from Australia's five biggest banks.
Kathlene Jones, the director of research for Cannex, says that although these packages were originally focused on professionals, they have broadened considerably in the last year or two as banks try to persuade customers to consolidate all their banking needs in one place.
She says that for many people the interest rate discount on the home loan
is reason enough to have a package. But most people will also have a transaction account and a credit card, which gives added savings.
Jones warns, however, that customers should look closely at the packages on offer, because a couple offer benefits that are widely available to non-package customers, and are not really worth the annual fee. (She declines to specify those "packages".)
Warren O'Rourke, the national manager of corporate affairs for home loan brokers Mortgage Choice, agrees that professional packages are now widely available.
"In Sydney and Melbourne, with house prices increasing significantly, people are borrowing more and many will qualify [for the package]," he says.
O'Rourke says that the number of lenders offering professionals packages has jumped by a third in the past year.
He says the fundamentals that a customer should look at when comparing packages are: a discount of 0.5 to 0.7 per cent off the standard variable home loan rate; no home loan application fee; no annual fee for a gold credit card; and discounts on other bank products, such as insurance.
Another issue to consider, he says, is the pricing, because not all banks have an annual fee for their packages. "The interest rate may be cheaper, but when you factor in the annual fee, sometimes a bank without a fee is better," he says.
Despite all the benefits, O'Rourke warns that people who already have a home loan should consider the costs of refinancing before they rush into switching to a professionals package.
There may be early repayment penalties, stamp duty on the new mortgage, and some banks still charge the mortgage application fee within their professionals package.
He also urges home buyers to consider other ways of reducing the interest bill on their home loan, such as making higher repayments than the required minimum and paying fortnightly instead of monthly.
BALLOONING MORTGAGES MEAN MORE QUALIFY FOR PROFESSIONALS PACKAGE
Owun and Suzanne Taylor have all the facts at their fingertips when it comes to choosing their home loan. The couple are mortgage brokers with a Mortgage Choice franchise in Newtown, Sydney.
For the last seven years they have used professionals packages from various banks for all their banking needs, including home loan, credit cards and transaction accounts. (They prefer not to disclose exactly which one they are using at present, for fear of upsetting the other lenders on their books.)
Owun Taylor says the annual fees on professionals packages, which range from about $120 to $300, are more than outweighed by the interest rate reduction the couple receives on their $250,000-plus home mortgage. Then there is the ease of banking, having a mortgage offset account linked to the couple's everyday transaction account and no fees for using other banks' ATMs.
"We are a very busy professional couple," he says. "I don't have time [to look for his bank's ATMs] and it all adds up."
As well as the mortgage interest rate savings, the Taylors each get a free gold credit card (usually $80 each a year).
It doubles as an ATM card and is linked to an incentive program. They also use the package discounts on home and contents insurance.
Owun Taylor says about 80 per cent of his clients end up taking a professionals package. "We don't say 'come in, here's a professionals package'. But once you go through all their needs, and the fact that the average loan size in this area is $280,000 to $290,000, a package is very attractive."
He says that because the full interest rate discount is not usually available for loans of less than $250,000, people with smaller home loans should think carefully about whether the annual fee is worth it.
But he also notes that there may be other reasons to have the flexibility of a package. For example, a package may be suitable for someone who is planning a big renovation, funded by drawing down against the equity in their home.
© 2003 Sydney Morning Herald
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