Basic Home Loan

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Basic Variable Loan

A basic home loan is generally a no frills home loan. It doesn't usually have an offset account, or come with a mandatory credit card or other fancy features. The BIG benefit of all that is, it will generally have a lower interest rate compared to the standard variable rate loan and you won't be paying the annual package fees (usually around $400 if you opt for the banks professional package). Many basic home loans have no ongoing fees but lenders will regularly charge an application fee. This type of loan is straightforward and like it's name basic.

If you are trying to decide whether to take a basic home loan or a standard variable home loan the decision will usually come down to two main areas:​

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Features

The basic variable home loan will normally allow you to pay of as much or as little as you like and will also allow you to redraw extra payments you have made. If you have low borrowings and this is all you need then a basic home loan may be a perfect fit for you.

Before deciding on the basicloan it would be worthwhile ensuring you taking a look at the features that may only be available to a standard variable loan. Offset accounts, credit card auto sweeps can be great tools, but they are certainly not needed by everyone. Infact most people who have an offset account today do not probably use it to the maximum benefit anyway. But the basic home loan does not usually come with an offset account, a Do you need the features that come with a standard variable rate loan or will you be paying for something you are not going to use? What features will you require to support your long term strategy? For example investors or first home buyers might require an offset account attached to their home loan.

In our first home ownerexample the use of an offset account could save you thousands of dollars per year in tax, check out our strategy page on how we might use different features.

Cost

When borrowing it is important to not only look at the headline interest rate on a home loan but the upfront and ongoing costs as well. If you are borrowing under$200,000 the basic home loans will generally look more attractive then the standard variable rate home loans. Even with taking the banks professional package deals offered in a standard variable rate home loan.

Basic home loans are attractive due to thenon existent or low ongoing fees and competitive interest rates. However, the interest rate might be just slightly higher compared to the standard variable rate loans linked with the banks professional package.

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How do you decide the best option?

Each lenders comparison rate is a great tool to assist you to compare the overall cost of borrowing. Fees have a much bigger impact on cost the less you borrow and a lesser impact the more you borrow.

To give you some idea, below I have compared a $400 annual fee and the equivalent increase in interest for you to break even and be indifferent to choosing a basic loan or a fully featured loan based solely on cost.

Sample Computation

Borrow $400,000 with an annual fee is $400. This is equivalent to 0.1% of interest

$200,000 Annual fee is $400 This is equivalent to 0.2% of interest

$100,000 Annual fee is $400 This is equivalent to a 0.4% of interest

As you can see from above, the less you borrow the more fees impact the overall cost.

Hidden Traps

Many basic home loans can look like a cost effective options but you need to check for any hidden fees, particularly those associated with settlement, such as legal and settlement attendance fees, LMI processing fee or Guarantor fee. You should also be on the lookout for any redraw fees that may apply if you want to redraw below the minimum redraw amount or manually redraw at a lender branch.

Considering The Best Home or Investment Loan

Considering the best home or investment loan is more than just the headline interest rate, features and cost.

Understanding your longer term goals, and creating a strategy to pay down your debt or invest more efficiently is essential. AtMango we ask more questions, so we can help you create a strategy to really support your goals. We also have software that we can quickly compare over 30 lenders to find you the best deal to implement your strategy.